Federal Reserve Bulletin, 2015-01

Federal Reserve Bulletin 2015 Compilation www.federalreserve.gov 0216 Board of Governors of the federal reserve system @FederalReserve Flickr.com/FederalReserve YouTube.com/FedReserveBoard Federal Reserve Bulletin 2015 Compilation

Federal Reserve Bulletin 2015 Compilation BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

ThisandotherFederalReserveBoardreportsandpublicationsareavailableonlineat www.federalreserve.gov/publications/default.htm. Toordercopiesof FederalReserveBoardpublicationsofferedinprint, seetheBoard’sPublicationOrderForm(www.federalreserve.gov/pubs/orderform.pdf) orcontact: PublicationsFulfillment MailStopN-127 Boardof Governorsof theFederalReserveSystem Washington,DC20551 (ph)202-452-3245 (fax)202-728-5886 (e-mail)Publications-BOG@frb.gov

iii Federal Reserve BULLETIN Contents Preface .................................................................................................................v The2014HomeMortgageDisclosureActData .....................................................1 NeilBhutta,JackPopper,andDanielR.Ringo,of theDivisionof ResearchandStatistics,preparedthisarticle.JimmyKelliherprovided researchassistance. LegalDevelopments:FourthQuarter,2014 ..........................................................45 LegalDevelopments:FirstQuarter,2015 ............................................................105 LegalDevelopments:SecondQuarter,2015 ........................................................199 LegalDevelopments:ThirdQuarter,2015...........................................................245 Index .................................................................................................................347

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 November 2015 Vol. 101, No. 4 The 2014 Home Mortgage Disclosure Act Data NeilBhutta,JackPopper,andDanielR.Ringo,of theDivisionof ResearchandStatistics, preparedthisarticle.JimmyKelliherprovidedresearchassistance. Thisarticleprovidesanoverviewof residentialmortgagelendingin2014anddiscussesa numberof changesinmortgagemarketactivityovertimebasedondatareportedunderthe HomeMortgageDisclosureActof 1975(HMDA).HMDArequiresmostmortgagelendinginstitutionswithofficesinmetropolitanareastodisclosetothepublicdetailedinformationabouttheirhome-lendingactivityeachyear.TheHMDAdataincludethedisposition of eachapplicationformortgagecredit;thetype,purpose,andcharacteristicsof each homemortgagethatlendersoriginateorpurchaseduringthecalendaryear;thecensustractdesignationsof thepropertiesrelatedtothoseloans;loanpricinginformation;personaldemographicandotherinformationaboutloanapplicants,includingtheirraceor ethnicityandincome;andinformationaboutloansales(seeappendixAforafulllist of itemsreportedunderHMDA).1 HMDAwasenactedtohelpmembersof thepublicdeterminewhetherfinancialinstitutionsareservingthehousingneedsof theirlocalcommunitiesandtreatingborrowersand loanapplicantsfairly,provideinformationthatcouldfacilitatetheeffortsof publicentities todistributefundstolocalcommunitiesforthepurposeof attractingprivateinvestment, andhelphouseholdsdecidewheretheymaywanttodeposittheirsavings.2Thedatahave proventobevaluableforresearchandareoftenusedinpublicpolicydeliberationsrelated tothemortgagemarket.3 Mortgagedebtisbyfarthelargestcomponentof householddebtintheUnitedStates,and mortgagetransactionscanhaveimportantimplicationsforhouseholds’financialwellbeing.TheHMDAdataarethemostcomprehensivesourceof publiclyavailableinformationontheU.S.mortgagemarket,providinguniquedetailsonhowmuchmortgagecredit getsextendedeachyear,whoobtainssuchcredit,andwhichinstitutionsprovidesuch credit. 1 The2014HMDAdatareflectpropertylocationsusingthecensus-tractgeographicboundariescreatedforthe2010 decennialcensusaswellasrecentupdatestothelistofmetropolitanstatisticalareas(MSAs)publishedbytheOfficeof ManagementandBudget.ThefirstyearforwhichtheHMDAdatausethismostrecentlistofMSAsis2014.Forfurtherinformation,seeFederalFinancialInstitutionsExaminationCouncil(2013),“OMBAnnouncement—Revised DelineationsofMSAs,”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/hmda/history2.htm)continuestoberesponsibleforcollectingtheHMDAdatafromreportinginstitutionsandfacilitatingpublicaccesstotheinformation.InSeptemberofeachyear,theFFIECreleasestothepublic summarydisclosuretablespertainingtolendingactivityfromthepreviouscalendaryearforeachreportinglenderas wellasaggregationsofhome-lendingactivityforeachmetropolitanstatisticalareaandforthenationasawhole.The FFIECalsomakesavailabletothepublicadatafilecontainingvirtuallyallofthereportedinformationforeachlendinginstitutionaswellasafilethatincludeskeydemographicandhousing-relateddataforeachcensustractdrawn fromcensussources.

2 FederalReserveBulletin|November2015 In2014,housepricescontinuedtheirupwardtrendevidentsince2012,andmortgageinterestratesdeclinedthroughouttheyear,althoughratesremainedslightlyhigherthanthe historicallowsreachedinlate2012andearly2013.Whilemortgagecreditstayedgenerally tight,conditionsappearedtoeasesomewhatoverthecourseof theyearasthefractionof mortgagelendingtolower-creditborrowersincreased,andreportsfromtheSeniorLoan OfficerOpinionSurveyonBankLendingPracticesindicatethatseverallargebanksrelaxed theircreditrequirementsforprimeloans.However,growthinnewhousingconstruction wasslowthroughouttheyear,suggestingsomepersistentsoftnessinnewhousingdemand.4 Significantregulatorychangesoccurredin2014thatmayhaveinfluencedlendingpatterns. InJanuary2014,thenewability-to-repay(ATR)andqualifiedmortgage(QM)rules,issued bytheConsumerFinancialProtectionBureau(CFPB),wentintoeffect.Asdiscussedin moredetailinalatersection,thenewrulesgenerallyrequirelendersoriginatingclosed-end loanstomakeareasonable,goodfaithdeterminationof whethermortgageborrowerswill beabletorepaytheirloans.ThisATRdeterminationincludesconsiderationandverificationof mortgageapplicants’incomes,otherdebts,andcredithistories.Therulesalso definecategoriesof QMloansthatarepresumedtomeettheATRrequirementandreceive certainprotectionsfromliability.TheQMrequirementsgenerallyincludealimitonthe borrower’sratioof totaldebtservicepaymentstoincome(DTI),limitsonpointsandfees, andvariousotherrestrictionsonloantermsandfeatures.5 AlsoinJanuary2014,revisedrulesimplementingtheHomeOwnershipandEquityProtectionAct(HOEPA),whichprovidesspecialconsumerprotections(suchasadditionaldisclosures)forborrowersconsideringcertainmortgageloansthatarepricedwellaboveprime rates,wentintoeffect.Mostnotably,thenewrulesextendHOEPAcoveragefromrefinance andhomeequityloanstoalsoincludehome-purchaseloansandhomeequitylinesof credit,aswellasaddingnewborrowerprotections,includingarequirementthatconsumers receivehomeownershipcounselingbeforeobtainingahigh-costmortgage.6 ThisarticlepresentsfindingsfromtheHMDAdatadescribingmortgagemarketactivity andlendingpatternsovertime,includingtheincidenceof higher-pricedornonprimelendingandratesof denialonmortgageapplications,acrossdifferentdemographicgroupsand lendertypes.7Someof thekeyfindingsareasfollows: 1. Thenumberof mortgageoriginationsin2014declined31percent,to6.0millionfrom 8.7millionin2013.Thisdecreasewasduetoadropinrefinancemortgagesforone-to four-familyproperties,whichfellbyover2.8million,or55percent,from2013,as mortgageinterestratesin2014remainedabovethelowlevelsexperiencedinearly2013. Incontrasttorefinancing,one-tofour-familyhome-purchaseoriginationsincreased by123,000,or4percent,from2013,continuinganupwardtrendsince2011. 2. Thenonconventionalshareof first-lienhome-purchaseloansforone-tofour-family, owner-occupied,site-builtproperties(thatis,loanswithmortgageinsurancefromthe 4 Formoreinformationoncreditandeconomicconditionsduring2014,seeBoardofGovernorsoftheFederal ReserveSystem(2015),MonetaryPolicyReport(Washington:BoardofGovernors,February24), www.federalreserve.gov/monetarypolicy/mpr_default.htm. 5 Formoreinformation,seeConsumerFinancialProtectionBureau,“AbilitytoRepayandQualifiedMortgage StandardsundertheTruthinLendingAct(RegulationZ),”webpage,www.consumerfinance.gov/regulations/ ability-to-repay-and-qualified-mortgage-standards-under-the-truth-in-lending-act-regulation-z. 6 Formoreinformation,seeConsumerFinancialProtectionBureau(2014),2013HomeOwnershipandEquity ProtectionAct(HOEPA)Rule:SmallEntityComplianceGuide(Washington:CFPB,January9),http://files .consumerfinance.gov/f/201401_cfpb_hoepa-compliance-guide.pdf. 7 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.Afinal HMDAdatasetreflectingthesechangesiscreatedtwoyearsfollowingtheinitialdatarelease.Thedatausedto preparethisarticlearedrawnfromtheinitialpublicreleasefor2013–14andfromthefinalHMDAdatasetfor yearspriortothat.Consequently,numbersinthisarticlefortheyears2012andearliermaydiffersomewhat fromnumberscalculatedfromtheinitialpublicreleasefiles.

The2014HomeMortgageDisclosureActData 3 FederalHousingAdministration(FHA)orguaranteesfromtheDepartmentof VeteransAffairs(VA),theFarmServiceAgency(FSA),ortheRuralHousingService (RHS))stoodatabout36percentin2014,downfrom38percentin2013andfroma peakof 54percentin2009.Thedeclinesince2009reflectsadecreaseintheFHAshare of loans,possiblyduetoaseriesof increases,startingin2010,inthemortgageinsurancepremium(MIP)thattheFHAchargesborrowers. 3. BlackandHispanicwhiteborrowersincreasedtheirshareof home-purchaseloansfor one-tofour-family,owner-occupied,site-builtpropertiesin2014.TheHMDAdata indicatethat5.2percentof suchloanswenttoblackborrowers,upfrom4.8percentin 2013,while7.9percentwenttoHispanicwhiteborrowers,upfrom7.3percentin2013, reversingadecliningtrendforbothgroups.Theshareof home-purchaseloanstohighincomeborrowersincreasedto46.1percentfrom44.8percentin2013. 4. TheHMDAdataprovidelittleindicationthatthenewATRandQMrulessignificantlycurtailedmortgagecreditavailabilityin2014relativeto2013.Forexample, despitetheQMrulethatcapsborrowers’DTIratioformanyloans,thefractionof high-DTIloansdoesnotappeartohavedeclinedin2014from2013.However,asdiscussedinmoredetaillater,therearesignificantchallengesindeterminingtheextentto whichthenewruleshaveinfluencedthemortgagemarket,andtheresultsheredonot necessarilyruleoutsignificanteffectsorthepossibilitythateffectsmayariseinthe future. 5. TheHMDAloanpricingdataindicatethat,in2014,lendingactivitydroppedsharply atthepricingthresholdswhereHOEPAprotectionskickin.Asdiscussedlater,there areseveralpotentialinterpretationsandimplicationsof thisfinding. 6. In2014,onlyabout3percentof conventionalhome-purchaseloansand2percentof conventionalrefinanceloanswerehigherpriced.However,smallbanksandcredit unionsweremuchmorelikelytooriginateconventionalhigher-pricedloansthanlarge banksandmortgagecompaniesandthusaccountedforahighlydisproportionate shareof conventionalhigher-pricedloansin2014.Forexample,whilesmallbanksand creditunionsoriginatedabout18percentof conventionalhome-purchaseloans,they accountedforabout59percentof higher-pricedconventionalhome-purchaseloans. 7. Theshareof mortgagesoriginatedbynondepository,independentmortgagecompanieshasincreasedsharplyinrecentyears.In2014,thisgroupof lendersaccountedfor 47percentof first-lienowner-occupanthome-purchaseloansand42percentof such refinanceloans,higherlevelsthanatanypointsinceatleast1995.Thisrecentrisehas beenwidespread,occurringacrossarangeof demographicgroupsandforbothconventionalandnonconventionallending.Smallbanksandcreditunionshavealso increasedtheirmarketsharesoverthepastdecade,whilethefractionof originations attributabletolargebanksandtheirnonbanksubsidiarieshasdiminishedsignificantly. 8. Duetothisshiftinglandscape,ahistoricallyhighshareof loansisnoworiginatedoutsidethefederallyinsuredbankingsystembyinstitutions—independentmortgagecompaniesandcreditunions—thatarenotsubjecttotheCommunityReinvestmentAct (CRA).Inaddition,smallbankshavesteadilyincreasedthefractionof theirlending doneoutsideof theirCRAassessmentareas.However,assessment-arealendingby largebankshasheldsteadyinrecentyearsatlevelswellabovethosereachedduringthe housingboom. Mortgage Applications and Originations In2014,7,062institutionsreporteddataonnearly10millionhomemortgageapplications (includingabout1.5millionapplicationsthatwereclosedbythelenderforincompleteness orwerewithdrawnbytheapplicantbeforeadecisionwasmade)thatresultedinabout 6millionoriginations.Thenumberof originationsin2014wasdownfrom8.7million originationsin2013(table1).

4 FederalReserveBulletin|November2015 Table1.Applicationsandoriginations,2004–14 Numbersofloans,inthousands,exceptasnoted Characteristicofloan 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 andofproperty 1–4Family Homepurchase Applications 9,804 11,685 10,929 7,609 5,060 4,217 3,848 3,650 4,023 4,554 4,662 Originations 6,437 7,391 6,740 4,663 3,139 2,793 2,547 2,430 2,742 3,112 3,235 Firstlien,owneroccupied 4,789 4,964 4,429 3,454 2,628 2,455 2,218 2,073 2,343 2,680 2,804 Site-built,conventional 4,107 4,425 3,912 2,937 1,581 1,089 1,005 999 1,251 1,622 1,736 Site-built,nonconventional 553 411 386 394 951 1,302 1,151 1,019 1,033 993 1,001 FHAshare(percent) 74.6 68.6 66.0 65.8 78.9 77.0 77.4 70.9 68.0 62.7 58.3 VAshare(percent) 21.6 26.7 29.0 27.1 15.2 13.9 15.2 18.2 19.9 24.3 28.4 FSA/RHSshare(percent) 3.9 4.7 5.0 7.1 5.9 9.0 7.4 10.9 12.0 13.0 13.3 Manufactured,conventional 106 100 101 95 68 43 44 40 44 51 51 Manufactured, nonconventional 24 27 30 29 28 21 17 15 14 14 16 Firstlien,non-owneroccupied 857 1,053 880 607 412 292 285 314 355 385 377 Juniorlien,owneroccupied 738 1,224 1,269 552 93 44 42 41 43 45 53 Juniorlien,non-owneroccupied 53 150 162 50 6 2 2 1 1 1 2 Refinance Applications 16,085 15,907 14,046 11,566 7,805 9,983 8,433 7,422 10,526 8,549 4,386 Originations 7,591 7,107 6,091 4,818 3,491 5,772 4,969 4,330 6,668 5,131 2,301 Firstlien,owneroccupied 6,497 5,770 4,469 3,659 2,934 5,301 4,516 3,856 5,930 4,385 1,950 Site-built,conventional 6,115 5,541 4,287 3,407 2,363 4,264 3,835 3,315 4,971 3,628 1,561 Site-built,nonconventional 297 151 110 180 506 979 646 508 917 713 360 FHAshare(percent) 68.3 77.3 87.5 91.5 92.2 83.7 79.3 63.2 61.2 61.1 47.3 VAshare(percent) 31.4 22.4 12.3 8.3 7.6 15.9 20.3 35.9 37.8 37.7 52.2 FSA/RHSshare(percent) .2 .3 .2 .1 .2 .4 .4 .9 .9 1.2 0.5 Manufactured,conventional 77 70 60 56 42 36 25 25 31 32 20 Manufactured, nonconventional 7 8 12 16 22 22 10 9 11 12 8 Firstlien,non-owneroccupied 618 582 547 474 330 350 359 394 660 671 292 Juniorlien,owneroccupied 464 729 1,036 661 219 115 88 74 73 70 55 Juniorlien,non-owneroccupied 13 25 39 23 9 7 6 5 5 5 4 Homeimprovement Applications 2,200 2,544 2,481 2,218 1,413 832 670 675 779 833 840 Originations 964 1,096 1,140 958 573 390 341 335 382 425 408 Multifamily1 Applications 61 58 52 54 43 26 26 35 47 51 45 Originations 48 45 40 41 31 19 19 27 37 40 35 Totalapplications 28,151 30,193 27,508 21,448 14,320 15,057 12,977 11,782 15,375 13,987 9,933 Totaloriginations 15,040 15,638 14,011 10,480 7,234 8,974 7,876 7,122 9,828 8,707 5,980 Memo Purchasedloans 5,142 5,868 6,236 4,821 2,935 4,301 3,229 2,939 3,163 2,794 1,752 Requestsforpreapproval2 1,068 1,260 1,175 1,065 735 559 445 429 474 516 501 Requestsforpreapprovalthat wereapprovedbutnotactedon 167 166 189 197 99 61 53 55 64 72 64 Requestsforpreapprovalthat weredenied 171 231 222 235 177 155 117 130 149 163 126 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).

The2014HomeMortgageDisclosureActData 5 Refinancemortgagesforone-to Figure1.Volumeofrefinanceoriginationsandprimerate, four-familypropertiesdroppedby 2012–14 over2.8million,or55percent, from2013to2014,asmortgage Percentage points Thousands of loans interestratesremainedabovethe 4.6 Prime rate (left scale) Refinance originations (right scale) 800 historiclowsreachedintheearly 4.4 700 monthsof 2013(figure1). 4.2 600 4.0 500 Whilethenumberof refinancings 3.8 400 fellforthesecondconsecutiveyear, 3.6 300 one-tofour-familyhome-purchase 3.4 200 originationsgrewbyalmost 3.2 100 3.0 0 123,000,or4percent,from2013. 2012 2013 2014 Mostone-tofour-familyhomepurchaseloansarefirstliensfor Note:Thedataaremonthly.Loansarefirst-lienmortgagesexcludingthosefor multifamilyhousing.Theprimerateistheaverageinterestrateon30-yearfixedowner-occupiedproperties.Inthe ratemortgagesbeingofferedtohigh-qualityprimeborrowersreportedbyFreddieMacinitsPrimaryMortgageMarketSurvey. Figure2.Numberofhome-purchaseandrefinance pastthreeyears,suchloanshave mortgageoriginationsreportedundertheHomeMortgage grownover35percent,fromnearly DisclosureAct,1994–2014 2.1millionin2011toover2.8millionin2014.However,thevolume A. Home purchase of suchhome-purchaseorigina- Millions of loans 6.0 tionshasnotyetclimbedbackto thelevelsobservedfrom1994to 5.0 2007(figure2).8Thenumberof first-lienhome-purchaseloansfor 4.0 non-owner-occupiedproperties— thatis,purchasesof rentalproper- 3.0 ties,vacationproperties,andsecondhomes—decreasedslightlyin 2.0 2014,from385,000in2013to 1.0 377,000in2014. 1994 1998 2002 2006 2010 2014 B. Refinance Theannualhome-purchaseloan Millions of loans volumespresentedinfigure2give 15.0 theimpressionthattheupward trendthatbeganin2011slowedin 12.0 2014.Thisimpressionismostlyan 9.0 artifactof adeclineinlendingin thesecondhalf of 2013.Figure3 6.0 plotsthemonthlyvolumeof firstlienhome-purchaseloansstarting 3.0 in2011,withandwithoutseasonal 0.0 1994 1998 2002 2006 2010 2014 Note:Thedataareannual.Mortgageoriginationsforone-tofour-familyowneroccupiedproperties,withjunior-lienloansexcludedin2004andlater. 8 TheHMDAdatapriorto2004didnotprovidelienstatusforloans,andthusthenumberofloanspriorto2004 includesbothfirst-andjunior-lienloans.Thatsaid,includingjunior-lienhome-purchaseloansin2014does notchangetheconclusionthathome-purchaselendingin2014wasbelowthatin1994.Itshouldalsobenoted that,becauseHMDAcoveragehasexpandedovertime,inpartasaresultofsignificantlymorecountiesbeing includedinmetropolitanstatisticalareasnowthanintheearly1990s,thelowerloanvolumein2014relativeto 1994isunderstated.

6 FederalReserveBulletin|November2015 adjustment.9Thefigureshowsthat, Figure3.Volumeofhome-purchaseoriginations,2011–14 infact,theseasonallyadjusted growthrateof home-purchase Thousands of loans originationsduringthecourseof 350 Seasonally adjusted 2014wasfairlysimilartothatseen Not seasonally adjusted from2011throughthefirsthalf of 300 2013. 250 Intable1,thevolumeof first-lien 200 lendingforowner-occupiedpropertiesisfurtherdisaggregatedbyloan 150 andpropertytype.(Alarger, supplementaryversionof table1, 100 2011 2012 2013 2014 withthedatabrokendownby month,isavailableintheExcelfile Note:Thedataaremonthly.Loansarefirst-lienhome-purchasemortgage postedwiththisarticle,asareallof originations. theothertablesreferencedinthe article.)Inadditiontolienand occupancystatus,theHMDAdataprovidedetailsonthetypeof propertysecuringthe loan(site-builtormanufacturedhome)andonthetypeof loan(conventionalornot).10As notedearlier,nonconventionallendinginvolvesloanswithmortgageinsuranceorguaranteesfromfederalgovernmentagencies,includingtheFHA,theVA,theRHS,andtheFSA. Conventionallendingencompassesallotherloans,includingthosesoldtothegovernmentsponsoredenterprises(GSEs)FannieMaeandFreddieMac. Nonconventionalloansaremorecommonforhomepurchasesthanrefinancingsandusuallyinvolvehighloan-to-value(LTV)ratios—thatis,theborrowersproviderelativelysmall downpayments.Forsite-builtproperties,nonconventionalhome-purchaseloansincreased lessthan1percentin2014,whileconventionalloansincreasedabout7percent.Thenonconventionalshareof first-lienhome-purchaseloansforone-tofour-family,owner-occupied,site-builtpropertiesstoodatabout36percentin2014,downslightlyfrom38percent in2013anddownsignificantlyfromitspeakof 54percentin2009inthewakeof thefinancialcrisis.11Thatsaid,lastyear,thenonconventionalshareremainedabovehistoricalaverages(figure4). Figure4showsthatthemarkeddeclineinthenonconventionalsharesince2009reflectsa decreaseintheFHAshareof loans,whiletheVAandFSA/RHSshareshaveheldsteady overthisperiod.OnefactorthatmayhelpexplainthereductionintheFHAshareisa seriesof increasesintheannualMIPthattheFHAchargestoborrowers.BetweenOcto- 9 ThedataserieswasadjustedforseasonalityusingtheCensusBureau’sX-12package.ForadescriptionofX-12 andseasonaladjustmentingeneral,seetheCensusBureau’s“FAQsonSeasonalAdjustment”at www.census.gov/const/www/faq2.html.Thedateusedtocompiledataatthemonthlylevelisthe“actiondate,” whichisthedateonwhichthelendinginstitutiontookactiononanapplication.Forapprovedapplications,this dateisusuallytheclosingdateororiginationdateoftheloan.Theactiondateisnotreleasedinthepublic HMDAdatafiles. 10 Manufactured-homelendingdiffersfromlendingonsite-builthomes,inpartbecausemostofthehomesare soldwithoutlandandaretreatedaschattel-securedlending,whichtypicallycarrieshigherinterestratesand shortertermstomaturitythanthoseonloanstopurchasesite-builthomes(forpricinginformationonmanufacturedhomeloans,seetable8).Thisarticlefocusesalmostentirelyonsite-builtmortgageoriginations,which constitutethevastmajorityoforiginations(asshownintable1).Thatsaid,itisimportanttokeepinmind that,becausemanufacturedhomestypicallyarelessexpensivethansite-builthomes,theyprovidealow-cost housingoptionforhouseholdswithmoremoderateincomes. 11 Foramoredetaileddiscussionofthepost-crisisriseinnonconventionallending,seeRobertB.Avery,Neil Bhutta,KennethP.Brevoort,andGlennB.Canner(2010),“The2009HMDAData:TheMortgageMarketin aTimeofLowInterestRatesandEconomicDistress,”FederalReserveBulletin,vol.96(December),pp.A39– A77,www.federalreserve.gov/pubs/bulletin/2010/default.htm.

The2014HomeMortgageDisclosureActData 7 ber2010andApril2013,the Figure4.Nonconventionalshareofhome-purchase annualMIPforatypicalhomemortgageoriginations,1994–2014 purchaseloanmorethandoubled, from0.55percentof theloan Percent amountto1.35percent.12Alsoin 100 2013,theFHAextendedtheperiod overwhichtheannualMIPis FSA/RHS VA FHA Conventional 80 requiredtobepaid.Foratypical home-purchaseloan,theannual 60 premiummustnowbepaidover thelifeof theloanratherthanuntil theLTVratiofallsbelow78per- 40 cent.Althoughthisextensionhas noeffectontheinitialcostof the 20 mortgage,itwouldchangethe potentiallonger-termcostif bor- 0 rowerscontinuedtoholdthemort- 1994 1998 2002 2006 2010 2014 gageaftertheLTVratiofellbelow Note:Thedataareannual.Home-purchasemortgageoriginationsforone-to 78percent.13 four-familyowner-occupiedproperties,withjunior-lienloansexcludedin2004 andlater.NonconventionalloansarethoseinsuredbytheFederalHousing Administration(FHA)orbackedbyguaranteesfromtheU.S.DepartmentofVeter- Theremainderof table1provides ansAffairs(VA),theFarmServiceAgency(FSA),ortheRuralHousingService additionaldetailsonthebreak- (RHS). downof one-tofour-familyhomepurchaseandrefinanceloansbylienandoccupancystatusandbypropertyandloan type.14Table1alsoprovidesthenumberof applicationsforandoriginationsof home-improvementloansforone-tofour-familyproperties,manyof whicharejuniorliensorunsecured,andloansforthepurchaseof multifamilyproperties(consistingof fiveormore units).Finally,theHMDAdataincludedetailsaboutpreapprovalrequestsforhome-purchaseloansandloanspurchasedbyreportinginstitutionsduringthereportingyear, althoughthepurchasedloansmayhavebeenoriginatedatanypointintime.Lendersalso reportedroughly501,000preapprovalrequests;roughly62percentof theserequeststurned intoanactualloanapplicationforaspecificpropertyin2014.15Table1alsoshowsthat,for 2014,lenderspurchased1.8millionloansfromotherinstitutions. 12 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. 13 For2015,theFHAreducedtheannualpremiumby50basispointsonnewforwardmortgagesbeginningon January26.SeeU.S.DepartmentofHousingandUrbanDevelopment(2015),“ReductionofFederalHousing Administration(FHA)AnnualMortgageInsurancePremium(MIP)RatesandTemporaryCaseCancellation Authority,”MortgageeLetter2015-01(January9),https://portal.hud.gov/hudportal/documents/huddoc?id=15- 01ml.pdf. 14 NotethatundertheregulationsthatgovernHMDAreporting,manystandalonejunior-lienloansarenot reportedbecauseeitherthelenderdoesnotknowthepurposeoftheloanorthereasonscitedfortheloanare notonesthattriggerareportingrequirement.Unlessajuniorlienisusedforhomepurchaseorexplicitlyfor homeimprovements,ortorefinanceanexistinglien,itisnotreportedunderHMDA.Further,homeequity linesofcredit,manyofwhicharejuniorliensandcouldalsobeusedtohelppurchaseahome,donothaveto bereportedintheHMDAdataregardlessofthepurposeoftheloan. 15 Reporterscan,butarenotrequiredto,reportpreapprovalrequeststhattheyapprovebutarenotactedonby thepotentialborrower.

8 FederalReserveBulletin|November2015 Mortgage Outcomes by Income and by Race and Ethnicity Akeyattributeof theHMDAdataisthattheyhelppolicymakersandthebroaderpublic betterunderstandthedistributionof mortgagecreditacrossdifferentdemographicgroups. Thenextsetof tablesprovidesinformationonloanshares,productusage,denialratesand reasons,andmortgagepricingforpopulationgroupsdefinedbyapplicantincome,neighborhoodincome,andapplicantraceandethnicity(tables2–8).Withtheexceptionof table8,whichincludesloansformanufacturedhomes,thesetablesfocusonfirst-lienhomepurchaseandrefinanceloansforone-tofour-family,owner-occupied,site-builtproperties. Ascanbeseenfromtable1,suchloansaccountedforabout78percentof allHMDAoriginationsin2014. The Distribution of Home Loans across Demographic Groups Table2showsdifferentgroups’sharesof home-purchaseandrefinanceloansandhow theseshareshavechangedovertime.Forexample,blackborrowers’shareof home-purchaseloans(conventionalandnonconventionalloanscombined)was5.2percentin2014, upfrom4.8percentin2013butstilllowerthanitspeakof 8.7percentin2006.Similarly, theHispanicwhiteshareof home-purchaseloanswas7.9percentin2014,upfrom7.3percentin2013,althoughwellbelowthe11.7percentshareseenin2006.Sharesof refinance loanstominoritiesotherthanAsianshavegenerallyincreasedsince2010.Thebottomof thetableprovidesthetotalloancountsforeachyear,andthusthenumberof loanstoa givengroupinagivenyearcanbeeasilyderived.16 Intermsof borrowerincome,theshareof home-purchaseloanstolow-ormoderateincome(LMI)borrowersdeclined,from28.4percentin2013to27.0percentin2014.17Followingdefinitionsusedbythefederalbanksupervisoryagenciesinenforcementof the CRA,LMIborrowersaredefinedasthosewithincomesof lessthan80percentof estimatedcurrentareamedianfamilyincome(AMFI);AMFIiscalculatedbasedonthe incomesof residentsof themetropolitanareaornonmetropolitanportionof thestatein whichtheloan-securingpropertyislocated.18For2014,theOfficeof Managementand Budgetpublishednewmetropolitanareadelineations,socautionshouldbeexercisedin comparingrelativeincomemeasuresbetween2013and2014.19 From2013to2014,thehome-purchaseloansharedirectedtohigh-incomeneighborhoods (definedascensustracts)decreasedfrom43.2percentto41.8percent.20LMIandmiddleincometractsbothsawsmallgains.Inadditiontothedifficultiesincomparisoninducedby thechangingmetropolitanareadefinitions,itisimportanttonotethatsharesbyneighborhoodincomein2012andthereafterarenotperfectlycomparablewiththosein2011and earlierbecausecensus-tractdefinitionsandcensus-tractmedianfamilyincomeestimateswererevisedin2012.Thecurrenttractdemographicmeasuresarebasedon2010 16 Forexample,thenumberofhome-purchaseloanstoAsiansin2014wasabout148,000,derivedbymultiplying 2.737millionloansby5.4andthendividingby100. 17 Notethatthesumofrefinancesharesacrossborrower-incomegroupsissignificantlylessthan100percent becauseincomeisnotalwaysreliedoninunderwritingdecisions,particularlyinrecentyears,whichappearsto reflectincreasedusageofnonconventionalstreamlinerefinanceprograms.Indeed,in2014,about75percentof refinanceloansforwhichborrowerincomewasnotreportedwerenonconventional. 18 Middle-incomeborrowershaveincomesofatleast80percentandlessthan120percentofAMFI,andhigh-incomeborrowershaveincomesofatleast120percentofAMFI. 19 Asimilarredefinitionofmetropolitanareasaffectscomparisonsbetweenthe2003and2004HMDAdata. 20 DefinitionsforLMI,middle-income,andhigh-incomeneighborhoodsareidenticaltothoseforLMI,middleincome,andhigh-incomeborrowersbutarebasedontheratioofcensus-tractmedianfamilyincometoAMFI measuredfromthe2006–10AmericanCommunitySurveydata.

The2014HomeMortgageDisclosureActData 9 Table2.Distributionofhomeloans,bypurposeofloan,2004–14 Percentexceptasnoted Characteristicofborrower 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 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 5.4 BlackorAfricanAmerican 7.1 7.7 8.7 7.6 6.3 5.7 6.0 5.5 5.1 4.8 5.2 Hispanicwhite 7.6 10.5 11.7 9.0 7.9 8.0 8.1 8.3 7.7 7.3 7.9 Non-Hispanicwhite 57.1 61.7 61.2 65.4 67.5 67.9 67.6 68.7 70.0 70.2 69.1 Otherminority2 1.4 1.3 1.1 1.0 .9 .9 .9 .8 .8 .7 .8 Joint 2.3 2.3 2.3 2.5 2.8 2.8 2.7 2.8 2.9 3.1 3.3 Missing 19.8 11.5 10.5 10.1 9.6 9.3 9.1 8.6 8.2 8.2 8.3 All 100 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 27.7 24.6 23.6 24.7 28.1 36.7 35.5 34.4 33.3 28.4 27.0 Middle 26.9 25.7 24.7 25.2 27.1 26.7 25.6 25.2 25.2 25.2 25.6 High 41.4 45.5 46.7 47.0 43.1 34.7 37.4 38.8 40.0 44.8 46.1 Incomenotusedornotapplicable 4.0 4.2 5.0 3.1 1.7 1.9 1.5 1.6 1.5 1.6 1.3 All 100 100 100 100 100 100 100 100 100 100 100 Neighborhoodincome4 Lowormoderate 14.5 15.1 15.7 14.4 13.1 12.6 12.1 11.0 12.8 12.7 13.3 Middle 48.7 49.2 49.5 49.6 49.8 50.2 49.4 49.4 43.6 43.7 44.6 High 35.8 34.7 33.7 35.1 35.9 35.8 37.7 39.1 43.2 43.2 41.8 All 100 100 100 100 100 100 100 100 100 100 100 B.Refinance Borrowerraceandethnicity1 Asian 3.5 2.9 3.0 3.1 3.1 4.1 5.2 5.4 5.5 4.7 4.4 BlackorAfricanAmerican 7.4 8.3 9.6 8.4 6.0 3.5 2.9 3.1 3.3 4.4 5.3 Hispanicwhite 6.2 8.6 10.1 8.7 5.3 3.2 3.0 3.3 3.9 5.0 6.2 Non-Hispanicwhite 57.2 60.9 59.6 62.7 70.7 74.6 74.3 73.5 72.5 70.5 67.8 Otherminority2 1.4 1.4 1.3 1.1 .8 .6 .5 .6 .6 .7 .9 Joint 2.1 2.1 1.9 2.0 2.2 2.6 2.7 2.8 3.1 3.1 3.3 Missing 22.1 15.7 14.6 14.1 11.9 11.4 11.4 11.3 11.1 11.6 12.2 All 100 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 26.2 25.5 24.7 23.3 23.5 19.6 19.0 19.2 19.6 21.1 22.2 Middle 26.3 26.8 26.1 25.6 25.5 22.5 22.5 21.3 21.8 21.7 22.2 High 38.8 40.8 43.7 46.1 44.8 45.8 49.6 48.1 47.7 46.3 45.6 Incomenotusedornotapplicable 8.7 6.9 5.5 5.0 6.2 12.1 8.9 11.4 10.9 10.9 10.0 All 100 100 100 100 100 100 100 100 100 100 100 Neighborhoodincome4 Lowormoderate 15.3 16.5 17.9 16.1 11.9 7.7 7.2 7.4 10.1 12.1 13.1 Middle 50.0 51.3 52.0 52.2 51.9 47.5 46.1 46.1 41.9 43.8 45.2 High 33.9 31.6 29.4 31.0 35.2 43.5 46.0 46.0 47.6 43.9 41.4 All 100 100 100 100 100 100 100 100 100 100 100 Memo Numberofhome-purchaseloans (thousands) 4,660 4,836 4,298 3,331 2,533 2,391 2,157 2,018 2,284 2,615 2,737 Numberofrefinanceloans(thousands) 6,412 5,692 4,397 3,588 2,869 5,243 4,481 3,823 5,888 4,341 1,921 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 80percentofestimatedcurrentareamedianfamilyincome(AMFI),middle-incomeborrowershaveincomethatisatleast80percentand lessthan120percentofAMFI,andhigh-incomeborrowershaveincomethatisatleast120percentofAMFI. 4 Thecategoriesfortheneighborhood-incomegrouparebasedontheratioofcensus-tractmedianfamilyincometoareamedianfamily incomefromthe2006–10AmericanCommunitySurveydatafor2012and2013andfromthe2000censusfor2004–11,andthethree categorieshavethesamecutoffsastheborrower-incomegroups(seenote3).

10 FederalReserveBulletin|November2015 censusdataand2006–10AmericanCommunitySurveydata,whereasthe2004–11data reliedon2000censusincomeandpopulationdata.21 OnewaytoexaminehowlendingtoLMIborrowersandneighborhoodschangedbetween 2013and2014intheabsenceof changestometropolitanstatisticalarea(MSA)definitions istofocusexclusivelyonlendinginMSAswhoseboundariesremainedthesameacrossthe twoyears.Thereare282suchMSAs,andtheyaccountedforabouthalf of allHMDA-reportedmortgageoriginationsin2013and2014combined.IntheseMSAs,changesinthe shareof loanstodifferentincomegroupslargelymirrorthenationwidepatternsshownin table2(numbersforthe282MSAsnotshownintables). Table3showstheaveragedollarvalueof home-purchaseandrefinanceloansbydifferent groupsandhowtheseaverageshavechangedovertime.Alldollaramountsarereportedin nominalterms.Overall,home-purchasedollarvaluesfollowthehistoricaltrendof home prices,risingduringthemid-2000s,fallingsharplythrough2008and2009,thenbeginning torecoverinthepastfewyears.Thetrendsdiffersubstantiallybyraceandethnicity,however.Theaveragehome-purchaseloantoaHispanicwhiteborrowerin2014wasfor $198,000,upfrom$190,000in2013butwellbelowthepeakof $238,000in2006.Incontrast,theaveragehome-purchaseloanamountforanon-Hispanicwhiteborrowerwas about$231,000in2014,higherthanthepre-crisispeakin2007of about$222,000.Asian borrowerstookoutthelargestloans,averaging$344,000forhomepurchasesand$343,000 forrefinancingsin2014,whereasloanstoblackborrowersaveraged$199,000forhome purchasesand$175,000forrefinancings.22 Intermsof borrowerincome,forLMIborrowers,theaveragehome-purchaseloanedged downfrom$133,000in2013to$132,000in2014;italsoedgeddownformiddle-income borrowers.High-incomeborrowerssawtheiraveragehome-purchaseloanvalueriseto $328,000in2014from$323,000in2013.TheaveragerefinanceloanvaluedeclinedforLMI borrowersbutroseformiddle-andhigh-incomeborrowers,whiletheaverageloanvaluefor bothhome-purchaseandrefinanceloansroseinLMI,middle-income,andhigh-income neighborhoods.Refinanceloansinhigh-incomeneighborhoodsincreasedthemostinaveragevalue,to$293,000in2014from$270,000in2013. Variation across Demographic Groups in Nonconventional Loan Use Table4showsthatblackandHispanicwhiteborrowersaremuchmorelikelytousenonconventionalloans(FHA,VA,RHS,andFSAloans)thanconventionalloanscompared withotherracialandethnicgroups.In2014,68percentof blackhome-purchaseborrowers and60percentof Hispanicwhitehome-purchaseborrowerstookoutanonconventional loan,comparedwithabout33percentof non-Hispanicwhitehome-purchaseborrowers andjust15percentof Asianhome-purchaseborrowers.Thesenumbershavedeclinedfrom theirpeaksin2009and2010,whenoverthree-fourthsof blackandHispanicwhitehomepurchaseborrowers,andoverone-half of non-Hispanicwhitehome-purchaseborrowers, tookoutnonconventionalloans. Nonconventionalusageisalsomoreprevalentforborrowerswithlowerincomesandin neighborhoodswithlowerincomes.In2014,aboutone-half of LMIhome-purchaseborrowersand48percentof thoseborrowingtopurchasehomesinLMIneighborhoodsused 21 Formoreinformationonthetransitiontothenewcensus-tractdata,seeRobertB.Avery,NeilBhutta,Kenneth P.Brevoort,andGlennB.Canner(2012),“TheMortgageMarketin2011:HighlightsfromtheDataReported undertheHomeMortgageDisclosureAct,”FederalReserveBulletin,vol.98(December),pp.1–46, www.federalreserve.gov/pubs/bulletin/2012/default.htm. 22 Medianloanamounts(notshownintables)followedsimilartrendsasaverageloanamounts.

The2014HomeMortgageDisclosureActData 11 Table3.Averagevalueofhomeloans,bypurposeofloan,2004–14 Thousandsofdollars,nominal Characteristicofborrowerandof 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 neighborhood A.Homepurchase Borrowerraceandethnicity1 Asian 280 316 326 334 299 276 293 291 304 328 344 BlackorAfricanAmerican 166 183 197 197 184 172 174 174 179 193 199 Hispanicwhite 189 224 238 220 186 168 168 168 176 190 198 Non-Hispanicwhite 193 211 216 222 209 195 204 204 213 226 231 Otherminority2 206 240 257 245 216 196 201 198 206 219 229 Joint 233 255 261 269 255 248 263 261 274 289 293 Missing 216 248 261 280 265 242 256 262 279 298 293 Borrowerincome3 Lowormoderate 114 116 117 123 128 129 128 125 131 133 132 Middle 165 170 170 176 182 187 189 184 192 194 193 High 281 306 313 317 297 291 303 302 313 323 328 Incomenotusedornotapplicable 208 235 254 266 218 195 214 225 233 262 272 Neighborhoodincome4 Lowormoderate 159 180 189 188 175 160 164 163 158 171 178 Middle 172 190 197 196 186 174 177 173 178 191 196 High 258 284 294 301 277 257 270 271 282 300 307 Memo:Allhome-purchaseloans 201 221 228 232 217 202 210 210 221 235 240 B.Refinance Borrowerraceandethnicity1 Asian 274 325 370 368 321 298 313 309 308 304 343 BlackorAfricanAmerican 151 180 199 192 173 184 180 174 181 171 175 Hispanicwhite 178 219 252 244 193 190 191 183 190 180 190 Non-Hispanicwhite 180 205 221 222 205 209 210 208 212 205 217 Otherminority2 190 229 269 258 211 217 218 207 213 201 215 Joint 210 246 265 262 243 247 254 249 254 248 267 Missing 194 226 246 250 242 243 248 253 253 244 247 Borrowerincome3 Lowormoderate 114 124 124 126 129 138 133 128 135 128 124 Middle 162 181 183 181 180 185 179 174 182 171 175 High 256 294 320 311 275 268 274 280 277 276 302 Incomenotusedornotapplicable 150 178 240 240 194 204 203 185 212 192 202 Neighborhoodincome4 Lowormoderate 142 169 188 185 164 172 172 167 163 153 158 Middle 158 184 201 198 182 184 182 175 181 173 181 High 245 282 313 311 272 259 265 269 269 270 293 Memo:Allrefinanceloans 185 212 232 231 212 216 220 218 221 213 224 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes. 1 Seetable2,note1. 2 Seetable2,note2. 3 Seetable2,note3. 4 Seetable2,note4. nonconventionalloans,comparedwith24percentof high-incomeborrowersand26percentof borrowersinhigh-incomeneighborhoods.Withrespecttorefinanceloans,minority andlower-incomeborrowersareagainmorelikelytousenonconventionalthanconventionalloans.Ingeneral,however,nonconventionalloansarelessprevalentinrefinance lending.23 23 Thereportednonconventionalshareofrefinanceloansislowerthanthetrueshareforthegroupscategorized

12 FederalReserveBulletin|November2015 Table4.Nonconventionalshareofhomeloans,bypurposeofloan,2004–14 Percentexceptasnoted Characteristicofborrowerand ofneighborhood 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ofborrower A.Homepurchase Borrowerraceandethnicity1 Asian 2.9 1.8 2.1 2.6 13.4 26.1 26.6 25.8 21.9 16.0 14.7 BlackorAfricanAmerican 21.7 14.3 13.6 21.7 64.1 82.0 82.9 80.3 77.2 70.6 68.0 Hispanicwhite 13.7 7.5 7.0 12.4 51.4 75.4 77.0 74.1 70.7 62.8 59.5 Non-Hispanicwhite 11.1 8.9 9.5 11.5 35.4 52.0 50.3 47.4 42.2 35.3 33.4 Otherminority2 14.0 9.3 9.4 14.8 48.4 67.6 68.8 65.9 62.2 55.3 53.9 Joint 16.9 12.8 14.4 17.2 46.4 59.4 56.3 53.6 48.9 41.8 41.3 Missing 11.3 5.1 5.7 8.8 32.7 50.6 49.4 45.9 39.4 31.9 32.2 Borrowerincome3 Lowormoderate 20.3 15.2 14.9 16.0 46.1 65.3 66.6 64.5 59.7 52.3 50.2 Middle 14.3 11.0 12.6 16.8 46.1 60.4 59.3 57.0 51.5 45.5 44.7 High 5.3 3.9 4.9 7.5 26.7 38.5 37.2 34.3 29.5 25.0 24.2 Neighborhoodincome4 Lowormoderate 15.8 9.7 9.6 13.8 45.5 64.4 65.1 61.2 57.9 49.6 48.0 Middle 14.1 10.2 10.8 14.2 42.7 59.8 59.4 56.9 52.0 44.5 43.0 High 7.1 5.4 6.1 7.6 27.4 43.4 42.0 39.5 34.6 28.0 26.1 Memo:Allborrowers 11.9 8.5 9.0 11.8 37.6 54.4 53.4 50.5 45.2 38.0 36.6 B.Refinance Borrowerraceandethnicity1 Asian 1.2 .7 .6 1.0 4.6 5.7 4.7 4.3 5.9 6.7 6.9 BlackorAfricanAmerican 11.1 5.8 4.4 10.2 39.2 53.8 42.0 37.8 38.6 37.0 40.3 Hispanicwhite 5.6 2.6 1.9 3.9 20.5 36.2 28.1 22.9 26.9 25.7 21.4 Non-Hispanicwhite 4.0 2.4 2.6 4.9 15.9 16.8 13.6 12.2 14.2 14.8 16.5 Otherminority2 5.5 3.4 2.4 4.9 20.0 28.3 23.3 21.9 25.5 24.9 25.7 Joint 7.5 3.7 3.4 6.2 19.5 21.1 16.6 16.3 20.1 20.4 26.6 Missing 4.2 1.9 1.7 4.1 18.7 19.0 12.5 13.6 16.5 16.8 21.8 Borrowerincome3 Lowormoderate 2.3 1.6 2.9 5.7 18.3 16.6 14.0 11.5 9.3 9.4 13.0 Middle 1.7 1.3 2.7 6.2 19.6 13.2 12.2 10.9 8.9 9.6 13.3 High .8 .6 1.1 2.7 10.5 7.2 6.7 6.3 5.5 6.2 8.8 Neighborhoodincome4 Lowormoderate 5.9 3.2 2.9 6.3 24.6 31.3 23.1 19.7 22.2 22.1 23.0 Middle 5.2 3.0 2.9 5.8 20.2 22.3 17.5 16.1 18.4 18.9 21.3 High 2.9 1.7 1.6 3.0 11.3 12.1 10.0 9.3 11.7 12.4 14.6 Memo:Allborrowers 4.6 2.6 2.5 5.0 17.6 18.7 14.4 13.3 15.6 16.4 18.7 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. BlackandHispanicwhiteborrowerstendtohavelowerincomes,onaverage,thannon-Hispanicwhiteborrowers.Still,racialandethnicdifferencesinnonconventionalloanusepersistwithinincomegroups.Figure5displaysthenonconventionalshareof home-purchase andrefinanceloansforAsian,black,Hispanicwhite,andnon-Hispanicwhiteborrowers splitintoLMI,middle-income,andhigh-incomegroups.Forhome-purchaseloans,black byborrowerincomebecause,inmostnonconventionalrefinanceloans,incomeisnotreported.Thus,when incomeisreportedonarefinanceloan,theloanislikelytobeconventional.

The2014HomeMortgageDisclosureActData 13 Figure5.Nonconventionalshareoforiginations,byborrowerrace,ethnicity,andincome,2014 A. Home purchase Percent of originations 80 Asian Black or African American Hispanic white Non-Hispanic white 60 40 20 0 Low or moderate income Middle income High income B. Refinance Percent of originations 30 Asian Black or African American Hispanic white Non-Hispanic white 20 10 0 Low or moderate income Middle income High income Note:Thedataareannual.Mortgageoriginationsforfirst-lien,one-tofour-family,owner-occupiedproperties.Fordefinitionofborrowerrace andethnicity,seetable2,note1.Forexplanationofborrowerincome,seetable2,note3.Fordefinitionofnonconventionalloans,seetable5, note1. andHispanicwhiteborrowersweremuchmorelikelythannon-Hispanicwhiteborrowers togetnonconventionalloanswithineachincomegrouping.Forrefinanceloans,asubstantialblack–whitegappersistsacrossincomegroups,butLMIandmiddle-incomeHispanic whiteborrowersusenonconventionalloansatapproximatelythesamerateastheirnon- Hispanicwhitecounterparts. Greaterrelianceonnonconventionalloansmayreflecttherelativelylowdown-payment requirementsof theFHAandVAlendingprograms,whichservetheneedsof borrowers whohavefewassetstomeetdown-paymentandclosing-costrequirements.24Thepatterns of productincidencecouldalsoreflectthebehaviorof lenderstosomeextent;forexample, concernshavebeenraisedaboutthepossibilitythatlenderssteerborrowersincertain neighborhoodstowardnonconventionalloans.25 24 FindingsoftheFederalReserveBoard’sSurveyofConsumerFinancesfor2010indicatethatliquidassetlevels andfinancialwealthholdingsforminoritiesandlower-incomegroupsaresubstantiallysmallerthantheyarefor non-Hispanicwhiteborrowersorhigher-incomepopulations.SeeBoardofGovernorsoftheFederalReserve System,“2010SurveyofConsumerFinances,”webpage,www.federalreserve.gov/econresdata/scf/scf_2010.htm. 25 See,forexample,GlennB.Canner,StuartA.Gabriel,andJ.MichaelWoolley(1991),“Race,DefaultRiskand

14 FederalReserveBulletin|November2015 Denial Rates and Denial Reasons In2014,theoveralldenialrateonapplicationsforhome-purchaseloansof 13.2percent wassomewhatlowerthanin2013,whilethedenialrateforrefinanceloanapplicationsof 30.6percentwassubstantiallyhigherthanin2013(table5).26Overlongerhorizons,denial rateshaveexhibitedsignificantvariation,andthesechangesdifferbytypeof loan.For example,forconventionalhome-purchaseloanapplications,thedenialrateof 11.7percent in2014was6.8percentagepointslowerthanin2006,whilefornonconventionalhome-purchaseloanapplications,thedenialrateof 15.6percentin2014was3.5percentagepoints higherthanin2006.Changesinrawdenialratesovertimereflectnotonlychangesincredit standards,butalsochangesinthedemandforcreditandinthecompositionof borrowers applyingformortgages.Forexample,thedenialrateonapplicationsforconventional home-purchaseloanswaslowerin2014thanduringthehousingboomyears,eventhough mostmeasuresof creditavailabilitysuggestthatcreditstandardsaretightertoday.27This resultmaystemfromarelativelylargedropinapplicationsfromriskierapplicants. Asinpastyears,black,Hispanicwhite,and“otherminority”borrowershadnotablyhigher denialratesin2014thannon-Hispanicwhiteborrowers,whiledenialratesforAsianborrowersweremoresimilartothosefornon-Hispanicwhiteborrowers.Forexample,the denialratesforconventionalhome-purchaseloanswereabout25percentforblackborrowers,19percentforHispanicwhiteborrowers,20percentforotherminorityborrowers, 12percentforAsianborrowers,and10percentfornon-Hispanicwhiteborrowers. Previousresearchandexperiencegainedinthefairlendingenforcementprocessshowthat differencesindenialratesandintheincidenceof higher-pricedlending(thetopicof the nextsubsection)amongracialorethnicgroupsstem,atleastinpart,fromfactorsrelatedto creditriskthatarenotavailableintheHMDAdata,suchascredithistory(includingcredit scores)andLTVratios.Differentialcostsof loanoriginationandthecompetitiveenvironmentalsomaybearonthedifferencesinpricing,asmaydifferencesacrosspopulationsin credit-shoppingactivities. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency FairLendingExaminationProcedures.28Theavailabilityof broaderinformationallowsthe examinerstodrawstrongerconclusionsaboutinstitutioncompliancewiththefairlending laws. Lenderscan,butarenotrequiredto,reportuptothreereasonsfordenyingamortgage application,selectingfromninepotentialdenialreasons(table6).Amongdeniedfirst-lien applicationsforone-tofour-family,owner-occupied,site-builtpropertiesin2014,about MortgageLending:AStudyoftheFHAandConventionalLoanMarkets,”SouthernEconomicJournal, vol.58(July),pp.249–62. 26 Denialratesarecalculatedasthenumberofdeniedloanapplicationsdividedbythetotalnumberofapplications,excludingwithdrawnapplicationsandapplicationfilesclosedforincompleteness. 27 BoththeMortgageBankersAssociationandtheUrbanInstitutepublishindexesofmortgagecreditavailability suggestingthatstandardshavebeenmuchtightersincethecrisis.SeeWeiLi,LaurieGoodman,EllenSeidman, JimParrott,JunZhu,andBingBai(2014),“MeasuringMortgageCreditAccessibility,”workingpaper(Washington:UrbanInstitute,November),www.urban.org/research/publication/measuring-mortgage-credit-accessibility. 28 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf.

The2014HomeMortgageDisclosureActData 15 Table5.Denialrates,bypurposeofloan,2004–14 Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ofborrower A.Homepurchase Conventionalandnonconventional1 Allapplicants 14.4 16.0 18.0 18.7 18.0 15.5 15.6 15.8 14.9 14.5 13.2 Asian 13.7 15.9 16.9 17.5 19.2 16.3 15.8 16.5 15.8 15.1 13.9 BlackorAfricanAmerican 23.6 26.5 30.3 33.5 30.6 25.5 24.8 26.0 26.0 25.5 22.7 Hispanicwhite 18.3 21.1 25.1 29.5 28.3 22.2 21.8 21.1 20.2 20.5 18.1 Non-Hispanicwhite 11.1 12.2 12.9 13.3 14.0 12.8 12.9 13.1 12.5 12.2 11.0 Otherminority2 19.4 20.8 24.0 26.7 25.5 21.2 21.9 20.9 20.8 21.5 18.8 Conventionalonly Allapplicants 14.6 16.3 18.5 19.0 18.3 15.8 15.2 15.1 13.6 12.9 11.7 Asian 13.7 16.0 17.1 17.5 19.1 15.8 14.8 15.5 14.4 13.9 13.0 BlackorAfricanAmerican 25.0 27.8 31.9 35.7 37.6 35.8 33.6 33.2 32.0 28.5 24.6 Hispanicwhite 18.6 21.4 25.7 30.5 32.5 26.9 24.9 24.2 22.4 21.5 18.7 Non-Hispanicwhite 11.2 12.3 13.2 13.3 14.1 13.3 12.9 12.7 11.6 10.9 9.8 Otherminority2 19.7 21.2 24.8 27.8 29.0 25.9 28.0 24.6 23.6 22.6 20.1 Nonconventionalonly1 Allapplicants 13.3 12.5 12.1 16.2 17.4 15.3 16.0 16.5 16.3 17.0 15.6 Asian 12.6 11.6 10.6 15.5 20.2 17.7 18.6 19.3 20.2 20.7 18.6 BlackorAfricanAmerican 17.7 16.8 16.2 22.8 25.3 22.6 22.7 23.9 24.0 24.2 21.7 Hispanicwhite 16.3 17.2 15.7 20.5 23.1 20.4 20.7 19.9 19.3 20.0 17.7 Non-Hispanicwhite 10.7 10.2 10.0 13.1 13.9 12.5 13.0 13.6 13.7 14.4 13.2 Otherminority2 16.8 16.3 15.2 18.6 20.9 18.7 18.7 18.8 18.9 20.5 17.7 B.Refinance Conventionalandnonconventional1 Allapplicants 29.5 32.6 35.4 39.6 37.7 24.0 23.3 23.8 19.9 22.7 30.6 Asian 18.8 23.5 27.5 32.6 32.5 21.4 19.5 20.1 17.3 20.5 27.5 BlackorAfricanAmerican 39.9 42.2 44.1 52.0 56.0 42.2 41.7 40.0 32.8 33.9 45.4 Hispanicwhite 28.7 30.1 33.2 43.0 49.1 36.4 33.4 33.2 27.5 28.7 36.0 Non-Hispanicwhite 24.1 26.9 30.1 33.7 32.2 20.7 20.6 21.3 17.8 20.0 27.1 Otherminority2 33.7 35.5 40.6 52.0 57.4 37.3 35.3 34.4 30.0 30.5 41.3 Conventionalonly Allapplicants 30.1 32.9 35.6 39.9 37.0 22.1 21.3 22.3 19.4 22.0 29.0 Asian 18.8 23.5 27.5 32.5 31.5 20.2 18.5 19.4 17.0 20.0 26.6 BlackorAfricanAmerican 41.7 43.0 44.7 53.3 60.9 48.6 41.4 40.6 34.8 35.1 46.5 Hispanicwhite 29.3 30.2 33.3 43.2 50.2 38.9 33.6 33.5 28.9 29.8 36.5 Non-Hispanicwhite 24.6 27.1 30.4 33.9 31.5 19.1 18.9 20.1 17.4 19.4 25.7 Otherminority2 34.5 35.7 40.9 52.6 59.4 38.4 34.8 34.4 31.1 31.0 40.3 Nonconventionalonly1 Allapplicants 15.0 20.1 21.9 31.6 40.9 31.1 33.3 32.2 22.2 25.9 36.5 Asian 15.0 20.0 22.0 38.5 48.9 37.2 34.2 32.7 22.2 26.1 37.5 BlackorAfricanAmerican 17.5 23.6 24.6 33.7 43.5 35.1 42.2 39.1 29.5 31.6 43.8 Hispanicwhite 15.7 23.6 26.3 34.6 43.4 31.4 33.0 32.3 23.3 25.4 34.4 Non-Hispanicwhite 12.0 17.6 19.7 28.3 36.1 27.4 29.3 29.0 19.7 23.0 33.7 Otherminority2 15.2 25.8 22.2 34.8 45.4 34.1 37.0 34.4 26.6 28.9 43.9 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Excludesapplicationswherenocreditdecisionwasmade. Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 NonconventionalloansarethoseinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.Departmentof VeteransAffairs,theFarmServiceAgency,ortheRuralHousingService. 2 Seetable2,note2. 75percentof deniedhome-purchaseapplicationsandabout63percentof deniedrefinance applicationshadatleastonereporteddenialreason.Thetwomostfrequentlyciteddenial reasonsforbothhome-purchaseandrefinanceloansweretheapplicant’scredithistoryand DTIratio(notethatthecolumnsintable6canadduptomorethan100percentbecause lenderscancitemorethanonedenialreason).Forbothhome-purchaseandrefinance

16 FederalReserveBulletin|November2015 Table6.Reasonsfordenial,bypurposeofloan,2014 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 23.1 3.7 22.2 12.9 6.5 5.2 9.5 .6 10.5 25.2 Asian 28.3 4.7 13.5 12.0 7.6 8.7 13.5 .6 11.4 20.5 BlackorAfricanAmerican 25.1 2.9 28.2 9.6 7.3 4.6 6.9 .6 10.0 27.3 Hispanicwhite 25.0 3.9 20.8 11.1 6.6 5.8 6.8 .5 12.0 28.4 Non-Hispanicwhite 21.9 3.8 21.8 14.1 6.2 4.9 9.8 .7 10.3 25.2 Otherminority2 23.6 3.4 26.6 9.7 7.3 5.3 7.0 .7 11.3 26.6 Conventionalonly Allapplicants 23.7 3.2 20.9 15.0 7.2 5.6 10.8 1.0 10.2 22.7 Asian 28.1 4.5 11.8 12.8 8.1 9.1 14.9 .7 11.3 19.4 BlackorAfricanAmerican 24.5 2.2 32.2 12.1 8.5 4.3 6.9 1.4 10.1 23.4 Hispanicwhite 25.4 3.1 22.1 13.8 7.6 6.1 7.5 1.0 12.5 24.1 Non-Hispanicwhite 23.0 3.3 20.1 16.2 6.8 5.3 11.0 1.0 9.6 23.0 Otherminority2 24.0 3.4 26.7 10.1 8.0 6.0 7.6 1.0 11.2 25.8 Nonconventionalonly1 Allapplicants 22.3 4.3 23.8 10.3 5.6 4.7 7.9 .1 11.0 28.5 Asian 29.0 5.2 20.0 9.2 5.8 7.3 7.9 .1 11.8 24.8 BlackorAfricanAmerican 25.5 3.3 25.9 8.2 6.6 4.8 6.8 .1 10.0 29.5 Hispanicwhite 24.8 4.5 19.9 9.2 5.8 5.7 6.2 .2 11.6 31.5 Non-Hispanicwhite 20.4 4.6 24.2 11.1 5.3 4.4 8.1 .2 11.3 28.3 Otherminority2 23.1 3.4 26.5 9.2 6.6 4.6 6.4 .4 11.3 27.4 B.Refinance Conventionalandnonconventional1 Allapplicants 15.8 1.0 18.4 15.3 2.9 3.0 10.4 .1 8.1 36.5 Asian 25.4 1.6 15.3 12.3 3.3 5.3 10.0 .2 9.7 31.3 BlackorAfricanAmerican 11.5 .5 20.0 12.8 3.3 2.0 7.7 .1 7.6 44.9 Hispanicwhite 19.4 1.0 20.6 11.4 3.6 3.6 7.7 .2 9.5 36.2 Non-Hispanicwhite 15.9 1.0 17.8 16.3 2.8 3.0 10.4 .1 8.0 35.9 Otherminority2 16.4 .7 18.9 12.2 3.0 2.9 7.7 .1 8.3 41.1 Conventionalonly Allapplicants 18.7 1.1 19.8 15.7 2.8 3.4 10.3 .2 8.2 32.8 Asian 27.1 1.7 15.4 12.7 3.3 5.6 10.0 .2 9.8 29.3 BlackorAfricanAmerican 14.6 .6 23.0 12.9 2.7 2.2 7.6 .2 7.1 41.0 Hispanicwhite 21.7 1.0 21.5 11.8 3.4 3.8 7.5 .2 9.0 34.4 Non-Hispanicwhite 18.5 1.1 19.1 16.7 2.7 3.3 10.3 .2 8.1 32.4 Otherminority2 19.8 .8 21.2 12.5 2.9 3.2 7.8 .1 8.7 35.9 Nonconventionalonly1 Allapplicants 7.0 .7 14.0 14.1 3.3 2.0 10.7 .03 7.7 47.7 Asian 11.5 1.0 14.7 9.4 3.1 3.2 9.7 .05 9.3 47.5 BlackorAfricanAmerican 6.2 .4 15.2 12.7 4.2 1.7 7.7 .01 8.3 51.3 Hispanicwhite 10.1 .9 17.1 9.7 4.8 2.7 8.6 .05 11.5 43.1 Non-Hispanicwhite 7.0 .7 13.4 15.0 3.1 2.0 10.7 .03 7.6 47.6 Otherminority2 7.8 .4 13.3 11.6 3.4 2.1 7.6 .03 7.2 54.4 Note:Deniedfirst-lienmortgageapplicationsforone-tofour-family,owner-occupied,site-builthomes.Columnssumtomorethan100because lendersmayreportuptothreedenialreasons.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 Seetable5,note1. 2 Seetable2,note2. applications,collateralismorelikelytobecitedasadenialreasononconventionalthan nonconventionalapplications.Forrefinanceapplications,theDTIratioismorelikelytobe citedasadenialreasononconventionalthannonconventionalapplications.

The2014HomeMortgageDisclosureActData 17 Denialreasonsvaryacrossracialandethnicgroupstosomedegree.Forexample,among deniedhome-purchaseloanapplicationsin2014,credithistorywascitedasadenialreason for28percentof deniedblackapplicants,21percentof deniedHispanicwhiteapplicants, 22percentof deniednon-Hispanicwhiteapplicants,andjust13percentof deniedAsian applicants.TheDTIratiowascitedmostoftenasadenialreasonforAsianhome-purchase applicantsat28percent,comparedwith22percentfornon-Hispanicwhiteapplicantsat thelowerend.Finally,collateralwascitedmostoftenasadenialreasononhome-purchase applicationsfornon-Hispanicwhiteapplicantsat14percent,comparedwith10percentfor blackapplicants. The Incidence of Higher-Priced Lending Currentprice-reportingrulesunderHMDA,ineffectsinceOctober2009,definehigherpricedfirst-lienloansasthosewithanannualpercentagerate(APR)of atleast1.5percentagepointsabovetheaverageprimeofferrate(APOR)forloansof asimilartype(for example,a30-yearfixed-ratemortgage).29Thespreadforjunior-lienloansmustbeatleast 3.5percentagepointsforsuchloanstobeconsideredhigherpriced.TheAPOR,whichis publishedweeklybytheFederalFinancialInstitutionsExaminationCouncil,isanestimate of theAPRonloansbeingofferedtohigh-qualityprimeborrowersbasedonthecontract interestratesanddiscountpointsreportedbyFreddieMacinitsPrimaryMortgage MarketSurvey.30 In2014,thefractionof home-purchaseloans(again,firstliensforone-tofour-family, owner-occupied,site-builtproperties)abovethehigher-pricedthresholdincreasedto 11.5percentfrom7.1percentin2013(table7.A).Thisincreasestemmedfromariseinthe higher-pricedshareof nonconventionalloansfrom13.8percentto26percent,whilethe higher-pricedshareof conventionalloansincreasedonlyslightly,from2.9percentto 3.1percent. Thehigher-pricedfractionof FHAhome-purchaseloansspikedfromabout5percentin early2013toabout40percentafterMay2013andcontinuedatmonthlyratesbetween35 and52percentthrough2014,foranannualaverageincidenceof about44percentin2014 (table8).Incontrast,lessthan1percentof VAandFSA/RHShome-purchaseloans werehigherpricedin2014.IncreasesintheFHA’sMIPandthetermlengthoverwhichit mustbepaidappeartohavepushedmanyFHAhome-purchaseloansjustoverthereportingthreshold;asshownintable8,over75percentof higher-pricedFHAhome-purchase loanswerewithin0.5percentagepointof thehigher-pricedthreshold.WiththeFHA reducingtheMIPby0.5percentagepointinJanuary2015,thefractionof FHAborrowers abovethereportingthresholdmayfallinnextyear’sdata. Therewasasmallerincreaseinthehigher-pricedfractionof refinancemortgages—to 3.3percentfrom1.9percentin2013(asshownintable7.A).Thisincreasewasalsolargely drivenbythehigher-pricedshareof FHArefinanceloans,whichroseto15.7percentfrom 6.2percentin2013. Table7.Aalsoshowsthat,in2014aswellasearlieryears,blackandHispanicwhiteborrowershadthehighestincidencesof higher-pricedloanswithinboththeconventionaland 29 Formoreinformationabouttherulechangesrelatedtohigher-pricedlendingandthewaysinwhichtheyaffect theincidenceofreportedhigher-pricedlendingovertime,seeAveryandothers,“The2009HMDAData,”in note11. 30 SeeFreddieMac,“MortgageRatesSurvey,”webpage,www.freddiemac.com/pmms;andFederalFinancial InstitutionsExaminationCouncil,“FFIECRateSpreadCalculator,”webpage,www.ffiec.gov/ratespread/ newcalc.aspx.

18 FederalReserveBulletin|November2015 Table7.Incidenceofhigher-pricedlending,bypurposeofloan,2004–14 A.Unadjusted Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ofborrower Homepurchase Conventionalandnonconventional1 Allborrowers 9.8 22.5 23.2 12.7 8.1 4.6 2.2 3.3 3.1 7.1 11.5 Asian 5.5 16.3 16.4 7.6 4.0 2.4 1.0 1.5 1.4 3.0 5.1 BlackorAfricanAmerican 24.3 46.7 46.4 27.6 14.5 7.1 3.0 5.0 5.3 14.2 25.5 Hispanicwhite 17.5 42.0 43.3 25.9 15.8 8.1 3.9 6.1 5.9 16.8 28.3 Non-Hispanicwhite 7.8 15.5 16.0 9.6 7.2 4.3 2.2 3.1 2.9 6.1 9.4 Otherminority2 14.4 30.3 30.7 16.1 9.1 5.3 2.3 3.5 3.4 8.7 13.5 Conventionalonly Allborrowers 11.0 24.5 25.3 14.0 7.3 4.6 3.3 3.8 3.2 2.9 3.1 Asian 5.6 16.6 16.7 7.7 3.3 1.9 1.0 1.3 1.2 1.1 1.5 BlackorAfricanAmerican 30.6 54.1 53.4 34.0 17.4 8.7 6.1 8.0 6.7 6.1 7.7 Hispanicwhite 20.0 45.3 46.3 28.9 17.7 11.0 9.6 10.7 8.7 7.3 6.5 Non-Hispanicwhite 8.6 16.9 17.5 10.5 6.5 4.8 3.4 3.9 3.2 2.9 3.0 Otherminority2 16.1 33.3 33.6 18.5 9.5 6.7 4.6 5.5 5.1 4.9 5.0 Nonconventionalonly1 Allborrowers 1.2 .9 1.8 3.0 9.5 4.6 1.3 2.7 3.0 13.8 26.0 Asian 2.4 .6 .8 1.3 8.2 3.9 .8 2.0 1.9 13.1 26.0 BlackorAfricanAmerican 1.4 1.6 2.5 4.5 12.8 6.8 2.4 4.3 4.9 17.6 33.8 Hispanicwhite 2.0 1.4 3.5 4.5 14.0 7.1 2.2 4.5 4.8 22.4 43.0 Non-Hispanicwhite 1.0 .7 1.5 2.5 8.4 3.9 1.0 2.3 2.6 12.0 22.2 Otherminority2 4.4 .7 2.1 2.4 8.8 4.7 1.2 2.5 2.4 11.7 20.7 Refinance Conventionalandnonconventional1 Allborrowers 14.5 25.0 30.3 21.0 10.9 3.8 1.8 2.1 1.5 1.9 3.3 Asian 5.8 15.1 19.5 12.5 3.1 .9 .4 .5 .4 .5 1.1 BlackorAfricanAmerican 30.0 46.2 50.7 38.1 22.8 9.0 6.5 6.8 4.1 3.8 5.7 Hispanicwhite 18.2 32.6 36.9 26.5 15.1 7.0 4.4 4.4 2.6 3.1 4.8 Non-Hispanicwhite 12.3 20.4 25.0 17.6 10.2 3.7 1.8 2.2 1.5 2.0 3.3 Otherminority2 17.6 26.9 32.3 23.8 13.9 4.7 2.6 2.6 2.0 2.2 3.0 Conventionalonly Allborrowers 15.2 25.7 31.0 21.8 10.4 3.1 1.3 1.5 1.2 1.5 2.2 Asian 5.8 15.2 19.6 12.5 2.9 .7 .2 .3 .3 .3 .7 BlackorAfricanAmerican 33.7 49.0 52.8 41.5 27.6 9.9 4.0 4.2 2.9 3.3 4.1 Hispanicwhite 19.2 33.4 37.5 27.3 16.0 7.2 3.3 3.3 2.3 2.4 2.8 Non-Hispanicwhite 12.8 20.9 25.6 18.2 9.8 3.1 1.3 1.6 1.2 1.6 2.4 Otherminority2 18.2 27.7 32.9 24.5 14.7 4.8 1.9 2.2 1.7 2.0 2.2 Nonconventionalonly1 Allborrowers 1.5 .9 3.1 6.6 13.2 6.7 4.9 5.9 3.2 3.9 7.9 Asian 3.6 2.1 2.5 4.9 8.9 4.8 3.1 4.0 1.8 2.6 6.8 BlackorAfricanAmerican 1.0 1.2 4.1 7.8 15.2 8.2 9.8 10.9 6.0 4.6 8.1 Hispanicwhite 2.0 .9 2.6 6.2 11.6 6.6 7.3 7.9 3.6 5.1 11.8 Non-Hispanicwhite 1.3 .7 2.8 6.0 12.1 6.5 4.6 5.9 3.3 4.2 8.3 Otherminority2 8.1 3.9 9.6 9.9 10.5 4.5 4.6 4.3 2.9 2.9 5.2 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 Seetable5,note1. 2 Seetable2,note2. nonconventionalloantypes.Thetableprovidestherawratesof higher-pricedlendingby groupfrom2004to2014,but,asdiscussedindetailinpreviousBulletinarticles,theraw ratesreportedinthepublicHMDAdatacanbedifficulttocompareoverlongertimehorizonsfortwomainreasons.First,adifferentprice-reportingrulewasinplacepriortoOctober2009,withthespreadbetweenamortgage’sAPRandtherateonaTreasurybondof

The2014HomeMortgageDisclosureActData 19 Table7.Incidenceofhigher-pricedlending,bypurposeofloan,2004–14 B.Adjusted Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ofborrower Homepurchase Conventionalandnonconventional1 Allborrowers 7.4 18.3 17.1 6.3 1.3 1.3 .6 .8 .8 .7 .8 Asian 3.8 13.0 11.4 3.1 .5 .5 .3 .3 .3 .3 .4 BlackorAfricanAmerican 19.3 40.3 38.5 16.7 1.9 1.3 .6 .7 .9 1.1 1.2 Hispanicwhite 12.3 34.5 32.8 13.0 2.1 1.4 1.0 1.3 1.6 1.6 1.6 Non-Hispanicwhite 5.8 12.1 10.9 4.3 1.3 1.4 .7 .8 .8 .7 .7 Otherminority2 10.5 24.7 22.7 8.0 1.5 1.4 .8 .9 1.1 .9 .9 Conventionalonly Allborrowers 8.2 20.0 18.7 7.1 1.9 2.3 1.3 1.4 1.2 .9 .8 Asian 3.8 13.3 11.6 3.2 .5 .6 .3 .4 .4 .3 .4 BlackorAfricanAmerican 24.4 46.9 44.5 21.2 4.7 4.0 2.6 2.6 2.7 1.8 1.4 Hispanicwhite 14.0 37.2 35.2 14.8 3.9 4.6 3.9 4.1 4.5 2.8 2.3 Non-Hispanicwhite 6.5 13.2 12.0 4.9 1.9 2.6 1.3 1.5 1.2 .8 .7 Otherminority2 11.6 27.2 25.0 9.3 2.7 3.7 2.3 2.5 2.6 1.7 1.3 Nonconventionalonly1 Allborrowers .9 .3 .2 .3 .4 .4 .1 .2 .3 .5 .7 Asian 2.2 .3 .1 .2 .2 .2 .1 .2 .2 .3 .4 BlackorAfricanAmerican 1.0 .5 .3 .6 .4 .7 .2 .3 .3 .8 1.1 Hispanicwhite 1.6 .3 .3 .2 .5 .4 .1 .3 .3 .8 1.1 Non-Hispanicwhite .8 .2 .2 .2 .3 .3 .1 .2 .3 .5 .7 Otherminority2 3.9 .3 .2 .2 .3 .3 .1 .1 .2 .3 .6 Refinance Conventionalandnonconventional1 Allborrowers 11.3 20.1 21.3 12.7 4.3 1.4 .6 .8 .7 .7 1.0 Asian 4.1 12.2 12.1 5.4 .8 .2 .1 .2 .1 .1 .2 BlackorAfricanAmerican 24.3 38.5 39.0 26.4 10.6 3.5 2.6 3.3 2.5 1.6 2.0 Hispanicwhite 13.4 27.0 25.8 14.8 5.6 2.5 1.8 1.8 1.1 .9 1.0 Non-Hispanicwhite 9.5 15.9 16.9 10.3 4.1 1.4 .6 .8 .7 .7 1.1 Otherminority2 13.2 22.0 22.3 14.5 7.1 2.1 .9 1.1 1.1 .8 .9 Conventionalonly Allborrowers 11.8 20.7 21.9 13.3 5.1 1.5 .5 .6 .4 .4 .7 Asian 4.1 12.3 12.1 5.4 .9 .2 .1 .1 0 0 .1 BlackorAfricanAmerican 27.3 40.8 40.7 29.4 17.1 6.3 2.0 1.8 1.0 1.0 1.4 Hispanicwhite 14.1 27.7 26.2 15.4 6.9 3.5 1.4 1.3 .8 .7 .8 Non-Hispanicwhite 9.9 16.3 17.3 10.9 4.8 1.6 .5 .6 .4 .5 .8 Otherminority2 13.6 22.6 22.7 14.9 8.3 2.8 .9 .9 .7 .7 .7 Nonconventionalonly1 Allborrowers 1.0 .6 .7 .5 .4 .5 1.2 2.5 2.4 1.8 2.1 Asian 2.9 1.8 1.3 1.4 .5 .3 .5 1.5 1.4 1.1 1.6 BlackorAfricanAmerican .6 .8 1.2 .6 .5 1.1 3.5 5.9 4.9 2.6 2.8 Hispanicwhite 1.4 .4 .3 .6 .7 .8 2.8 3.5 1.9 1.3 1.7 Non-Hispanicwhite .8 .4 .4 .3 .4 .5 1.0 2.4 2.5 2.1 2.5 Otherminority2 6.3 3.4 7.8 6.3 1.9 .4 1.1 2.0 2.2 1.3 1.5 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1.Seetextfordetailsonhowadjustedincidencesofhigher-pricedlendingarecalculated. 1 Seetable5,note1. 2 Seetable2,note2. comparableterm(ratherthantheAPOR)reportedif itroseabove3percentagepoints.31 Second,thepreviousprice-reportingrulecreatedunintendeddistortionsinreportingover 31 Thereportingthresholdforjuniorlienswas5percentagepoints.

20 FederalReserveBulletin|November2015 Table8.Distributionofpricespread,2014 Percentexceptasnoted LoanswithAPORspreadabove1.5percentagepoints1 Purposeandtypeofloan Totalnumber Distribution,bypercentagepointsofAPORspread Number Percent 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 5ormore Site-builthomes Homepurchase Conventional 1,735,766 53,654 3.1 56.3 18.5 10.8 8.6 3.1 2.6 FHA2 583,539 258,647 44.3 76.2 21.0 2.1 .6 .03 .05 VA/RHS/FSA3 417,201 1,538 .4 79.5 12.9 1.4 .9 3.1 2.3 Refinance Conventional 1,561,325 34,546 2.2 48.1 19.8 11.3 11.8 5.0 4.1 FHA2 170,306 26,675 15.7 58.0 13.8 6.0 19.6 1.5 1.1 VA/RHS/FSA3 189,626 1,745 .9 88.6 1.0 2.0 1.2 6.2 1.1 Manufacturedhomes Homepurchase Conventional 50,957 39,193 76.9 6.1 4.7 6.8 13.7 12.9 55.8 FHA2 12,231 8,163 66.7 53.4 31.3 7.0 4.0 4.3 .01 VA/RHS/FSA3 4,012 46 1.2 87.0 10.9 0 2 0 .01 Refinance Conventional 20,405 6,147 30.1 20.6 14.7 14.0 21.9 12.4 16.4 FHA2 5,009 1,034 20.6 60.1 21.3 6.3 11.5 .7 .2 VA/RHS/FSA3 3,162 25 .8 84.0 12 0 0 4 0 Note:First-lienmortgagesforone-tofour-familyowner-occupiedhomes. 1 Averageprimeofferrate(APOR)spreadisthedifferencebetweentheannualpercentagerateontheloanandtheAPORforloansofasimilar typepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Thethresholdforfirst-lienloansisaspreadof 1.5percentagepoints. 2 LoansinsuredbytheFederalHousingAdministration. 3 LoansbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theRuralHousingService,ortheFarmServiceAgency. time(whichiswhythereportingrulewaschanged),sodatafromyearspriorto2009are notevendirectlycomparablefromyeartoyear.32 Table7.Bprovidesadjustedratesof higher-pricedlendingthatareintendedtobemore comparableovertime.Usingthedatesof applicationandorigination(whicharenot releasedinthepublicHMDAdatafiles)andassumingallloansare30-yearfixed-rate mortgages,wecanestimatetheAPRof loansthatwereoriginatedundertheoldpricing rule.33ThisestimatedAPRcanthenbecomparedwiththeAPOR,asisdoneunderthe newprice-reportingrule.Finally,becausetheimpliedthresholdspreadovertheAPORduringthepreviousreportingregimegottoashighasabout2.5percentagepoints,table7.B reportsthefractionof loanswithanestimatedAPRspreadovertheAPOR(ortheactual reportedspreadforloansmadeunderthenewrules)of atleast2.5percentagepoints— 32 Thesedistortionsarerelatedtothefactthatchangesinlong-termTreasuryratesdonotalwaysleadtoparallel changesinmortgagerates.Foradiscussionofhowtheoldrulecouldproducemisleadingdataabouttrendsin higher-pricedlending,seeNeilBhuttaandDanielR.Ringo(2014),“The2013HomeMortgageDisclosureAct Data,”FederalReserveBulletin,vol.100(November),pp.1–32,www.federalreserve.gov/pubs/bulletin/2014/ default.htm. 33 Theassumptionthatallmortgageswerefixedratelikelyunderstatestheextentofhigher-pricedlendingduring theearlyyearsofthehousingboom.Duringthisperiod,adjustable-ratemortgageswerequiteprevalent,and theAPRsonsuchloansaretiedtoevenshorter-termTreasuryratesthanfixed-ratemortgages.Thus,whenthe yieldcurveisrelativelysteep,asitwasin2004,thebarforadjustable-ratemortgagestobereportedashigher pricedwouldhavebeenevenhigherthanforfixed-ratemortgages.

The2014HomeMortgageDisclosureActData 21 ratherthan1.5percentagepoints,asintable7.A.34Higher-pricedlendingbythismeasure virtuallydisappearedby2008andhasnotreemerged,likelyreflectingthelackof subprime mortgagelending. Regulatory Changes Severalsignificantchangestotheregulationof themortgagemarkettookplacein2014. Thissectionbrieflydiscussesthenewrulesandanalyzessomepossibleeffectsof thesenew rules. Ability-to-Repay and Qualified Mortgage Rules OnJanuary10,2014,theCFPB’sfinalATRandQMrules,pursuanttotheDodd-Frank WallStreetReformandConsumerProtectionActof 2010,wentintoeffect.Tohelpensure thatlendersmakeareasonable,goodfaithdeterminationthatborrowerswillbeableto repaytheirmortgageloans,thenewATRrulesrequirelenderstomeetminimumunderwritingstandards,suchasconsideringandverifyingamortgageapplicant’sassetsor income,debtload,andcredithistoryformostclosed-endresidentialmortgageloans.Borrowersmayallegeaviolationof theATRrequirementwithinthreeyearsof thedateof violationoruseaviolationof theATRrequirementasadefensetoforeclosureforthelife of theloan.LendersthatarefoundtoviolatetheATRrulescanbeliableformonetary damages. LendersarepresumedtocomplywiththeATRrequirementwhentheymakeaQMloan, whichmustmeetfurtherunderwritingandpricingstandards.35Theserequirementsgenerallyincludealimitonpointsandfeesto3percentof theloanamountandvarious restrictionsonloantermsandfeatures(forexample,nonegativeamortizationorinterestonlypaymentsandaloantermof 30yearsorless).36QMloansalsogenerallyrequirethat theborrower’stotalDTIratiodoesnotexceed43percent.However,currently,the43percentDTIcapdoesnotapplytoFHA,VA,FSA,andRHSloans,loansthatareeligiblefor purchasebytheGSEs,andportfolioloansmadebysmallcreditors. TheHMDAdatacanprovidesomeinsightintowhetherthesenewruleshadaneffecton creditavailability,althoughtheyareanimperfectresource.Forexample,if thenewrules discouragedlendingtoriskierborrowers,theycouldhaveledtoasignificantreductionin theshareof loanstominorityandLMIborrowers,whotendtohavelowerassetsand creditscoresandhigherDTIratios.37However,asdiscussedearlier,blackandHispanic 34 Foramoredetaileddiscussionofthisadjustmenttechnique,seeAveryandothers,“The2009HMDAData,”in note11. 35 Infact,therearetwolevelsoflegalprotection:a“safeharbor”(thatis,aconclusivepresumptionofcompliance)forQMloansthatarenothigherpriced(firstlienswithanAPRthatislessthan1.5percentagepoints abovetheAPORorjuniorlienswithanAPRthatislessthan3.5percentagepointsabovetheAPOR)and a“rebuttablepresumptionofcompliance”forQMloansthatarehigherpriced.ForFHAloans,thesafeharborisgiventoloanswithAPRsthatareequaltoorlessthan1.15percentagepointsplustheongoingMIPover theAPOR.MostVAloanshavesafe-harborstatusregardlessoftheAPR.Thesafe-harborpricethresholdalso differsforsmallcreditors. 36 Forinformationonhowtheterms“pointsandfees”and“loanamount”aredefinedforthepurposesofQMs andotherguidanceontherules,seeConsumerFinancialProtectionBureau(2014),Ability-to-RepayandQualifiedMortgageRule:SmallEntityComplianceGuide(Washington:CFPB,November3),http://files.consumerfinance.gov/f/201411_cfpb_atr-qm_small-entity-compliance-guide.pdf. 37 FordataoncreditscoresandDTIratiosbyborrowerraceandincome,seeNeilBhuttaandGlennB.Canner (2013),“MortgageMarketConditionsandBorrowerOutcomes:Evidencefromthe2012HMDADataand MatchedHMDA–CreditRecordData,”FederalReserveBulletin,vol.99(November),pp.1–58, www.federalreserve.gov/pubs/bulletin/2013/default.htm.

22 FederalReserveBulletin|November2015 whiteborrowers’shareof home-purchaseloansincreasedin2014afterhavingdeclinedfor severalyears.Inaddition,if theQMcapontheDTIratioforconventionalnon-GSEloans wasbinding,therecouldhavebeenasignificantincreaseinthefrequencyatwhichlenders citedtheDTIratioasareasonfordenial.However,therewaslittlechangeinthisfrequency.38Also,aswillbediscussedlater,jumbohome-purchaseloans,whicharenoteligibleforGSEpurchaseandwouldbesubjecttotheDTIcaptoqualifyasQMs,grewmuch morerapidlythanotherhome-purchaseloans. Toexplorefurther,thissectionexamineswhethertherulesmayhavecurbedhigh-DTI loans.TheHMDAdatadonotprovideallof theinformationnecessarytocalculateDTI ratios,sowecannotdirectlymeasurehowthefrequencyof loanswithDTIratiosinexcess of 43percenthaschangedwiththeintroductionof theATRandQMrules.Otherdebts, suchasautoloansandstudentloans,areaddedtomonthlymortgageobligationsinthe numeratorof theDTIcalculation.Thetermof theloan,whichisnotreportedunder HMDA,canalsoaffecttheDTIratio,asashortertermincreasesmonthlymortgagepayments,holdingallelseequal. Withthesecaveatsinmind,wemaystillbeabletogleansomeusefulinformationonthe extentof high-DTIlending.ForeachHMDAloanwithareportedincome,weestimatea “frontend”DTIratiobasedontheloanamount,income,originationdate,andreported spreadovertheAPOR.ThisapproximateDTIratioistheratioof monthlymortgagepayment(principalandinterestonly)toincome,assumingthattheloanfollowsa30-year fixed-ratestructure,withallpointsandfeesfinancedoverthelifeof theloan.Theinterest rateisassumedtobethereportedspreadovertheAPORplustheAPORtakenfromtwo weeksbeforetheloanwasoriginated.If thespreadwasbelowthereportablethreshold,the interestrateisassumedtobetheAPORplus0.25percentagepointforconventional loans.39Forexample,foraloanof $100,000toaborrowerwithannualincomeof $50,000, anunreportedspread,andtherelevantAPORequalto4percent,theapproximateDTI ratiowouldbe11.8percent. Figure6displaysthedistributionsof theseapproximateDTIratiosbydemographicgroup in2013and2014(additionaldataarereportedintable9).The2014dataarerestrictedto loanswithanapplicationdateonorafterJanuary10,2014,thedatewhentheATRrules wereimplemented.Again,theestimatedfront-endDTIratiosarelowerthanthe“back end”DTIratioslendersactuallyusetoassesstheATRandQMeligibility,whichinclude otherhousing-relatedobligations,suchastaxesandinsurance,aswellasnonmortgagedebt payments.Thatsaid,if theATRandQMruleswereasignificantdeterrenttoloanswitha back-endDTIratioabove43percent,wemightexpecttoseetheupperpercentilesof the estimatedfront-endDTIratiodecreasenoticeablybetween2013and2014.Infact,thedistributionslookquitesimilaracrossthetwoyears.40Evenforconventionaljumboloans, whicharenoteligibleforpurchasebytheGSEsandthereforemusthaveaDTIbelow 38 ThefrequencywithwhichtheDTIratiowascitedasadenialreasonedgedupto23.1percentfrom22.1percent in2013fordeniedhome-purchaseapplicationsanddroppedslightlyto15.8percentfrom16.6percentforrefinancedenials. 39 Thelackofdataonspreadsbelowthereportingthresholdcouldmasksomesmallchangesinthedistribution ofDTIratiosbetween2013and2014.IntheabsenceofdataonthetrueAPRs,weassumeaspreadof 0.25percentagepointonconventionalandVAloanstoreflectthefactthatinterestratesneartheprevailing primeratearemorecommonthanthosefarfromit.ForFHAloanswithoutareportedspread,weassumea spreadof1.35percentagepointsforloanswithanapplicationdateonorafterApril1,2013.Forloanswithan applicationdatebeforeApril1,2013,weassumeaspreadof1.25percentagepointsforFHAhome-purchase loansandaspreadof0.75percentagepointforFHArefinancings.ThesespreadsreflectthetypicalMIPrates. FSAandRHSloansareassumedtohaveaspreadof0.5percentagepointifnospreadisreportedtomatchthe guaranteefees.TheapproximateDTIratiosarecappedat51percent,asextremelyhighvalueslikelyreflect misreporteddata. 40 Asseenintable9,the90thand95thpercentilesoftheapproximateDTIratioforrefinanceloanstoLMIbor-

The2014HomeMortgageDisclosureActData 23 Figure6.Percentilesofapproximatedebt-to-incomeratiosforhome-purchasemortgages,byborrower race,ethnicity,andincome,2013and2014 A. Race and ethnicity Percent 90th percentile Percent 99th percentile 40 2013 2014 40 2013 2014 30 30 20 20 10 10 0 0 Asian Black or Hispanic Non-Hispanic Asian Black or Hispanic Non-Hispanic African white white African white white American American B. Income Percent 90th percentile Percent 99th percentile 40 2013 2014 40 2013 2014 30 30 20 20 10 10 0 0 Low or moderate Middle Higher Low or moderate Middle Higher Note:Thedataareannual.First-lienhome-purchasemortgagesforone-tofour-family,owner-occupied,site-builthomes.Thedatafor2014are restrictedtoloanswithanapplicationdateonorafterJanuary10,2014.Fordefinitionofborrowerraceandethnicity,seetable2,note1.For explanationofborrowerincome,seetable2,note3. 43percentinordertobeaQM,theestimatedDTIratioslargelyheldsteadybetween2013 and2014. Anumberof factorsmayhelpexplainwhytheATRandQMrulesappeartohavehadlittle bitein2014relativeto2013.Sincethefinancialcrisisandthrough2013,lendershavetightenedstandards,andmostloanshavebeeneitherGSEeligibleornonconventional;thus, mostlendingin2013mayhavealreadymetthenewATR,if notQM,standards.Moreover, lendersmayhaveadjustedtothenewrulespriortotheactualimplementationdatein2014, reducingthedifferencesbetween2013and2014.Atthesametime,lendersmakingloansin 2013thatwouldnothavebeenQMloansunderthenewrulesmayhavebeenwillingto continuedoingsoin2014despitesomeaddedlegalrisk. Still,itisimportanttorecognizethatwedonotknowhowthemarketwouldhaveevolved in2014intheabsenceof thenewrules.Perhapsintheirabsence,DTIratioswouldhave risensignificantly.Inaddition,borrowersmayhavereducednonmortgagedebt,whichwe donotobserveintheHMDAdata,inresponsetothenewrules.Thus,wecannotruleout thattherewasaneffectonDTIratiosin2014relativeto2013.Furthermore,theATRand QMrulescouldhaveaffectedotherdimensionsof themortgagemarketthatarenot observedintheHMDAdata,suchastheuseof low-documentationandinterest-only loans.Finally,evenif theruleshadlittleeffectin2014,theymaybecomemorebindingin thefutureif mortgagelendersandinvestorsregaintheirappetiteforrisk. rowersdidcomedownalittle,but,forallhome-purchaseloansandmostothergroupsintherefinancemarket, theupperpercentileseitherstayedthesameorincreased.

24 FederalReserveBulletin|November2015 Table9.Percentilesofestimatedfront-enddebt-to-incomeratios,bypurposeofloan,2013–14 Percent Percentile Characteristicofborrowerand 2013 2014 ofneighborhood 50 75 90 95 99 50 75 90 95 99 A.Homepurchase Borrowerraceandethnicity1 Asian 19 24 30 33 38 19 25 30 33 38 BlackorAfricanAmerican 18 23 27 30 35 18 23 28 31 36 Hispanicwhite 19 25 30 32 37 20 26 31 33 38 Non-Hispanicwhite 16 20 25 28 34 16 21 26 29 34 Otherminority2 18 24 29 32 37 19 24 29 32 38 Joint 15 20 25 28 34 16 20 25 28 34 Missing 16 21 27 30 35 17 22 27 30 35 Borrowerincome3 Lowormoderate 20 25 29 32 38 20 25 30 33 38 Middle 17 22 27 30 35 18 22 27 30 35 High 14 18 22 25 31 14 18 23 26 32 Neighborhoodincome4 Lowormoderate 17 22 28 31 36 18 23 29 32 37 Middle 16 21 26 29 35 17 22 27 30 35 High 16 21 26 29 35 16 21 26 29 35 Incomenotusedornotapplicable 15 20 25 28 35 14 19 24 27 35 Memo Conventionaljumboloans5 17 23 28 31 38 18 23 28 31 37 Allhome-purchaseloans 16 21 26 29 35 17 22 27 30 35 B.Refinance Borrowerraceandethnicity1 Asian 16 21 28 32 51 18 24 29 33 45 BlackorAfricanAmerican 13 19 26 32 51 14 20 26 32 51 Hispanicwhite 15 22 29 35 51 17 23 30 34 51 Non-Hispanicwhite 12 17 23 28 42 13 19 25 29 42 Otherminority2 15 21 29 36 51 16 23 30 34 51 Joint 12 17 23 27 39 14 19 25 29 39 Missing 13 18 25 30 48 14 20 26 30 43 Borrowerincome3 Lowormoderate 18 25 33 42 51 18 25 32 39 51 Middle 14 19 24 27 34 15 20 26 29 36 High 10 14 19 22 29 12 17 22 25 31 Neighborhoodincome4 Lowormoderate 13 19 26 32 51 14 20 27 32 51 Middle 12 18 24 29 46 14 19 26 30 44 High 13 18 24 28 42 14 20 26 30 41 Incomenotusedornotapplicable 11 16 22 26 35 12 17 23 27 36 Memo Conventionaljumboloans5 17 23 29 33 43 18 24 29 33 41 Allrefinanceloans 13 18 24 29 46 14 20 26 30 43 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Thedatafor2014arerestrictedtoloanswithan applicationdateonorafterJanuary10,2014.Seetextfordetailsonhowthefront-enddebt-to-incomeratioisestimated. 1 Seetable2,note1. 2 Seetable2,note2. 3 Seetable2,note3. 4 Seetable2,note4. 5 Jumboloansareloanswithamountsinexcessofthesingle-familyconformingloan-sizelimitsforeligibilityforpurchasebythe government-sponsoredenterprises.

The2014HomeMortgageDisclosureActData 25 Table10.DistributionofHOEPAloans,bycharacteristicofloan,2004–14 Percentexceptasnoted Loansbypurpose, lienstatus,property 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 type,andamount HOEPAloans (total) 24,437 35,985 15,195 10,780 8,577 6,446 3,407 2,373 2,193 1,873 1,262 Loanpurpose Homepurchase 0 0 0 0 0 0 0 0 0 0 31.8 Homeimprovement 37.7 26.1 42.4 45.4 30.5 31.1 32.6 32.3 31.5 30.1 18.0 Refinance 62.3 73.9 57.6 54.6 69.5 68.9 67.4 67.7 68.5 69.9 50.2 Lienstatus First 55.5 60.5 53.6 52.8 78.5 84.1 83.9 82.8 84.6 84.0 91.6 Junior 44.5 39.5 46.4 47.2 21.5 15.9 16.1 17.2 15.4 16.0 8.4 Propertytype Sitebuilt 88.0 91.8 83.7 81.0 72.7 67.8 68.3 65.7 65.7 69.1 75.2 Manufacturedhome 12.0 8.2 16.3 19.0 27.3 32.2 31.7 34.3 34.3 30.9 24.8 Loanamount Lessthan$50,000 72.4 48.4 72.1 74.3 66.7 72.5 76.5 77.8 75.6 71.0 53.2 Greaterthan $50,000 27.6 51.6 27.9 25.7 33.3 27.5 23.5 22.2 24.4 29.0 46.8 Note:Mortgagesforone-tofour-familyowner-occupiedhomes.HOEPAloansaremortgageswithtermsthattriggeredtheadditionalprotections providedbytheHomeOwnershipandEquityProtectionAct. HOEPA Loans UnderHOEPA,certaintypesof mortgageloansthathaveinterestratesorfeesabovespecifiedlevelsaresubjecttoadditionalconsumerprotections,suchasspecialdisclosuresand restrictionsonloanfeatures.NewrulesextendingHOEPA’sprotectionsfromrefinanceand homeequityloanstoalsoincludehome-purchaseloansandhomeequitylinesof credit becameeffectiveonJanuary10,2014.Theserulesalsoaddednewprotectionsforhigh-cost mortgages,suchasapre-loancounselingrequirementforborrowers. Thenewrulesalsochangedthebenchmarkusedtoidentifyhigh-costloansthatarecoveredbyHOEPA’sprotections.Insteadof usingtheyieldonTreasurysecurities,high-cost loansareidentifiedbycomparingaloan’sAPRwiththeAPOR.HOEPAcoveragenow appliestofirstlienswithanAPRmorethan6.5percentagepointsabovetheAPOR.If the loanisajuniorlienortheloanamountislessthan$50,000andissecuredbypersonal property(suchasamanufacturedhome),thenthehigh-costthresholdis8.5percentage pointsabovetheAPOR.Priorto2014,HOEPA’sprotectionsweretriggeredif theloan’s APRexceeded8percentagepointsabovetherateonaTreasurysecurityof similartermfor firstliens,and10percentagepointsforjuniorliens.Finally,underthenewrules,HOEPA coverageisalsotriggeredif thepointsandfeesexceedcertainthresholds.41 WhileHOEPAloanswereneveralargefractionof themortgagemarket,theyhavebecome evenrarersincethehousingboom.In2005,lendersreportednearly36,000HOEPAloans (table10).In2014,thetotalwas1,262loans,downfrom1,873in2013despitetheadditionalcoverageof home-purchaseloans. WhileHOEPAloanswerequiterarein2014,mortgageswithanAPRnearto,butbelow, thetriggeringthresholdweresomewhatmorecommon.Figure7plotsthefrequencyof first-lienmortgagesforowner-occupiedpropertiesagainstthespreadovertheAPORina 41 Underthenewrules,aloanisalsoconsideredhighcostifthepointsandfeesexceed5percentofthetotalloan amountforaloanequaltoormorethan$20,000and8percentofthetotalloanamountor$1,000foraloan lessthan$20,000,withtheloanamountsadjustedannuallyforinflation.

26 FederalReserveBulletin|November2015 1percentagepointrangearound Figure7.NumberoforiginationsnearHOEPAspread theHOEPAtriggeringthreshold. thresholds,2013and2014 Thetoppanelcombinesloansof $50,000ormoreformanufactured A. Manufactured and loan amount ≥ $50,000 or site built homeswithallloansforsite-built Number of loans homes,astheseloansallhavea 1,200 HOEPAthresholdof 6.5percent- 2013 2014 1,000 agepoints.Thebottompanelpres- 800 entsthefrequencyof loansless 600 than$50,000formanufactured homes,whichtriggerHOEPApro- 400 tectionsif theAPRismorethan 200 8.5percentagepointsabovethe 0 6.05 6.15 6.25 6.35 6.45 6.55 6.65 6.75 6.85 6.95 APOR.Inbothpanels,thevalues Spread over the APOR (percentage points) from2013areplottedforcomparison,astheAPOR-baseddefinition of high-costmortgageswasnotin B. Manufactured and loan amount < $50,000 usethen.Inbothpanels,the2014 Number of loans plotsarerestrictedtoloanswithan 700 2013 2014 applicationdateonorafterJanu- 600 ary10,2014,whenthenewrule 500 wentintoeffect. 400 300 Bothpanelsshowaprecipitous 200 dropinthenumberof loans 100 originatedin2014attheHOEPA 0 8.05 8.15 8.25 8.35 8.45 8.55 8.65 8.75 8.85 8.95 pricethreshold,whereasfor Spread over the APOR (percentage points) 2013—beforethenewthreshold rulestookeffect—nosuchdisconti- Note:Thedataareannual.First-lienmortgageoriginationsforowner-occupied propertiesclusteredintobinsof0.05percentagepoint.Thedatafor2014are nuitywasevident.Thispattern restrictedtoloanswithanapplicationdateonorafterJanuary10,2014.HOEPA suggeststhatHOEPAdiscouraged isHomeOwnershipandEquityProtectionAct;APORisaverageprimeofferrate. lendingabovethepricethresholds, butthemechanismbywhichthe marketrespondstoHOEPAisunclear.OnepossibilityisthatlendersreducetheAPRon theirofferstopushtheloanunderthethreshold,whichwouldimplyabenefittoconsumersintheformof alowerprice.Anotherpossibilityisthat,ratherthanadjustingprices, lendersdeniedapplicationstheywouldhaveacceptedintheabsenceof HOEPA.In thiscase,consumersmayormaynotbenefitfromthelaw.Finally,prospectiveborrowers mayhavechosentorejecthigh-costofferswhenpresentedwiththeadditionalHOEPAdisclosures.Furtherresearchisneededtounderstandtherelativeimportanceof eachof these mechanisms. Lending Institutions In2014,therewere7,062reportinginstitutions(table11).Thetotalconsistedof 4,118 banksandthrifts(hereafter,banks),of which3,367weresmall,definedashavingassetsof lessthan$1billion;1,984creditunions;139mortgagecompaniesaffiliatedwithdepositories(banksandcreditunions);and821independentmortgagecompanies.42Bankscollec- 42 DataonbankassetsweredrawnfromtheFederalDepositInsuranceCorporationReportsofConditionand Income.The$1billionthresholdisbasedonthecombinedassetsofallbankswithinagivenbankingorganization.DataavailableintheHMDAReporterPanelcanbeusedtohelpidentifythevarioustypesofinstitutions. Affiliateinstitutionsincludeallmortgagecompaniesknowntobewhollyorpartiallyownedbyadepository—

The2014HomeMortgageDisclosureActData 27 Table11.Lendingactivity,bytypeofinstitution,2014 Percentexceptasnoted Typeofinstitution1 Institutionsandtypeofactivity Affiliated Independent Smallbank Largebank Creditunion mortgage mortgage All company company Numberofinstitutions 3,367 751 1,984 139 821 7,062 Applications(thousands) 787 3,616 909 501 4,119 9,933 Originations(thousands) 558 2,161 545 313 2,403 5,980 Purchases(thousands) 26 1,061 12 172 481 1,752 Numberofinstitutionswithfewerthan100loans 1,935 149 1,150 38 88 3,360 Originations(thousands) 79.3 6.7 44.5 1.6 3.4 135.5 Numberofinstitutionswithfewerthan25loans 667 45 443 16 41 1,212 Originations(thousands) 8.2 .6 5.2 .2 .5 14.7 Home-purchaseloans(thousands)2 220 869 172 189 1,288 2,737 Conventional 73.8 74.3 86.8 58.9 51.9 63.4 Higher-pricedshareofconventionalloans 11.3 1.7 8.9 1.0 1.5 3.1 LMIborrower3 28.9 23.5 26.1 30.1 28.8 27.0 LMIneighborhood4 11.9 11.8 12.7 12.6 14.7 13.3 Non-Hispanicwhite5 81.3 69.9 70.7 71.0 65.9 69.1 Minorityborrower5 11.8 17.8 14.4 16.8 22.6 19.3 Sold6 70.6 72.7 43.7 97.3 97.6 84.1 Refinanceloans(thousands)2 119 723 177 86 816 1,921 Conventional 85.7 90.6 96.4 80.2 69.2 81.3 Higher-pricedshareofconventionalloans 11.3 1.5 3.5 .8 1.2 2.2 LMIborrower3 22.5 23.5 24.6 21.1 20.6 22.2 LMIneighborhood4 11.3 12.8 13.9 12.0 13.6 13.1 Non-Hispanicwhite5 84.2 68.8 71.2 68.3 63.7 67.8 Minorityborrower5 8.2 17.1 14.6 17.1 18.2 16.8 Sold6 58.0 72.6 29.8 96.4 98.4 79.4 1 Smallbanksconsistofthosebankswithassets(includingtheassetsofallotherbanksinthesamebankingorganization)oflessthan $1billionattheendof2013.Largebanksareallotherbanks.Affiliatedmortgagecompaniesarenondepositorymortgagecompaniesowned byoraffiliatedwithabankingorganizationorcreditunion. 2 First-lienmortgagesforone-to-fourfamily,owner-occupied,site-builthomes. 3 Seetable2,note3. 4 Seetable2,note4. 5 Seetable2,note1.“Minorityborrower”referstononwhite(excludingjointormissing)orHispanicwhiteapplicants. 6 Excludesoriginationsmadeinthelastquarteroftheyearbecausetheincidenceofloansalestendstodeclineforloansoriginatedtowardthe endoftheyear,aslendersreportaloanassoldonlyifthesaleoccurswithinthesameyearasorigination. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome. tivelyaccountedforabout45percentof allreportedmortgageoriginations;independent mortgagecompanies,about40percent;creditunions,over9percent;andaffiliates,the remainder. Manyinstitutionsreportlittleactivity.About48percentof institutions(3,360outof 7,062) reportedfewerthan100mortgageoriginationsin2014,accountingforabout136,000originations,or2percentof alloriginations.About17percentof institutionsoriginatedfewer than25loans,intotalaccountingforaboutone-fourthof 1percentof alloriginations. thatis,institutionsforwhichthe“otherlendercode”intheReporterPanelequals1,2,or5.Allcreditunions reporttotheNationalCreditUnionAdministrationexceptfourlargecreditunions(BoeingEmployeesCredit Union,NavyFederalCreditUnion,PentagonFederalCreditUnion,andStateEmployeesCreditUnion), whichreporttotheCFPB.

28 FederalReserveBulletin|November2015 Table11providesseveralotherstatisticstohelpcomparethelendingpatternsof different typesof institutionsin2014,andwediscusssomehighlightshere.First,depositoriestend tooriginateasignificantlyhigherfractionof conventionalloansthannondepositories.As willbeseeninthenextsection,thisdifferenceholdshistoricallyaswell. Second,in2014,smallbanksandcreditunionsaccountedforahighlydisproportionate shareof conventionalhigher-pricedloans.Over11percentof conventionalhome-purchase loansforone-tofour-family,owner-occupied,site-builtpropertiesoriginatedbysmall bankswerehigherpriced,aswerenearly9percentof suchloansoriginatedbycredit unions.Incontrast,lessthan2percentof suchloansoriginatedbyothertypesof institutionswerehigherpriced.Thenumbersforbothhome-purchaseandrefinancelending implythat,eventhoughsmallbanksandcreditunionsaccountedforlessthan18percent of conventionalhome-purchaseandrefinanceloans,theyoriginatedover55percentof conventionalhigher-pricedloans.Interestingly,furtheranalysisindicatesthatthesedifferencesinhigher-pricedlendinghold,onaverage,evenwhencomparingsmallbanksand creditunionstootherlendersoperatinginthesamecounty. Notably,underthenewQMrules,higher-pricedconventionalQMloanswillhavearebuttablepresumptionof compliancewiththeATRrules,asopposedtoaconclusivepresumptionof compliance(thatis,asafeharbor),unlesstheloanisoriginatedbyasmallcreditor, inwhichcasethesafe-harborAPRthresholdis3.5percentagepointsovertheAPOR ratherthan1.5percentagepoints.43Manysmallbanksandcreditunionsmayfitthesmall creditordefinition,andover85percentof thehigher-pricedloansoriginatedbytheseinstitutionshadAPORspreadsof lessthan3.5percentagepoints.Thus,manyof thesehigherpricedloansmayhavesafe-harborstatusif theysatisfyallof theotherQMcriteria. Third,smallbanksandcreditunionsaresignificantlylesslikelytooriginatemortgagesto minorityborrowers,comparedwithindependentmortgagecompanies,butaremoresimilar toindependentmortgagecompaniesintermsof theirshareof lendingtoLMIborrowers andneighborhoods.Patternsof lendingovertimebydemographicgroupandlendertype arediscussedindetailinalatersection. Fourth,theHMDAdataprovideinformationonwhetheroriginatedloansweresoldwithin thesamecalendaryearandthetypeof institutiontowhichtheyweresold,suchasoneof theGSEsorabankinginstitution(seeappendixAforafulllistof purchasertypes). Table11displaysthefractionof loanssoldwithinthecalendaryear,asopposedtobeing heldinportfolio.44Nondepositoriessoldvirtuallyallof theirloansin2014.Incontrast, creditunionssoldlessthanone-half of thehome-purchaseloanstheyoriginatedandless thanone-thirdof therefinanceloanstheyoriginated.Thatsaid,asdiscussedlater,portfoliolendingamongdepositorieshasdeclinedsignificantlyovertime. Table12liststhetop25reportinginstitutionsaccordingtotheirtotalnumberof originations,alongwiththesamesetof lendingcharacteristicsasthoselistedintable11.45Wells Fargoreportedthemostoriginations,withabout374,000.Thenext-highesttotalwasfor QuickenLoans,followedbyBankof AmericaandJPMorganChase.Overall,thetop25 lendersaccountedforabout34percentof allloanoriginationsin2014,downfrom41per- 43 Othercriteriamustalsobemettoachievesafe-harborstatus,suchasholdingtheloaninportfolioforatleast threeyears. 44 BecauseloansalesarerecordedintheHMDAdataonlyiftheloansareoriginatedandsoldinthesamecalendaryear,loansoriginatedtowardtheendoftheyeararelesslikelytobereportedassold.Forthatreason, statisticsonloansalesarecomputedusingonlyloansoriginatedduringthefirstthreequartersoftheyear. 45 Someinstitutionsmaybepartofalargerorganization;however,thedataintable12areatthereporterlevel. Becauseaffiliateactivityhasdeclinedmarkedlysincethehousingboom,atop25listattheorganizationlevelis notlikelytobesignificantlydifferent.

The2014HomeMortgageDisclosureActData 29 Table12.Top25respondentsintermsoftotaloriginations,2014 Percentexceptasnoted Home-purchaseloans2 Total Total Respondent Ins t t y i p tu e t 1 ion (th o o r t u i i g o s i n a n s n a d - s) ( 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 t C v io e o n n n a - - l p H r i i g c h e e d r 3 ro b L w o M e r- I r4 n h b e L o o i M o g r d h - I 5 - H w i N s h p o i a n te n - 6 ic b M or i r n o o w ri e ty r6 Sold7 WellsFargoBank,NA Largebank 374 448 151 76.2 .2 18.5 11.2 68.0 20.3 74.2 QuickenLoans,Inc. Ind.mort.co. 283 0 46 54.7 .5 26.8 13.1 55.7 13.3 100.0 BankofAmerica,NA Largebank 162 43 43 80.3 0 019.8 11.7 62.9 27.4 73.7 JPMorganChaseBank,NA Largebank 145 218 51 85.7 .7 18.7 11.1 64.0 22.7 62.5 U.S.Bank,NA Largebank 87 106 27 79.4 .4 28.3 11.7 70.9 11.1 75.5 FlagstarBank,FSB Largebank 82 22 45 58.8 .9 25.1 12.6 66.9 25.5 99.2 Citibank,NA Largebank 72 24 21 95.4 0 11.7 12.9 47.7 30.3 52.0 PNCBank,NA Largebank 72 0 19 69.8 0 33.7 14.2 62.7 15.2 87.8 NationstarMortgage Ind.mort.co. 61 27 3 53.0 .1 18.1 15.7 48.7 38.0 99.4 loanDepot.com Ind.mort.co. 58 0 17 50.3 .9 17.0 14.9 53.2 31.8 99.9 FreedomMortgageCorp. Ind.mort.co. 58 47 10 54.0 .1 25.3 12.3 66.2 21.8 99.9 USAAFederalSavingsBank Largebank 55 0 41 29.1 .1 13.5 9.6 64.1 14.2 92.8 PrimeLending,A Affiliated 48 0 36 57.6 1.2 28.8 13.0 69.0 16.5 99.9 PlainscapitalCompany mort.co. BranchBankingand Largebank 47 48 21 70.1 .2 26.4 12.0 69.3 12.1 72.2 TrustCo. NavyFederalCreditUnion Creditunion 47 0 23 41.3 22.6 21.9 12.6 55.4 21.4 47.2 StearnsLending,Inc. Ind.mort.co. 47 16 26 56.7 .7 32.4 16.3 63.8 25.4 98.3 RegionsBank Largebank 41 0 16 65.0 3.9 33.3 13.9 72.9 22.8 66.9 ShoreMortgage Ind.mort.co. 38 0 19 77.9 1.2 28.5 13.3 63.9 29.5 99.7 GuildMortgageCo. Ind.mort.co. 37 0 26 43.1 2.8 29.8 18.1 67.4 23.3 99.9 GuaranteedRate,Inc. Ind.mort.co. 37 0 24 78.3 .6 22.2 12.5 74.0 14.9 99.5 SunTrustMortgage,Inc. Affiliated 35 33 14 85.7 0 20.2 10.0 64.1 16.3 98.8 mort.co. CaliberHomeLoans,Inc. Ind.mort.co. 35 16 24 54.6 .5 33.2 16.2 59.5 24.6 100.0 StonegateMortgageCorp. Ind.mort.co. 29 30 18 45.9 1.6 33.9 13.8 72.0 19.6 99.7 FranklinAmerican Ind.mort.co. 28 54 19 56.0 1.1 30.3 11.5 80.9 13.8 100.0 MortgageCo. AcademyMortgageCorp. Ind.mort.co. 28 0 21 42.0 1.0 33.1 16.6 64.8 25.6 99.9 Top25institutions … 2,007 1,132 760 65.0 1.0 23.7 12.7 65.1 20.6 84.6 Allinstitutions … 5,980 1,752 2,737 63.4 3.1 27.0 13.3 69.1 19.3 84.1 1 Seetable11,note1 2 Seetable11,note2. 3 Shareofconventionalloansthatarehigherpriced. 4 Seetable2,note3. 5 Seetable2,note4. 6 Seetable2,note1.“Minorityborrower”referstononwhite(excludingjointormissing)orHispanicwhiteapplicants. 7 Seetable11,note6. ...Notapplicable. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome. (continuedonnextpage) centin2013.Thesesamefirmsalsopurchasedover1millionloansfromotherlending institutionsduring2014(theseloanscouldhavebeenoriginatedin2014orinearlieryears). Thetopinstitutionsdiffersignificantlyintheirlendingpatterns.Forexample,over95percentof Citibank’shome-purchaseloanswereconventional,comparedwith29percentfor USAAFederalSavingsBank.Regardingloansales,NavyFederalCreditUnionsoldonly 47percentof itshome-purchaseoriginations,whereastheaverageacrossthetop25institutionswasabout85percent.Finally,thecompositionof borrowersvariedacrossthetop25 institutions.Forsomeinstitutions,one-thirdormoreof home-purchaseborrowerswere

30 FederalReserveBulletin|November2015 Table12.Top25respondentsintermsoftotaloriginations,2014–continued Percentexceptasnoted Refinanceloans2 Respondent Ins t t y i p tu e t 1 ion N (t a u h n m o d u b s s e ) - r t C v io e o n n n a - - l p H r i i g c h e e d r 3 row b L o M e r r - I er4 n h b e L o o i M o g r d h - I 5 - H w i N s h p o i a n te n - 6 ic b M or i r n o o w ri e ty r6 Sold7 WellsFargoBank,NA Largebank 137 86.4 .5 19.8 13.2 67.1 19.7 88.2 QuickenLoans,Inc. Ind.mort.co. 217 69.2 .3 22.8 12.9 58.5 11.5 100.0 BankofAmerica,NA Largebank 87 93.8 .2 28.9 14.8 63.6 24.0 87.7 JPMorganChaseBank,NA Largebank 70 90.6 1.4 24.1 13.0 65.9 21.3 80.7 U.S.Bank,NA Largebank 38 94.1 3.7 26.6 14.0 62.7 10.0 53.0 FlagstarBank,FSB Largebank 26 77.0 .9 17.6 12.1 67.0 23.3 98.1 Citibank,NA Largebank 39 93.4 0 29.3 15.1 61.4 19.0 93.2 PNCBank,NA Largebank 33 87.0 .1 30.8 14.2 67.1 11.6 64.6 NationstarMortgage Ind.mort.co. 47 88.0 3.1 34.9 18.8 64.0 25.1 99.9 loanDepot.com Ind.mort.co. 35 61.1 .9 22.8 14.5 66.1 19.6 100.0 FreedomMortgageCorp. Ind.mort.co. 42 15.6 .1 5.6 15.1 58.2 23.5 99.9 USAAFederalSavingsBank Largebank 9 51.6 .1 9.8 10.6 59.8 15.8 69.8 PrimeLending,APlainscapital Affiliated 7 88.7 1.3 19.8 11.5 74.8 14.5 99.8 Company mort.co. BranchBankingandTrustCo. Largebank 11 91.4 .5 27.9 13.1 73.7 9.8 58.1 NavyFederalCreditUnion Creditunion 8 40.0 1.3 14.6 11.9 53.5 24.9 55.1 StearnsLending,Inc. Ind.mort.co. 15 84.8 .2 22.1 13.8 64.5 23.4 97.9 RegionsBank Largebank 13 94.5 1.2 31.4 15.1 80.2 16.0 30.8 ShoreMortgage Ind.mort.co. 14 94.3 .7 19.0 11.4 66.7 25.0 99.5 GuildMortgageCo. Ind.mort.co. 5 82.2 .7 23.5 15.9 71.6 18.5 99.9 GuaranteedRate,Inc. Ind.mort.co. 9 95.1 .3 14.3 10.0 77.7 11.9 99.1 SunTrustMortgage,Inc. Affiliated 16 87.6 0 28.2 13.3 66.3 14.9 98.8 mort.co. CaliberHomeLoans,Inc. Ind.mort.co. 7 85.0 .1 19.3 12.4 63.9 21.0 99.9 StonegateMortgageCorp. Ind.mort.co. 8 64.1 .9 17.4 11.5 68.7 17.0 99.6 FranklinAmericanMortgageCo. Ind.mort.co. 7 81.8 .7 22.0 11.3 79.1 14.4 99.9 AcademyMortgageCorp. Ind.mort.co. 3 84.4 .4 23.3 11.0 75.5 16.2 99.8 Top25institutions … 904 78.9 .8 23.3 13.7 63.9 17.8 89.4 Allinstitutions … 1,921 81.3 2.2 22.2 13.1 67.8 16.8 79.4 LMI,whileatotherinstitutionsfewerthan20percentof borrowerswereinthatcategory.46 Whileitisdifficulttoknowpreciselywhysuchvariationexists,thesedifferencescould reflectdifferentbusinessstrategies,differentcustomerdemandsinthemarketsandgeographicregionstheyserve,orsomecombinationof thesetwobroadfactors. Changes in Market Structure over Time Overthepasttwodecadesorso,severaldevelopmentshaveinfluencedtheevolutionof the mortgagemarket.Onedevelopmenthasbeentheemergenceof creditscoringandautomatedunderwriting,whichhasfacilitatedthegrowthof secondarymarketsformortgages andotherconsumerloans.Anotherwasbankderegulationinthemid-1990s,whichallowed bankstomoreeasilyexpandacrossthenationandgrowtheirbalancesheets.Finally,the recentmortgageandfinancialcrisisledtothefailureof many(majorandminor)lenders andongoingdifficultiesforsomesurvivors,andithasstimulatednewregulationsaimedat discouragingriskymortgagelendingandlimitingthesystemicriskposedbythelargest financialinstitutions.TheHMDAdata,whichgobacktotheearly1990sanddisclosethe identityof thelenderoneachmortgageapplication,allowustostudyhowthemarkethas 46 Notethatforlenderswithasignificantnonconventionalshareofrefinanceloans(forexample,FreedomMortgageCorporation),borrowerincomemaynotbereportedformostloans,thuspushingdowntheLMIshareof borrowers.

The2014HomeMortgageDisclosureActData 31 Figure8.Marketshares,bylendertype,1995–2014 A. Home purchase Percent 100 Credit union Small bank Large bank Affiliated mortgage company Independent mortgage company 80 60 40 20 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 B. Refinance Percent 100 Credit union Small bank Large bank Affiliated mortgage company Independent mortgage company 80 60 40 20 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Note:Thedataareannual.Mortgageoriginationsforone-tofour-familyowner-occupiedproperties,withjunior-lienloansexcludedin2004and later.Smallbanksarepartoforganizationswithlessthan$1billioninassets,measuredin2014dollars.Largebanksareallotherbanks. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome. evolvedinresponsetotheseandotherevents.Tothatend,theremainderof thissection documentschangesoverthepast20yearsinthelendingactivityandmarketshareof the differenttypesof mortgagelendersdescribedearlier. Figure8displaysthemarketsharesof thefivetypesof institutionslistedearlierintable11 forhome-purchaseandrefinanceloanssince1995,focusingonfirst-lienmortgagesforonetofour-familyowner-occupiedproperties.47Thefigurepanelsillustratethesharplyrising sharesince2007of bothhome-purchaseandrefinanceloansoriginatedbyindependent mortgagecompanies.48Withthecollapseof thehousingandsecondarymortgagemarket, 47 ForhistoricalcategorizationsofHMDAreportersintolendertypes,werelyheavilyoninformationprovidedby RobertB.Avery.Smallbanksaredefinedasthosehavingassets(includingallinstitutionsinthebankingorganization)oflessthan$1billion,inflation-adjustedto2014dollars. 48 HMDAcoveragehasexpandedovertime,particularlywiththeadditionofnewMSAsandtheexpansionof existingMSAbordersin2004and2014.Thetrendsinmarketsharesovertimeareessentiallyunchangedbythe restrictionofdatatocountiesthathavecontinuouslybeenpartofanMSAsince1995(whereHMDAcoverage iscloseto100percent).

32 FederalReserveBulletin|November2015 manyindependentmortgagecom- Figure9.Shareofhome-purchaseloansoriginatedby panieswentoutof business,espeindependentmortgagecompanies,byloantype, 1995–2014 ciallythosefocusedonsubprime lending,andthemarketshare Percent of thisgroupdroppedsharply 70 Conforming Jumbo Nonconventional between2006and2007.49The 60 industryhasmorethanrecovered 50 itsmarketshare,however,and,in 40 2014,independentmortgagecom- 30 paniesaccountedforabout47per- 20 centof home-purchaseloansand 10 42percentof refinancings,frac- 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 tionsthatarehigherthanatany pointinthepast20years. Note:Thedataareannual.Home-purchasemortgageoriginationsforfirst-lien, one-tofour-family,owner-occupiedproperties.Conformingloanshavealoan amountbelowthesingle-familyloan-sizelimitforeligibilityforpurchasebya Themarketsharesof creditunions government-sponsoredenterprise.Fordefinitionofjumboloans,seetable9, havealsoreachedhistorichighs, note5;fordefinitionofnonconventionalloans,seetable5,note1. thoughtheyarestillunder10percentforbothhome-purchaseand refinancelending.Incontrast,largebankshavelostsignificantmarketshareinhome-purchaselendingsince2008,andnonbankaffiliatesof depositories,whichtendtobeowned bythelargestbankingorganizations,havebecomefarlessactivethantheywereinthelate 1990sandearly2000s.Finally,smallbanksslowlylostmarketsharefromthemid-1990s through2006andthenreboundedsharplyinthenextfouryears.However,since2010,their sharehasbeenmostlyflatforhome-purchaseloansanddeclinedslightlyforrefinance loans,andbothsharesstandbelowwhattheywereinthemid-1990s. Thereareavarietyof potentialexplanationsforthedeclineinlargebanks’shareof mortgageoriginations.Onepossiblecauseisthenewregulatoryenvironment,withhighercapitalandliquidityrequirementsthatmaybemostbindingforthelargestbanks.Thelargest banksmayalsohavesizablevolumesof pre-crisisvintagemortgagesintheirportfolios(due inparttoacquisitionsof failedbanks),sothereductioninmarketsharecouldreflectan efforttorebalancetheirassets.Yetanotherpossibilityisthatlargebankshavefoundmore profitableinvestmentopportunitiesinothermarkets,whereasmonolinemortgagecompanieswillcontinuetofocusonmortgagelending.Moreresearchisneededtounderstand theimportanceof theseandotherexplanationsforthecontractioninlargebanks’mortgageoriginationactivity. Market Shares by Loan Type and Size Somereportssuggestthattheriseof independentmortgagecompaniesiscloselytiedto nonconventionallendingandawillingnesstooriginateriskierloans.50However,the HMDAdataindicatethattheirrisehasbeenbroadbasedacrossdifferenttypesof loans anddemographicgroups.Asfigure9shows,independentmortgagecompanieshavemarkedlyincreasedtheirshareof conventionalconforming,conventionaljumbo,andnonconventionalhome-purchaseloanssince2008(marketsharesforotherlendertypesandfor 49 Themarketshareofindependentmortgagecompaniesin2007maybeslightlyunderstatedduetotheclosure ofseverallargelendersthatdidnotsubmitHMDAdatafor2007eventhoughtheymadeloansduringtheyear priortotheirclosure.Formoreinformation,seeRobertB.Avery,KennethP.Brevoort,andGlennB.Canner (2008),“The2007HMDAData,”FederalReserveBulletin,vol.94(December),pp.A107–A146, www.federalreserve.gov/pubs/bulletin/2008/articles/hmda/default.htm. 50 See,forexample,JoeLight(2014),“NonbankMortgageLendersBounceBack,”WallStreetJournal, August27.

The2014HomeMortgageDisclosureActData 33 Figure10.Marketshareofindependentmortgagecompanies,bystate,2014 Percent 59–75 44–58 29–43 13–28 Note:Thedataareannual.Home-purchasemortgageoriginationsforfirst-lien,one-tofour-family,owner-occupiedproperties. refinanceloansareshownintables13.Aand13.B;forbrevity,onlyselectedyearsare showninthesetables).51Furthermore,asdiscussedinmoredetailinthenextsubsection, independentnonbankshavesignificantlyincreasedtheirlendingtobothwhiteandminorityborrowersandinlower-andhigher-incomeneighborhoods.Allof thatsaid,therisein lendingbyindependentmortgagecompanieshasnotbeenentirelyuniformacrossthe country.Theiractivityhasrisenmostsignificantly,onaverage,instatestothewestand southwest,whereindependentmortgagecompaniesnowtendtooriginatethemajorityof home-purchaseloans(figure10). Figure11indicates(asdotables13.Aand13.B)thatindependentmortgagecompanies weresignificantlymorelikelyin2014thanin2010toreportsellingconventionalconformingloanstotheGSEsandnonconventionalloansintoGinnieMae–guaranteedsecurities, suggestingatighterlinkbetweenthesegovernment-backedsecondary-marketinstitutions 51 Aloanqualifiesasconformingintables13.Aand13.BiftheloanamountisbelowtheGSEs’conformingloansizelimitforasingle-familyhomeforthatyearandlocation.Theconformingloan-sizelimitwasmostlyuniformacrossthenationpriorto2008.ThelimitsinAlaska,Hawaii,theU.S.VirginIslands,andGuamare 50percenthigherthaninthenationatlarge.Fortheyears2008andthereafter,designatedhigher-costareas haveelevatedlimits.For2014,thegeneralconformingloan-sizelimitwas$417,000,andthemaximumhighcost-arealoan-sizelimitwas$625,000(and50percenthigherinAlaska,Hawaii,theU.S.VirginIslands,and Guam).Intables13.A,13.B,14.A,and14.B,“jumboloans”referstoloansabovethislimit,whicharenoteligibleforsaletotheGSEs.Conformingloan-sizelimitsincreasewiththenumberofunitsthatmakeupthe property,buttheHMDAdatadonotdifferentiatebetweenpropertieswithanywherefromonetofourunits. Someloansinthetablemaythereforehavebeenmisclassifiedasjumbodespitebeingeligibleforpurchasebya GSE. Priorto2004,theHMDAdatadidnotdistinguishbetweenmanufacturedandsite-builtpropertiesanddidnot provideinformationonthelienstatusoftheloan.Forconsistencyovertime,tables13.A,13.B,14.A,and14.B includeloansforbothsite-builtpropertiesandmanufacturedhomes.However,regardinglienstatus,thedatain tables13.A,13.B,14.A,and14.Bincludebothfirst-andjunior-lienloanspriorto2004andfirstliensonlyfrom 2004onward,asjuniorliensbecamehighlyprevalentin2005and2006.

34 FederalReserveBulletin|November2015 andnonbankoriginators.52For Figure11.Loanssoldbyindependentmortgage example,in2014,almost40percent companies,bytype,purpose,andpurchaseroftheloan, 1995–2014 of nonconventionalhome-purchase loansand78percentof noncon- A. Conventional conforming loans sold to a GSE ventionalrefinancingsoriginated byindependentmortgagecompa- Percent nieswerereportedassecuritizedby 80 Home purchase Refinance theoriginatinginstitutionwith 60 GinnieMaebacking.In2010,these numberswereonly10percentfor 40 homepurchasesand20percentfor refinancings.Whilebankshave 20 reportedlybecomelesswillingin 0 recentyearstopurchaseloans 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 originatedbynonbanksandbundle themforsaletotheGSEsorfor creatingGinnieMaesecurities, B. Nonconventional loans securitized with Ginnie Mae guarantee nonbanksappeartohaveadapted tothenewenvironmentbyworking Percent 80 directlywiththeseagencies. Home purchase Refinance 60 Onepotentialconcernwiththis 40 tighteninglinkisthat,because nonbanksmayhavelessstable 20 sourcesof financingandlessfinan- 0 cialoversightthanbanks,theymay 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 bemorelikelytofailandexpose Note:Thedataareannual.Home-purchasemortgageoriginationsforfirst-lien, theGSEsandGinnieMaeto one-tofour-family,owner-occupiedproperties.GSEisgovernment-sponsored losses.53However,othershave enterprise.Conformingloanshavealoanamountbelowthesingle-familyloansizelimitforeligibilityforpurchasebyaGSE.Fordefinitionofnonconventional notedthat,sincethefinancialcrisis, loans,seetable5,note1. nonbanksaresubjecttomorefederalandstateoversightthanthey oncewere,andnonbankshavetomeetcertainfinancialstandardssetbytheGSEsand GinnieMaeinordertoworkwiththem.54 Otherinterestingpatternsovertimeandacrossinstitutiontypesinportfolioandjumbo lendingemergeintables13.Aand13.B.Financingforconventionaljumboloanscontractedwiththecollapseintheprivate-labelmortgage-backedsecuritiesmarket.Conformingloanlimitsincreasedforhigher-costareasin2008whilehousepricesgenerallyfell,furtherreducingthepoolof potentialjumboloans.Therewereonly36,000conventional home-purchasejumboloansin2010,downfromapre-crisispeakof 614,000suchloansin 2005.In2014,thisnumberhadrisenagainto132,000loansbutcontinuedtorelyheavily 52 TheHMDAdataunderstatethetrueshareofloansultimatelysoldtotheGSEsorintopoolsbackedbyGinnie Mae,becausemanyloansarefirstsoldbytheoriginatortoanotherbankormortgagebank,whichthensellsor securitizesthem.Inthesecases,theloansarenotlikelytobereportedassoldtotheGSEsorintoaGinnieMae security. 53 SeeFederalHousingFinanceAgency,OfficeofInspectorGeneral(2014),RecentTrendsintheEnterprises’ PurchasesofMortgagesfromSmallerLendersandNonbankMortgageCompanies(Washington:FHFA,July), www.fhfaoig.gov/AuditsAndEvaluations/RecentTrendsEnterprises.AlsoseeKateBerry(2015),“GinnieMae’s Quandary:ScantResourcestoPoliceNonbanks,”NationalMortgageNews,April22,www.nationalmortgagenews.com/news/servicing/ginnie-maes-quandary-scant-resources-to-police-nonbanks-1049380-1.html. 54 SeeMarshallLuxandRobertGreene(2015),“What’sBehindtheNon-BankMortgageBoom?”MRCBG AssociateWorkingPaperSeries42(Cambridge,Mass.:Mossavar-RahmaniCenterforBusinessandGovernment,HarvardKennedySchool,June),www.hks.harvard.edu/centers/mrcbg/publications/awp/awp42.

The2014HomeMortgageDisclosureActData 35 Table13.Distributionoflenderandpurchasertype,bypurposeandtypeofloan,1995–2014 A.Homepurchase Percentexceptasnoted Loansbytype,lender,andpurchaser 1995 2000 2005 2010 2012 2013 2014 Allloans(inthousands) 3,112 4,375 4,964 2,218 2,343 2,680 2,804 Smallbank 9.7 5.7 4.3 7.9 8.3 8.4 8.1 Largebank 28.9 27.8 35.3 42.4 36.3 34.4 31.5 Creditunion 1.5 1.9 2.1 3.7 4.9 5.7 6.4 Affiliatedmortgagecompany 26.9 35.9 25.0 11.4 9.3 8.6 6.8 Independentmortgagecompany 33.0 28.6 33.3 34.7 41.3 42.9 47.2 Conventionalconformingloan(in thousands) 2,199 3,082 3,912 1,014 1,229 1,569 1,655 Smallbank 11.2 6.8 4.6 10.7 10.8 10.3 9.9 Portfolio 72.2 69.7 50.2 48.2 42.0 40.9 40.6 Sold(GSE) 14.6 11.0 12.8 19.6 23.0 22.9 23.9 Largebank 33.4 31.3 34.6 45.7 39.3 37.2 33.8 Portfolio 61.0 52.9 23.7 23.2 25.5 25.6 26.2 Sold(GSE) 22.2 28.5 36.7 58.3 60.8 59.7 58.2 Creditunion 1.9 2.4 2.5 7.0 8.1 8.2 9.0 Portfolio 80.9 78.8 61.5 53.3 52.6 54.6 60.5 Sold(GSE) 7.9 12.5 26.2 31.6 35.9 32.7 27.6 Affiliatedmortgagecompany 23.9 34.5 25.1 10.5 8.7 8.1 6.4 Portfolio 14.3 14.0 10.4 10.4 2.2 1.9 3.3 Sold(GSE) 57.4 44.7 45.1 51.4 46.3 53.1 55.1 Independentmortgagecompany 29.6 24.8 33.1 26.0 33.1 36.1 40.9 Portfolio 12.4 10.6 10.4 13.1 9.5 7.4 6.4 Sold(GSE) 45.7 39.4 9.8 21.7 33.4 42.4 50.9 Conventionaljumboloan(inthousands)1 183 329 614 36 67 105 132 Smallbank 6.9 4.0 1.8 6.6 5.4 4.7 4.4 Portfolio 82.2 80.4 59.5 92.6 89.7 85.8 79.2 Largebank 41.7 44.6 42.3 69.3 75.6 74.2 71.6 Portfolio 85.8 80.2 42.3 95.4 96.7 92.4 92.6 Creditunion .8 1.4 .8 4.3 3.6 4.6 4.9 Portfolio 87.3 86.5 83.6 89.9 85.0 92.2 91.3 Affiliatedmortgagecompany 29.1 31.4 24.4 13.5 6.8 5.8 4.6 Portfolio 32.7 21.9 15.1 43.9 18.7 12.7 20.8 Independentmortgagecompany 21.5 18.6 30.7 6.3 8.6 10.8 14.4 Portfolio 18.8 16.9 8.4 26.5 9.3 9.8 11.1 Nonconventionalloan(inthousands)2 729 963 438 1,168 1,047 1,007 1,017 Smallbank 5.7 3.0 4.4 5.4 5.5 5.7 5.7 Sold(GinnieMae) 11.3 6.1 1.4 2.2 3.1 3.3 5.5 Largebank 12.2 10.8 31.5 38.6 30.2 26.0 22.5 Sold(GinnieMae) 41.2 42.7 46.1 61.8 69.9 68.8 66.8 Creditunion .4 .5 .5 .8 1.3 1.7 2.3 Sold(GinnieMae) 37.7 50.8 1.9 23.2 36.9 52.3 48.5 Affiliatedmortgagecompany 35.5 41.6 24.8 12.0 10.0 9.7 7.7 Sold(GinnieMae) 55.8 62.2 54.9 22.6 18.0 22.9 36.6 Independentmortgagecompany 46.1 43.9 38.8 43.2 53.0 57.0 61.8 Sold(GinnieMae) 29.7 37.3 12.9 10.1 22.5 30.9 39.9 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomesfor2005andafter.Mortgagesforone-tofour-family owner-occupiedhomesfor1995and2000.Rowsmaynotsumto100becauseofrounding.Smallbanksconsistofthosebankswithassets (includingtheassetsofallotherbanksinthesamebankingorganization)oflessthan$1billionattheendof2013.Largebanksareallother banks.GSEisgovernment-sponsoredenterprise. 1 Seetable9,note5. 2 Seetable5,note1. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome. onportfoliolending.Incontrasttoconformingloans,largebanksaccountedfor72percent of jumboloansin2014,sharplyhigherthantheir42percentsharein2005,andover90percentof theseloanswereheldinportfolio.

36 FederalReserveBulletin|November2015 Table13.Distributionoflenderandpurchasertype,bypurposeandtypeofloan,1995–2014 B.Refinance Percentexceptasnoted Loansbytype,lender,andpurchaser 1995 2000 2005 2010 2012 2013 2014 Allloans(inthousands) 1,437 2,235 5,770 4,516 5,930 4,385 1,950 Smallbank 12.7 6.0 3.6 7.3 7.1 5.8 6.4 Largebank 33.0 40.2 37.1 54.1 50.4 49.3 37.6 Creditunion 4.5 3.7 3.0 6.9 7.7 8.0 9.3 Affiliatedmortgagecompany 19.6 26.0 24.7 9.5 5.9 5.7 4.5 Independentmortgagecompany 30.1 24.1 31.7 22.2 28.9 31.2 42.3 Conventionalconformingloan(in thousands) 1,238 2,052 4,962 3,790 4,872 3,529 1,499 Smallbank 14.0 6.3 3.9 7.9 7.7 6.4 6.9 Portfolio 73.8 76.1 52.2 27.7 24.5 32.0 50.0 Sold(GSE) 14.8 9.1 14.9 34.4 38.9 33.6 23.9 Largebank 34.3 40.6 36.4 56.2 52.5 51.0 40.3 Portfolio 66.4 74.3 28.8 13.1 15.0 19.0 24.9 Sold(GSE) 24.4 13.3 34.5 63.9 72.0 65.9 62.3 Creditunion 5.0 3.9 3.3 7.9 8.9 9.3 11.3 Portfolio 88.2 89.0 71.1 55.2 56.2 59.6 71.3 Sold(GSE) 4.3 4.7 17.9 33.2 33.6 30.8 18.9 Affiliatedmortgagecompany 18.2 25.4 25.1 9.6 5.9 5.4 4.5 Portfolio 17.3 36.3 20.3 5.5 1.5 1.7 3.6 Sold(GSE) 61.8 30.0 42.5 67.7 63.7 67.4 68.9 Independentmortgagecompany 28.4 23.8 31.2 18.4 25.0 27.9 37.0 Portfolio 30.0 17.2 7.4 3.2 1.7 1.6 1.8 Sold(GSE) 34.6 17.8 7.5 26.0 53.8 67.7 74.7 Conventionaljumboloan(inthousands) 104 118 649 70 131 131 83 Smallbank 6.1 4.0 1.5 4.5 3.8 3.6 4.1 Portfolio 76.4 78.4 42.0 87.3 84.5 83.2 83.4 Largebank 40.2 48.0 43.1 69.7 77.9 74.1 70.0 Portfolio 84.5 79.9 39.2 94.5 96.4 88.2 91.4 Creditunion .9 1.2 1.2 5.0 4.0 4.7 5.5 Portfolio 90.2 86.1 84.1 93.6 92.1 93.0 90.4 Affiliatedmortgagecompany 30.6 27.1 22.0 14.9 5.6 4.6 3.5 Portfolio 33.4 22.2 17.5 53.4 21.4 12.5 27.0 Independentmortgagecompany 22.1 19.7 32.3 5.9 8.6 13.0 17.0 Portfolio 30.6 16.2 7.5 28.3 8.6 8.5 7.8 Nonconventionalloan(inthousands) 95 65 158 655 927 725 368 Smallbank 4.0 2.2 1.4 4.2 4.5 3.4 4.6 Sold(GinnieMae) 21.1 2.4 .9 1.8 6.1 4.3 4.0 Largebank 7.8 13.0 33.4 40.5 35.3 36.9 19.0 Sold(GinnieMae) 50.2 66.2 59.4 69.0 82.2 88.2 85.5 Creditunion .9 .3 .3 1.0 2.1 2.3 1.8 Sold(GinnieMae) 52.9 21.8 14.0 61.0 67.7 74.7 58.2 Affiliatedmortgagecompany 26.5 44.0 20.1 8.3 6.0 7.1 4.8 Sold(GinnieMae) 71.2 70.8 60.5 35.9 41.9 55.3 62.3 Independentmortgagecompany 60.8 40.5 44.8 46.0 52.1 50.4 69.8 Sold(GinnieMae) 37.2 30.2 5.4 20.4 52.3 64.4 78.1 Note:Seenotestotable13.A. Regardingconventionalconformingloans,amongdepositories,smallbanksandcredit unionshavealwaysbeenmorelikelythanlargebankstoholdloansinportfolio.However, acrossallinstitutions,portfoliolendingisfarlesscommonthanitwasinthe1990sand early2000s.In1995,smallbanksheldnearlythree-fourthsof theconventionalconforming loanstheyoriginated,largebanksheldover60percent,andcreditunionsheldover 80percent;in2014,thosenumbersdecreasedtoabout41percent,26percent,and60percent,respectively.

The2014HomeMortgageDisclosureActData 37 Market Shares by Figure12.Shareofhome-purchaseloansoriginatedby Demographic Group independentmortgagecompanies,byborrowerraceand ethnicityandbyneighborhoodincome,1995–2014 Forthepast20years,theoverall marketsharesof thedifferent A. Borrower race and ethnicity lendertypeshavefollowedsimilar Percent trendsacrossdemographicgroups, 70 Asian Black or African American evenforthosegroupsthataccount Hispanic white Non-Hispanic white forarelativelysmallproportionof 50 totallending.Nevertheless,anumberof significantdifferences 30 betweenvariousgroupshavepersisted,andafewgroup-specific 10 deviationsfromthebroadertrends 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 haveoccurred. Asfigure12shows,blackandHis- B. Neighborhood income panicwhiteborrowershavegener- Percent allyobtainedagreatershareof 70 theirloansfromindependentmort- Low or moderate income Middle or high income gagecompaniesthanAsianand 50 non-Hispanicwhiteborrowers,particularlyinrecentyears(tables 30 14.Aand14.Bprovide—forhomepurchaseandrefinanceloans, 10 respectively—themarketsharesof allfivelendertypesbyborrower 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 demographicgroup).Between1995 Note:Thedataareannual.Home-purchasemortgageoriginationsforfirst-lien, and2006,theindependentmortone-tofour-family,owner-occupiedproperties.Fordefinitionofborrowerrace gagecompanyshareof home-pur- andethnicity,seetable2,note1;fordefinitionofneighborhoodincome,see table2,note4. chaseloanswasfairlyconstantfor allfourgroups:onaverage,just under30percentforAsianandnon-Hispanicwhiteborrowersandjustabove40percent forblackandHispanicwhiteborrowers.Followingthefinancialcrisis,theseshares increasedsubstantiallyforallgroupsandhaveriseninparallelsince2009. IndependentmortgagecompaniesalsotendtohaveahighermarketshareinLMIneighborhoodsthaninnon-LMIneighborhoods.Ineveryyearsince1995,theindependentnonbankshareof home-purchasemortgagestoborrowersresidinginLMItractshasexceeded thattoborrowersinmiddle-andhigh-incometracts,withanaveragedifferenceof about 4.5percentagepoints.Thisdifferencehasheldsteadyastheshareof loansoriginatedby independentmortgagecompanieshasincreasedsince2007.Intherefinancemarket,differencesbetweenthedistributionsof lendersharesbyneighborhoodincomehavedecreased (asshownintable14.B).Priorto2007,theindependentmortgagecompanyshareof refinanceloanswithinlow-incometractswas8.5percentagepointshigherthaninmiddle-and high-incometracts.Since2010,thedifferencesinmarketshareforalllendertypeshave beenlessthan2percentagepoints. Changing Market Structure and the Community Reinvestment Act TheCRA,passedin1977,aimstohelpensurethatthecreditneedsof LMIcommunities arebeingmet.Tothatend,theCRAdirectsthefederalbankingregulatoryagencies, includingtheFederalReserve,theFederalDepositInsuranceCorporation,andtheOffice of theComptrollerof theCurrency,tousetheirsupervisoryauthoritytoencourage

38 FederalReserveBulletin|November2015 Table14.Distributionoflendertype,byborrowerraceandethnicity,neighborhoodincome,andpurpose ofloan,1995–2014 A.Homepurchase Percentexceptasnoted Loansbycharacteristicofborrower 1995 2000 2005 2010 2012 2013 2014 andofneighborhood,andbylendertype Allloans(thousands) 3,112 4,375 4,964 2,218 2,343 2,680 2,804 Asianborrower1 Allloans(thousands) 86 155 245 120 121 149 149 Largebank 34.2 39.7 38.7 46.4 42.9 42.0 39.6 CRAshare 81.3 73.1 53.9 76.9 75.7 77.0 74.0 Smallbank 6.0 3.2 1.9 4.5 5.1 5.4 4.6 CRAshare 71.7 64.3 55.8 58.6 58.3 58.8 53.7 Creditunion 0.9 1.5 1.1 2.4 3.2 3.9 4.9 Affiliatedmortgagecompany 26.3 31.7 26.8 11.0 8.0 7.0 5.0 Independentmortgagecompany 32.6 23.9 31.4 35.6 40.9 41.8 45.8 BlackorAfricanAmericanborrower1 Allloans(thousands) 216 279 376 134 120 128 147 Largebank 25.5 21.0 28.5 37.0 31.1 29.1 25.5 CRAshare 76.5 66.5 37.4 70.2 70.6 69.8 66.9 Smallbank 5.1 3.2 1.8 6.5 6.1 6.3 6.2 CRAshare 75.0 65.7 59.3 46.7 51.8 51.0 42.0 Creditunion 0.8 0.9 1.2 2.3 3.4 4.7 5.6 Affiliatedmortgagecompany 29.6 40.0 26.2 12.4 10.1 9.6 7.7 Independentmortgagecompany 39.0 34.6 42.3 41.8 49.4 50.4 55.0 Hispanicwhiteborrower1 Allloans(thousands) 195 345 515 180 180 194 220 Largebank 26.4 24.3 29.6 34.1 30.3 27.4 24.3 CRAshare 80.6 71.4 49.7 76.7 76.7 76.4 72.9 Smallbank 6.5 2.7 1.5 4.5 4.2 4.4 4.2 CRAshare 81.4 73.5 66.5 59.9 60.0 61.5 55.9 Creditunion 0.6 0.8 0.8 1.9 2.8 3.4 3.8 Affiliatedmortgagecompany 22.9 35.2 26.9 10.3 6.4 6.5 5.2 Independentmortgagecompany 43.5 36.8 41.2 49.1 56.3 58.3 62.5 Non-Hispanicwhiteborrower1 Allloans(thousands) 2,371 2,897 3,084 1,504 1,638 1,879 1,934 Largebank 30.2 29.5 37.8 42.8 36.7 34.8 32.0 CRAshare 75.3 66.0 51.7 67.4 69.7 69.7 67.1 Smallbank 11.0 7.4 5.9 9.4 9.8 9.8 9.6 CRAshare 77.3 75.0 70.9 63.9 61.9 61.6 58.5 Creditunion 1.6 2.0 2.5 4.0 5.3 5.8 6.5 Affiliatedmortgagecompany 27.8 35.7 25.2 11.2 9.5 8.7 7.0 Independentmortgagecompany 29.5 25.2 28.7 32.6 38.8 40.9 44.9 Low-ormoderate-incomeneighborhood2 Allloans(thousands) 316 526 752 269 302 344 377 Largebank 27.0 26.5 31.4 40.5 34.1 31.2 27.8 CRAshare 79.0 67.2 48.8 71.7 73.0 73.0 69.8 Smallbank 8.8 4.7 3.0 7.1 7.6 7.7 7.3 CRAshare 85.5 76.8 71.1 62.0 63.8 63.2 57.7 Creditunion 1.2 1.2 1.6 3.2 4.8 5.6 6.1 Affiliatedmortgagecompany 26.5 37.8 25.7 10.1 8.5 8.0 6.4 Independentmortgagecompany 36.4 29.7 38.4 39.2 45.0 47.5 52.4 Middle-orhigh-incomeneighborhood2 Allloans(thousands) 2,300 3,738 4,159 1,925 2,026 2,322 2,417 Largebank 26.7 28.7 36.4 43.0 36.8 35.1 32.2 CRAshare 76.7 66.2 50.6 68.8 70.2 70.2 67.4 Smallbank 9.3 5.5 4.4 7.9 8.1 8.3 8.1 CRAshare 79.7 74.2 69.5 62.0 62.6 61.7 58.0 Creditunion 1.5 1.8 2.1 3.7 4.9 5.6 6.3 Affiliatedmortgagecompany 29.8 35.9 25.1 11.7 9.4 8.8 6.9 Independentmortgagecompany 32.6 27.9 31.9 33.8 40.7 42.3 46.5 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomesfor2005andafter.Mortgagesforone-tofour-family owner-occupiedhomesfor1995and2000.CommunityReinvestmentAct(CRA)sharereferstothefractionofloansoriginatedinacountyin whichtheoriginatingbankoperatesabranchoffice.Smallbanksconsistofthosebankswithassets(includingtheassetsofallotherbanks inthesamebankingorganization)oflessthan$1billionattheendof2013.Largebanksareallotherbanks. 1 Seetable2,note1. 2 Seetable2,note4. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome.

The2014HomeMortgageDisclosureActData 39 Table14.Distributionoflendertype,byborrowerraceandethnicity,neighborhoodincome,andpurpose ofloan,1995–2014 B.Refinance Percentexceptasnoted Loansbycharacteristicofborrower 1995 2000 2005 2010 2012 2013 2014 andofneighborhood,andbylendertype Allloans(thousands) 1,437 2,235 5,770 4,516 5,930 4,385 1,950 Asianborrower Allloans(thousands) 34 41 168 232 327 203 84 Largebank 36.4 46.5 45.1 55.7 47.6 49.1 40.8 CRAshare 82.8 76.3 59.9 75.7 69.3 73.4 73.8 Smallbank 4.9 2.4 1.5 3.9 3.1 2.7 2.6 CRAshare 75.0 66.5 45.1 35.2 47.9 45.6 42.3 Creditunion 2.5 3.1 1.9 3.7 4.2 5.3 6.4 Affiliatedmortgagecompany 21.7 25.3 23.5 9.5 5.5 5.1 4.2 Independentmortgagecompany 34.4 22.8 28.0 27.2 39.5 37.7 46.1 BlackorAfricanAmericanborrower Allloans(thousands) 82 151 476 130 198 194 103 Largebank 27.1 32.6 32.2 52.6 53.9 51.2 34.7 CRAshare 84.6 57.7 42.7 71.2 69.3 71.3 71.1 Smallbank 6.9 3.1 1.4 4.5 3.6 3.1 4.5 CRAshare 78.9 61.6 59.4 53.9 48.0 48.7 40.4 Creditunion 4.1 2.3 2.1 6.8 7.2 7.3 8.5 Affiliatedmortgagecompany 17.6 30.3 27.0 9.0 5.2 5.4 4.5 Independentmortgagecompany 44.1 31.7 37.3 27.2 30.1 33.0 47.9 Hispanicwhiteborrower Allloans(thousands) 61 119 492 135 229 219 120 Largebank 36.6 35.8 36.8 54.1 55.5 53.1 39.8 CRAshare 91.0 71.8 62.1 81.3 81.5 83.2 81.0 Smallbank 8.8 2.1 1.0 3.0 2.6 2.1 2.2 CRAshare 84.6 65.3 60.8 57.8 48.5 51.3 48.4 Creditunion 3.3 2.3 1.5 7.1 6.8 6.8 8.9 Affiliatedmortgagecompany 16.1 26.4 22.9 10.2 5.4 5.1 5.0 Independentmortgagecompany 35.1 33.3 37.9 25.5 29.6 33.0 44.1 Non-Hispanicwhiteborrower Allloans(thousands) 1,081 1,354 3,529 3,360 4,304 3,095 1,326 Largebank 34.2 41.2 38.7 53.4 50.1 49.1 38.1 CRAshare 83.6 69.0 53.7 71.6 68.4 69.1 69.8 Smallbank 15.1 8.7 5.0 8.6 8.5 7.1 7.9 CRAshare 82.0 78.7 73.3 68.8 64.8 64.5 62.4 Creditunion 4.7 4.4 3.4 7.0 8.0 8.3 9.7 Affiliatedmortgagecompany 21.1 24.9 25.5 9.4 6.1 5.7 4.5 Independentmortgagecompany 24.8 20.7 27.4 21.6 27.3 29.8 39.7 Low-ormoderate-incomeneighborhood Allloans(thousands) 153 340 953 325 602 532 257 Largebank 28.4 35.9 33.4 53.1 52.3 49.6 36.6 CRAshare 84.6 59.4 53.5 74.1 70.1 72.2 72.8 Smallbank 10.4 4.6 2.5 6.7 5.6 4.7 5.6 CRAshare 88.9 75.2 70.3 70.3 66.3 64.8 63.2 Creditunion 4.3 2.3 2.3 7.7 8.1 8.2 9.8 Affiliatedmortgagecompany 15.8 28.3 23.9 8.6 5.1 5.1 4.1 Independentmortgagecompany 41.0 28.9 37.8 23.9 28.9 32.5 43.9 Middle-orhigh-incomeneighborhood Allloans(thousands) 1,061 1,845 4,783 4,160 5,303 3,841 1,687 Largebank 31.7 41.9 38.1 54.4 50.4 49.5 37.8 CRAshare 84.1 64.8 53.0 72.1 68.4 69.8 70.3 Smallbank 11.8 5.7 3.7 7.2 7. 5.8 6.4 CRAshare 84.8 76.3 70.9 66.3 64.8 63.2 59.7 Creditunion 4.4 3.5 3.0 6.7 7.6 7.9 9.1 Affiliatedmortgagecompany 22.1 25.8 24.9 9.6 6.1 5.8 4.6 Independentmortgagecompany 29.9 22.9 30.3 22.1 29.0 31.0 42.1 Note:Seenotestotable14.A.

40 FederalReserveBulletin|November2015 insureddepositoryinstitutionstohelpmeetthecreditneedsof allsegmentsof theirlocal communities—thoseareaswherebankinginstitutionshaveaphysicalbranchofficepresenceandtakedeposits(theirCRAassessmentareas)—includingLMIareas. Atthetimeof theCRA’senactment,federallyinsuredbankinginstitutionsdominated mortgagelendingandheldnearlythree-fourthsof mortgagedebt.55BecausetheCRA appliesonlytobanksandfocusesinparticularonbanks’assessmentareas,shiftsinlending activityawayfrombanksandtheirassessmentareasmayweakentheCRAasatoolfor communitiestohelpensurefinancialinstitutionsaremakingcreditavailableanddoingso inasafeandsoundmanner.56Indeed,theCRAprovidescommunitygroupswithopportunitiestoprovidefeedbacktobankregulatorsontheCRAperformanceof localbanksduringCRAexamsandtoprotestexpansionactivitiesof banksonCRAgrounds.Research hasfoundthat,duringthehousingboom,higher-pricedlendingandmortgagedelinquenciesweremuchmoreprevalentamongloansoriginatedbyindependentmortgagecompaniesandbybanksoutsideof theirassessmentareascomparedwithbankloanswithintheir assessmentareas.57 Theanalysisthusfarindicatesthatnon-CRA-coveredinstitutions—creditunionsandindependentmortgagecompanies—nowaccountforahistoricallylargeshareof mortgage lending,andtheirshareof lendingtocertaingroups,suchasHispanics,isespeciallyhigh. Nowweexaminetrendsintheassessment-areashareof loansmadebybanks(notincludingloansoriginatedbytheirnonbanksubsidiaries,whichtendtobeoutsidebanks’assessmentareas).Inparticular,figure13presentsassessment-areasharesof home-purchase loansovertime,separatelyforsmallandlargebanks,byraceandethnicityandbyneighborhoodincome.Forthisanalysis,wedefineabank’sCRAshareasthefractionof loans originatedwithincountieswherethebankhasatleastonebranchoffice. Forsmallbanks,therehasbeenapersistentdeclineinthewithin-assessment-areashareof theirhome-purchaselendingforeachgroupexamined,althoughthedeclineappearssomewhatmorepronouncedforloansgoingtoblackborrowersandinLMIneighborhoods.As of 2014,theshareof loansoriginatedbysmallbankswithintheirassessmentareaswas between50and60percentforallgroups,exceptforloanstoblackborrowers,forwhichthe assessment-areasharewasclosertojust40percent. Incontrast,largebanks’shareof lendingwithintheirassessmentareasdeclinedsharply from2004through2007,especiallyforblackborrowers,butsince2008ithasrisenbackto levelsthatarecomparablewiththoseinpre-2004years.Atcloseto70percentforallgroups in2014,theassessment-areasharesof home-purchaselendingbylargebankstendnowto exceedthesharesforsmallbanks. 55 SeeRobertB.Avery,MarshaJ.Courchane,andPeterM.Zorn(2009),“TheCRAwithinaChangingFinancial Landscape,”inPrabalChakrabarti,DavidErickson,RenS.Essene,IanGalloway,andJohnOlson,eds., “RevisitingtheCRA:PerspectivesontheFutureoftheCommunityReinvestmentAct,”specialissue,CommunityDevelopmentInvestmentReview,vol.4(February),pp.30–46,www.frbsf.org/community-development/files/ revisiting_cra.pdf. 56 TheCRAdoesnotfocussolelyonmortgagelending,butmortgagelendinghasbeenahistoricallyimportant componentintheevaluationofbanks’CRAperformance. 57 SeeRobertB.AveryandKennethP.Brevoort(2015),“TheSubprimeCrisis:IsGovernmentHousingPolicyto Blame?”ReviewofEconomicsandStatistics,vol.97(May),pp.352–63.AlsoseeBhuttaandCanner,“MortgageMarketConditionsandBorrowerOutcomes,”innote37.

The2014HomeMortgageDisclosureActData 41 Figure13.CRAshareofhome-purchaseloans,bybanksize,borrowerraceandethnicity,and neighborhoodincome,1995–2014 A. Small banks Percent Percent 90 90 70 70 50 50 30 30 Asian Black or African American Low or moderate income 10 Hispanic white Non-Hispanic white 10 Middle or high income 19961998 20002002 200420062008 2010 2012 2014 19961998 20002002 200420062008 2010 2012 2014 B. Large banks Percent Percent 90 90 70 70 50 50 30 30 Asian Black or African American Low or moderate income 10 Hispanic white Non-Hispanic white 10 Middle or high income 19961998 20002002 200420062008 2010 2012 2014 19961998 20002002 200420062008 2010 2012 2014 Note:Thedataareannual.First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.CommunityReinvestmentAct(CRA) sharereferstothefractionofloansoriginatedinacountyinwhichtheoriginatingbankoperatesabranchoffice.Smallbanksarepartoforganizationswithlessthan$1billioninassets,measuredin2014dollars.Largebanksareallotherbanks.Fordefinitionofborrowerraceandethnicity,seetable2,note1;fordefinitionofneighborhoodincome,seetable2,note4. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome.

42 FederalReserveBulletin|November2015 Appendix A: Requirements of Regulation C RegulationCrequireslenderstoreportthefollowinginformationonhome-purchaseand home-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

The2014HomeMortgageDisclosureActData 43 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 ‰ spreadabovecomparableTreasurysecurityforapplicationstakenpriortoOctober1,2009 ‰ spreadaboveaverageprimeofferrateforapplicationstakenonorafterOctober1,2009 For loans subject to the Home Ownership and Equity Protection Act ‰ indicatorof whetherloanissubjecttotheHomeOwnershipandEquityProtectionAct

45 Federal Reserve BULLETIN February 2015 Vol. 101, No.1 Legal Developments: Fourth Quarter, 2014 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act First American Bank Corporation Elk Grove Village, Illinois OrderApprovingtheAcquisitionof aBank FRBOrderNo.2014–18(November13,2014) FirstAmericanBankCorporation(“FirstAmerican”),ElkGroveVillage,Illinois,has requestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHC Act”)1toacquireBankof CoralGables,CoralGables,Florida.Immediatelyfollowingthe proposedacquisition,Bankof CoralGableswouldbemergedintoFirstAmerican’ssubsidiarybank,FirstAmericanBank,ElkGroveVillage.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister26758(2014)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. FirstAmerican,withconsolidatedassetsof approximately$3.4billion,isthe234thlargest insureddepositoryorganizationintheUnitedStates.4FirstAmericancontrolsFirst AmericanBank,whichoperatesonlyinIllinois.FirstAmericanBankisthe21stlargest insureddepositoryinstitutioninIllinois,controllingapproximately$2.4billionindeposits, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate.5 Bankof CoralGables,withconsolidatedassetsof approximately$99million,isthe4,653rd largestinsureddepositoryorganizationintheUnitedStates.Bankof CoralGablesoperatesonlyinFlorida.Bankof CoralGablesisthe204thlargestinsureddepositoryinstitutioninFlorida,controllingapproximately$92millionindeposits,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. 1 12U.S.C.§1842. 2 ThemergerofBankofCoralGablesintoFirstAmericanBankissubjecttotheapprovaloftheFederalDeposit InsuranceCorporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c). TheFDICapprovedthebankmergeronSeptember26,2014. 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofJune30,2014,unlessotherwisenoted. 5 StatedataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,cooperativebanks,industrialbanks,andsavingsbanks.

46 FederalReserveBulletin|February2015 Onconsummationof thisproposal,FirstAmericanwouldbecomethe225thlargest depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $3.5billion,whichrepresentlessthan1percentof thetotalamountof assetsof insured depositoryinstitutionsintheUnitedStates.FirstAmericanwouldhavetotaldepositsof approximately$2.4billion.InFlorida,FirstAmericanwouldbecomethe204thlargest depositoryorganization. InterstateandDepositCapAnalysis Section3(d)of theBHCActimposescertainrequirementsoninterstatetransactions.Section3(d)generallyprovidesthattheBoardmayapproveanapplicationbyabankholding companythatiswellcapitalizedandwellmanagedtoacquirecontrolof abankinastate otherthanthehomestateof thebankholdingcompany,withoutregardtowhetherthe transactionisprohibitedunderstatelaw.6However,thissectionfurtherprovidesthatthe Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststatethathasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeorfiveyears.7TheBoardalsomusttakeinto accounttherecordof performanceof theacquiringbankundertheCommunityReinvestmentAct(“CRA”)8andapplicablestatecommunityreinvestmentlaws.9Inaddition,the Boardmaynotapproveanapplicationbyabankholdingcompanytoacquireaninsured depositoryinstitutionif thehomestateof suchinsureddepositoryinstitutionisastate otherthanthehomestateof thebankholdingcompanyandthebankholdingcompany controlsorwouldcontrolmorethan10percentof thetotaldepositsof insureddepository institutionsintheUnitedStates.10 Forpurposesof theBHCAct,thehomestateof FirstAmericanisIllinoisandthehome stateof Bankof CoralGablesisFlorida.11FirstAmericaniswellcapitalizedandwellmanagedunderapplicablelaw.Floridahasathree-yearminimumagerequirement,12andBank of CoralGableshasbeeninexistenceformorethanthreeyears. Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutions,thetotal amountof consolidateddepositsof insureddepositoryinstitutionsintheUnitedStatesis $11.0trillion.Onconsummationof theproposedtransaction,FirstAmericanwould controllessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.TheBoardalsohastakenintoaccountFirstAmericanBank’srecordof performanceundertheCRAanddeterminedthatitdoesnotprohibit theBoardfromapprovingtheproposal.Accordingly,inlightof allthefactsof record,the Boardisnotprohibitedfromapprovingtheproposalundersection3(d)of theBHCAct. 6 12U.S.C.§1842(d)(1)(A). 7 12U.S.C.§1842(d)(1)(B). 8 12U.S.C.§2901etseq. 9 12U.S.C.§1842(d)(1)(3). 10 12U.S.C.§1842(d)(2)(A).TheBoardalsomaynotapproveanapplicationifthecombinedorganizationwould control30percentormoreofthetotaldepositsofinsureddepositoryinstitutionsinanystateinwhichthe acquirerandtargethaveoverlappingbankingoperations.12U.S.C.§1842(d)(2)(B).FirstAmericanandBank ofCoralGablesdonothaveoverlappingbankingoperationsinanystate. 11 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedatewhenthecompanybecamea bankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankischartered. 12 SeeFLA.STAT.§658.295(3)(b)(2005).FloridalawprohibitsaFloridabankfrombeingacquiredbyanoutof-statebankholdingcompanyorbankunlesstheFloridabankhasexistedandcontinuouslyoperatedasa bankformorethanthreeyears.

LegalDevelopments:FourthQuarter,2014 47 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.13FirstAmericanBankandBankof CoralGablesdonotcompetedirectlyin anybankingmarket. TheDepartmentof Justicehasconductedareviewof thepotentialcompetitiveeffectsof theproposalandadvisedtheBoardthatitdoesnotbelievethatconsummationof theproposalislikelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbanking market.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunity tocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinanyrelevantbankingmarket.Accordingly,theBoardhasdeterminedthat competitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only basisandaconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof thecombinedorganizationtoabsorbthecostsof theproposalandthe proposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,the Boardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant.Further,the Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.FirstAmericanandFirst AmericanBankarebothwellcapitalizedandwouldremainsoonconsummationof the proposedacquisition.Theproposedtransactionisabankholdingcompanyacquisitionof abankandasubsequentbankmerger,structuredasacashtransaction.Theassetquality, earnings,andliquidityof FirstAmericanBankandBankof CoralGablesareconsistent withapproval,andFirstAmericanappearstohaveadequateresourcestoabsorbthecosts of theproposalandtocompletetheintegrationof theinstitutions’operations.14Basedon 13 12U.S.C.§1842(c)(1). 14 Theanticipatedaggregatecashconsiderationtobepaidinconnectionwiththemergerisapproximately $7.5million,andFirstAmericanhassufficientcashtofundtheproposedtransaction.Acommentercriticized FirstAmericanfortheproposedpurchaseprice,claimingthatitdoesnotreflecttheamountshareholdersof BankofCoralGablespreviouslyinvestedinthebank.ThisallegationisoutsidethescopeofwhattheBoardis requiredtoconsideraspartoftheapplicationsprocess.SeeWesternBancshares,Inc.v.BoardofGovernorsof theFederalReserveSystem,480F.2d749(10thCir.1973).

48 FederalReserveBulletin|February2015 itsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancial resourcestoeffecttheproposal.15 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FirstAmerican,FirstAmericanBank,andBankof CoralGables,includingassessments of theirmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingand anti-moneylaunderinglaws. FirstAmericanandFirstAmericanBankareeachconsideredtobewellmanaged.First American’sexistingriskmanagementprogramanditsdirectorateandseniormanagement areconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof FirstAmericanhavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors. TheBoardalsohasconsideredFirstAmerican’splansforimplementingtheproposal.First Americanisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof the post-acquisitionintegrationprocessforthisproposal.FirstAmericanwouldimplementits riskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,and theseareconsideredacceptablefromasupervisoryperspective.Inaddition,FirstAmerican’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andFirstAmericanisproposingtointegrate Bankof CoralGables’existingmanagementandpersonnelinamannerthataugments FirstAmericanBank’smanagement.16 FirstAmerican’ssupervisoryrecord,managerialandoperationalresources,andplansfor operatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconcludethatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordof effectivenessof FirstAmericanandBankof Coral Gablesincombattingmoneylaunderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).17TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,18and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant 15 Aspartofthisproposal,someshareholdersofBankofCoralGablesarerequiredtopurchasesharesofFirst American.ThecommenterfurthercriticizedFirstAmericanforfailingtodisclosethepurchasepricepershare tobepaidbytheseshareholders.ThisallegationalsoisoutsidethescopeofwhattheBoardisrequiredtoconsideraspartoftheapplicationsprocess. 16 Onconsummation,twoindividualscurrentlyservingasdirectorsofBankofCoralGableswillbeaddedtothe boardofdirectorsofFirstAmericanBank. 17 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 18 12U.S.C.§2901(b).

LegalDevelopments:FourthQuarter,2014 49 depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.19 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof FirstAmericanBankandBankof CoralGables,datareportedby FirstAmericanBankundertheHomeMortgageDisclosureAct(“HMDA”),20otherinformationprovidedbyFirstAmerican,confidentialsupervisoryinformation,andthepublic commentreceivedontheproposal.TheBoardreceivedonecommentthatobjectedtothe proposalonthebasisof FirstAmericanBank’sfair-lendingrecordintheChicagoMetropolitanStatisticalArea(“ChicagoMSA”)asreflectedin2012HMDAdata. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorof theCRAperformancerecordsof thatinstitution.21TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting thecreditneedsof itsentirecommunity,includingLMIneighborhoods.22Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,onsiteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof FirstAmericanBank.FirstAmericanBankwasassignedanoverall ratingof “satisfactory”atitsmostrecentCRAperformanceevaluationbytheFDICin February2013(“FABEvaluation”).FirstAmericanBankreceiveda“highsatisfactory” ratingforboththeLendingTestandtheServiceTestanda“lowsatisfactory”ratingforthe InvestmentTest.23 WithrespecttotheLendingTest,examinersnotedthatFirstAmericanBank’slending activitywasadequateinresponsetoassessmentareacreditneeds.Examinersdetermined thatthebankoriginatedanadequatepercentageof itsloansinsideitsassessmentarea. AlthoughFirstAmericanBank’sdistributionof lendingtoborrowersof differentincomes andbusinessesof differentsizeswasconsideredadequate,examinershighlightedthat,with respecttothebank’soverallhomemortgagelending,lendingtolow-incomeaswellas moderate-incomeborrowerswasconsideredgood.ExaminersfoundthatFirstAmerican Bank’sgeographicdistributionof loanswasadequate,includingitsdistributionof homemortgageloans.24 Thebank’ssmallbusinesslendingperformancewasconsideredadequate,includingitsdistributionof smallloans(lessthanorequalto$1million)tobusinesses,consistentwiththe demographiccharacteristicsof thearea.ExaminersfoundthatFirstAmericanBankmade arelativelyhighlevelof communitydevelopmentloans.ExaminersalsonotedthatFirst 19 12U.S.C.§2903. 20 12U.S.C.§2801etseq. 21 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 22 12U.S.C.§2906. 23 Theevaluationwaspreparedusingtheinteragencyevaluationproceduresforlargeinstitutionscoveringthe periodfromJune2,2010,throughFebruary19,2013.TheassessmentareaencompassedCook,DeKalb, DuPage,Grundy,Kane,Kendall,Kankakee,Lake,McHenry,andWillcountiesinIllinois. 24 TheFABEvaluationfoundthatopportunitiesforfinancialinstitutionstolendinlow-andmoderate-income tractswerelimitedbecauseonly4percentofhousingunitslocatedinlow-incometracts,and18percentof housingunitslocatedinmoderate-incometracts,wereowner-occupied.

50 FederalReserveBulletin|February2015 AmericanBankmadeuseof innovativeand/orflexiblelendingpracticestoserveassessmentareacreditneeds,inparticularthecreditneedsof smallbusinessesandfirst-time homebuyers.FirstAmericanBankisqualifiedasapreferredU.S.SmallBusinessAdministration(“SBA”)lenderand,duringtheevaluationperiod,fundedanumberof SBAloans. FirstAmericanBankalsoparticipatedinguaranteedloanprogramssponsoredbytheFederalHousingAdministrationandtheU.S.Departmentof VeteransAffairs. WithrespecttotheInvestmentTest,examinersconcludedthatFirstAmericanBankhad anadequatelevelof qualifiedcommunitydevelopmentinvestmentsandgrants,occasionallyusingcomplexinvestmentinstruments.WithrespecttotheServiceTest,examiners foundthatFirstAmericanBank’sdeliverysystemswerereasonablyaccessibletoallportionsof theinstitution’sassessmentareaandhighlightedthebank’sconvenientbranch hoursof operation,automatedtellermachinenetwork,mobilebanking,andflexibilityof productsandservices.Furthermore,examinersfoundthatFirstAmericanBankwasa leaderinprovidingcommunitydevelopmentservices;andthatbankemployees,management,andboardmembersparticipatedinanumberof differentqualifyingcommunity developmentservices,asignificantportionof whichtargetedassistancetolow-andmoderate-incomeindividualsandfamilies. CRAPerformanceof Bankof CoralGables.Bankof CoralGableswasassignedanoverall “satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof June2011(“Bankof CoralGablesEvaluation”).25Examinersnotedthatthebank’sCRA performancedemonstratedareasonableresponsivenesstothecreditneedsof itsassessmentarea.Examinersfoundthatamajorityof thesmallbusinessandresidentialrealestate loansoriginatedbyBankof CoralGablesweremadewithinthebank’sassessmentarea. ExaminersalsonotedthatBankof CoralGables’overalldistributionof loansreflecteda reasonabledispersionwithinitsassessmentareaandthatBankof CoralGables’penetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,and amongbusinessesof differentsizeswasreasonablegiventhedemographicsof theassessmentarea. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof FirstAmericanBankandBankof CoralGables incomplyingwithfairlendingandotherconsumerprotectionlaws.Aspartof thisevaluation,theBoardreviewedtheFirstAmericanBankandBankof CoralGablesEvaluations, assessedFirstAmericanBank’sHMDAdata,andconsideredthecommentontheapplicationandotheragencies’viewsonFirstAmericanBank’srecordof performanceunderfair lendinglaws.TheBoardalsoconsideredFirstAmericanBank’sfairlendingpoliciesand procedures. Analysisof HMDAData.TheBoardanalyzedFirstAmericanBank’s2012HMDAdata, themostrecentpubliclyavailableinthespecificmarketareaaddressedinthepublic comment(ChicagoMSA),aswellasits2013HMDAdata.TheBoardrevieweddata relatedtoallHMDAreportableloanstodevelopaviewof thebank’soveralllendingpatterns,aswellasthesubsetof thosedatarelatedspecificallytotheloanproductsthatwere thesubjectof thepubliccommentontheproposal,includingconventionalhomepurchase loans,homeimprovementloans,andrefinanceloans.TheBoardanalyzedthebank’scombinedassessmentareainadditiontothespecificmarketareaaddressedinthepubliccom- 25 TheBankofCoralGablesEvaluationwaspreparedusingevaluationproceduresforsmallinstitutionscovering theperiodfromJune5,2008,throughJune3,2011.TheseproceduresevaluatetheCRAperformanceofa bank’slendingrelativetofiveperformancecategories:averagenetloan-to-depositratio,assessmentarealending,geographicdistribution,borrowerdistribution,andresponsetoCRA-relatedcomplaints.

LegalDevelopments:FourthQuarter,2014 51 ment(ChicagoMSA).Withinthosedatasets,theBoardfocuseditsreviewondatarelated toconventionalhomepurchaseloans,refinanceloans,andhomeimprovementloansmade ordeniedtoborrowersof theracesandethnicitieshighlightedbythepubliccomment(i.e., AfricanAmericansandHispanics). Thecommenterexpressedconcerns,basedon2012HMDAdata,thatFirstAmericanBank wasnotmeetingthecreditneedsof minorityindividualsintheChicagoMSA.Inparticular,thecommenterallegedthatFirstAmericanBankdidnotoriginateanyconventional homepurchaseloanstoAfricanAmericans,andoriginatedmorerefinanceloansandhome improvementloanstowhitesthantoAfricanAmericansorHispanics.Thecommenteralso assertedthatFirstAmericanBankdisproportionatelydeniedapplicationsbyAfrican AmericanandHispanicapplicantsforhomepurchaseloansandhomeimprovementloans intheChicagoMSA,suggestingapatternof denialratedisparities.26 TheBoard’sreviewconfirmedthelevelsof lendingbyFirstAmericanBanktoAfrican AmericanandHispanicborrowersanddenialdisparityratiosnotedbythecommenter.However,theBoard’sanalysisof HMDAdataforconventionalhomepurchase loans,refinanceloans,andhomeimprovementloansbyFirstAmericanBankintheChicagoMSAdidnotshowanysignificantdifferencesbetweenFirstAmericanBank’slending andtheaggregatelendingforsuchloanproductsinthatMSAfor2012and2013.27In 2012,4.3percentof FirstAmericanBank’sHMDAloansintheChicagoMSAwereoriginatedtoAfricanAmericans,and9.7percentof FirstAmericaBank’sHMDAloanswere originatedtoHispanics.Incomparison,forallHMDAreportersintheChicagoMSAin 2012,thepercentageof loansoriginatedtoAfricanAmericanswas4.6percentandthepercentageof loansoriginatedtoHispanicswas6.7percent.Similarly,in2013,3.2percentof FirstAmericanBank’sHMDAloansintheChicagoMSAwereoriginatedtoAfrican Americansand8percentof FirstAmericanBank’sHMDAloanswereoriginatedtoHispanics.Incomparison,forallHMDAreportersintheChicagoMSAin2013,thepercentageof loansoriginatedtoAfricanAmericanswas5.7percentandthepercentageof loans originatedtoHispanicswas8percent. Further,HMDAdatafortheChicagoMSAdemonstratethatin2012and2013,First AmericanBankhadalowerdisparityinitsdenialpercentagesforHMDAloanstoAfrican AmericanandHispanicapplicantsascomparedtowhitenon-Hispanicapplicantsthanthe aggregatedisparityindenialpercentagesforHMDAloansamongsuchapplicantsbyall HMDAlendersintheChicagoMSA.In2012,thedisparitiesbetweenthepercentagesof HMDAloansdeniedtoAfricanAmericanandHispanicapplicantsascomparedto thepercentagesof HMDAloansdeniedtowhitenon-Hispanicapplicantswere1.7percent and1.4percentagepoints,respectively,forFirstAmericanBankand2.1and1.8percentage points,respectivelyforallHMDAlendersintheChicagoMSA.Similarly,in2013,thedisparitiesbetweenthepercentagesof HMDAloansdeniedtoAfricanAmericanandHispanicapplicantscomparedtothepercentagesof HMDAloansdeniedtowhiteapplicants were1.9and1.6percentagepoints,respectively,forFirstAmericanBank,and2.1and 1.8percentagepoints,respectively,forallHMDAlendersintheChicagoMSA. 26 Inadditiontothesefairlendingallegations,thecommenterprovidedinformationrelatedtoanindividualconsumer’scomplaintaboutFirstAmericanBank’srewardscheckingproduct.Individualconsumercomplaints generallyareconsideredtobeoutsidethescopeofwhattheBoardisrequiredtoconsideraspartoftheapplicationsprocess,unlesstheyallegeapatternorpracticeinviolationoffederalbankinglaws,whichisnotthe presentcase.TheFDIC’srecentFABEvaluationdidnotfindsuchapatternorpracticebyFirstAmerican Bank. 27 Aggregatelendingisdefinedasthenumberofloansoriginatedandpurchasedbyallreportinglendersinspecifiedincomecategoriesasapercentageoftheaggregatenumberofloansoriginatedandpurchasedbyall reportinglendersinthemetropolitanorassessmentarea.Inthiscontext,aggregatelendingisconsideredan indicatorofthelendingopportunitiesinthegeographicareainwhichthebankislocated.

52 FederalReserveBulletin|February2015 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherthebank excludedordeniedcredittoanygrouponaprohibitedbasis.28Fullyevaluatingabank’s compliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof the bank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. TheBoardhasconsultedwith,andplacesspecialemphasisontheviewsof,FirstAmerican Bank’sprimaryfederalsupervisor,theFDIC,regardingitsevaluationof thebank’scompliancewithfairlendinglawsandregulations.BasedonitsrecentFABEvaluation,the FDICreportedthatitdidnotfindevidencethatFirstAmericanBankengagedindiscriminatoryorotherillegalcreditpracticesandexpressednoconcernregardingtheadequacyof FirstAmericanBank’sfairlendingpoliciesandprocedures. WithrespecttothespecificHMDAdataonhomepurchase,homeimprovement,andrefinanceloanscitedbythecommenter,FirstAmericanprovidedinformationreflectingnondiscriminatoryreasonsforindividuallendingdecisions(i.e.,credithistory,inadequatecollateral,anddebt-to-incomeratio).FirstAmericanalsoprovidedtheBoardwithdetailed informationonFirstAmericanBank’straining,marketing,advertising,andunderwriting guidelines,reflectingitsstatedcommitmenttothepreventionof prescreening,discouragement,andexclusionof creditapplicationsonaprohibitedbasis.Thesesamematerialswere availabletotheFDICduringitsrecentreviewof FirstAmericanBank. FirstAmericanBank’sFairLendingProgram.FirstAmericanBankhasinstitutedpolicies andprocedurestohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Thebank’slegalandcomplianceriskmanagementprogram includeswrittenpoliciesoutliningthebank’sresponsibilityforcompliancewithfairlendinglawsandregulations.Theprogramprovidesforasecond-levelreviewof alldeclinedand withdrawnretailandmortgageloansbyacommitteecomposedof thebank’schairman, president,andmanagersintheretailandmortgageloandepartments.Theprogramalso requiresannualfairlendingtrainingforallemployeesinvolvedinanyaspectof thebank’s credittransactions. Inaddition,fairlendingauditsareconductedperiodicallythroughouttheyearbyFirst AmericanBank’sInternalAuditDepartment,whichreportsdirectlytoFirstAmerican Bank’sAuditCommittee.Theseinternalauditsevaluatethebank’scompliancewithfair lendinglawsandmonitorsforfairlendingriskindecision-makingandpricingusingthe InteragencyFairLendingReviewGuidelines.TheInternalAuditDepartmentperforms annualin-depthfairlendingreviewsof thebank’sHMDAdata.FirstAmericanBank’s riskmanagementsystemsanditspoliciesandproceduresforassuringcompliancewithfair lendinglawswouldbeimplementedatthecombinedorganization. 28 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

LegalDevelopments:FourthQuarter,2014 53 C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.FirstAmericanhasrepresentedthatoneof themotivatingfactorsbehindtheproposedacquisitionistoallowFirstAmericantobetterserveitscustomersintheCoral Gables,Floridaarea.29Inaddition,Bankof CoralGablesisoperatingunderaConsent OrderwiththeFDICandtheFloridaOfficeof FinancialRegulation,30anditslendinghas beenconstrainedbythetermsof theConsentOrder.Throughconsummationof theproposal,FirstAmericanwouldbeabletoprovideadditionalfinancialandmanagerial resourcesneededtoenablethemergedbanktoincreaseitslendinginthegreaterCoral GablesmarketandreachcustomersthroughouttheentireMiami/Dadearea. FirstAmericanrepresentsthatuponconsummationof theproposal,itwillprovidecustomersof Bankof CoralGableswiththefullrangeof productsandservicescurrently beingofferedtocustomersof FirstAmericanBank,includingtrustservices,healthsavings accounts,abroaderbrokeroriginationmodel,andaservicemortgageprogramaimedat meetingtheneedforfixed-ratemortgagesinlow-andmoderate-incomeareas.FirstAmericanalsoplanstoexpandthemarketingof Bankof CoralGables’homeequitylending programandtouseFirstAmericanBank’sSBAPreferredLenderstatustoexpandBank of CoralGables’existingtradefinancebusiness. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyFirstAmerican,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonthe Board’sanalysisof theHMDAdata,itsevaluationof themortgagelendingoperationsand complianceprogramsof FirstAmericanBankandBankof CoralGables,itsreviewof examinationreports,anditsconsultationswithotheragencies,theBoardconcludesthat theconvenienceandneedsfactor,includingtheCRArecordsof theinsureddepository institutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”31 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 29 FirstAmericanBankoriginated10smallbusinessloansinthestateofFloridain2013. 30 ConsentOrder,FDIC-09-6906,OFR0697-FI-12/09(2010). 31 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7).

54 FederalReserveBulletin|February2015 financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.32These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.33 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,FirstAmerican wouldhaveapproximately$3.5billioninconsolidatedassetsandwouldbethe225thlargest financialinstitutionintheUnitedStates.TheBoardgenerallypresumesthatamerger resultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-border activities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompaniesengageandwouldcontinuetoengageintraditionalcommercialbankingactivities.Theresultingorganizationwouldexperiencesmallincreasesinthemetrics thattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness, withtheresultingfirmgenerallyrankingoutsideof thetop100U.S.financialinstitutions intermsof thosemetrics.Forexample,FirstAmerican’sintrafinancialassetsandliabilities wouldconstituteanegligibleshareof thesystem-widetotal,bothbeforeandafterthe transaction.Theresultingorganizationwouldnotengageincomplexactivities,norwould itprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtrade orresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.34Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon 32 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 33 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 34 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:FourthQuarter,2014 55 compliancebyFirstAmericanwithalltheconditionsimposedinthisOrder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsafterthedateof thisOrder,unlesssuchperiodis extendedforgoodcausebytheBoardortheFederalReserveBankof Chicago,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember13,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard ViewPoint Financial Group, Inc. Plano, Texas, LegacyTexas Bank Plano, Texas, OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2014–20(December9,2014) ViewPointFinancialGroup,Inc.(“ViewPoint”),hasrequestedtheBoard’sapprovalunder section3of theBankHoldingCompanyAct(“BHCAct”)1tomergewithLegacyTexas Group,Inc.(“LegacyTexas”),andtherebyacquireitssubsidiarystatememberbank,LegacyTexasBank,allof Plano,Texas.Inaddition,LegacyTexasBankhasrequestedthe Board’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMerger Act”)2tomergewithViewPoint’ssubsidiarybank,ViewPointBank,N.A.(“ViewPoint Bank”),Plano,Texas,withLegacyTexasBankasthesurvivingentity.3LegacyTexasBank alsohasappliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthelocationsof themainofficeandthebranchesof ViewPointBank.4 Noticeof theproposals,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(79FederalRegister44773(August1,2014))and inlocalnewspapersinaccordancewithrelevantstatutesandtheBoard’sRulesof Procedure.5AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof thebank mergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof therequest wasprovidedtotheappropriatebankingagency.Thetimeforsubmittingcommentshas 1 12U.S.C.§1842. 2 12U.S.C.§1828(c). 3 AlthoughLegacyTexasBankfiledundertheBankMergerActandFRAbecauseitsnameandcharterwillsurvivethemerger,ViewPointBankistheacquirerforsubstantivepurposesofthisproposalandwouldimplement itsmanagement,policies,procedures,andcontrolsatthecombinedorganization. 4 12U.S.C.§321.Theselocationsarelistedintheappendix. 5 12CFR262.3(b).

56 FederalReserveBulletin|February2015 expired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct,andtheFRA. ViewPoint,withconsolidatedassetsof approximately$4.0billion,isthe210thlargest insureddepositoryorganizationintheUnitedStates.6ViewPointcontrolsViewPointBank, whichoperatesonlyinTexas.ViewPointBankisthe24thlargestdepositoryinstitutionin Texas,controllingdepositsof approximately$2.5billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthestate.7 LegacyTexas,withtotalconsolidatedassetsof $1.8billion,isthe391stlargestinsured depositoryorganizationintheUnitedStates.LegacyTexascontrolsLegacyTexasBank, whichoperatesonlyinTexas.LegacyTexasBankisthe37thlargestinsureddepository institutioninTexas,controllingdepositsof approximately$1.5billion,whichrepresentless than1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,ViewPointwouldbecomethe162ndlargestinsured depositoryorganizationintheUnitedStates,withtotalconsolidatedassetsof approximately$5.8billion.ViewPointwouldhavetotalconsolidateddepositsof approximately $4.1billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.InTexas,ViewPointwouldbecomethe16th largestdepositoryorganization,controllingdepositsof approximately$4.1billion,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.8 ViewPointandLegacyTexashavesubsidiarydepositoryinstitutionsthatcompetedirectly intheDallasandFortWorthbankingmarkets,bothinTexas.9TheBoardhasconsidered thecompetitiveeffectsof theproposalinthesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthebankingmarkets;therelativesharesof totaldepositsininsureddepository institutionsinthemarkets(“marketdeposits”)controlledbyViewPointandLegacy- Texas;10theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,as 6 Assetandnationwidedeposit-rankingdataareasofJune30,2014,unlessotherwisenoted. 7 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 8 12U.S.C.§§1842(c)(1)and1828(c)(5). 9 TheDallasbankingmarketisdefinedasDallasandRockwallcounties;thesoutheasternquadrantofDenton County,includingDentonandLewisville;thesouthwesternquadrantofCollinCounty,includingMcKinney andPlano;thecommunitiesofForneyandTerrellinKaufmanCounty;andMidlothian,Waxahachie,andFerrisinEllisCounty,allinTexas(the“Dallasbankingmarket”).TheFortWorthbankingmarketisdefinedas Tarrant,Johnson,andWisecounties;ParkerCounty(minusMineralWells);andthesouthwesternquadrantof DentonCounty,includingRoanoke,allinTexas(the“FortWorthbankingmarket”). 10 DepositandmarketsharedataareasofJune30,2013,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinan-

LegalDevelopments:FourthQuarter,2014 57 measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);11and othercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthemarkets.Onconsummationof the proposal,theDallasbankingmarketwouldremainhighlyconcentratedandtheFortWorth bankingmarketwouldremainunconcentrated,asmeasuredbytheHHI.TheHHIchange ineachmarketwouldbeminimal,andnumerouscompetitorswouldremaininbothmarkets.12 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketsinwhichViewPointandLegacyTexascompetedirectly orinanyotherrelevantbankingmarket.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,earningsprospects,andthe impactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof cialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 11 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. 12 ViewPointoperatestheninthlargestdepositoryinstitutionintheDallasbankingmarket,withapproximately $2.1billionindeposits,whichrepresent1.4percentofmarketdeposits.LegacyTexasoperatesthe15thlargest depositoryinstitutioninthesamemarket,controllingdepositsofapproximately$1.2billion,whichrepresent lessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,ViewPointwouldoperatetheseventhlargestdepositoryinstitutioninthemarket,controllingweighteddepositsofapproximately $3.3billion,whichrepresent2.2percentofmarketdeposits.TheHHIwouldincreasebythreepointsto1811, and126competitorswouldremaininthemarket. ViewPointoperatesthe51stlargestdepositoryinstitutionintheFortWorthbankingmarketwithapproximately$57millionindeposits,whichrepresentlessthan1percentofmarketdeposits.LegacyTexasoperates the20thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$242million, whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,View- Pointwouldoperatethe17thlargestdepositoryinstitutioninthemarket,controllingweighteddepositsof approximately$300million,whichrepresentlessthan1percentofmarketdeposits.TheHHIwouldincreaseby lessthan1pointto994,and74competitorswouldremaininthemarket.

58 FederalReserveBulletin|February2015 theorganizationtoabsorbthecostsof theproposalandtheproposedintegrationof the operationsof theinstitutions. Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant.Further,theBoardhasconsideredthefutureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialandmanagerialresourcesandthe proposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.ViewPointBankandLegacyTexasBankarebothwellcapitalizedandthecombinedinstitutionwouldremainsoon consummationof theproposedacquisition.Theproposedtransactionisabankholding companymergerthatisstructuredasacashandshareexchangeandasubsequentbank mergerof thesubsidiarydepositoryinstitutions.13Theassetquality,earnings,andliquidity of bothViewPointBankandLegacyTexasBankareconsistentwithapproval,andView- Pointappearstohaveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Basedonitsreviewof therecord,the Boardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of ViewPoint,LegacyTexas,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the Boardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheorganizations’recordsof compliancewith applicablebankingandanti-money-launderinglaws. ViewPoint,LegacyTexas,andtheirsubsidiarydepositoryinstitutionsareeachconsidered tobewellmanaged.ViewPoint’sexistingrisk-managementprogramanditsdirectorateand seniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutive officersof ViewPointhavesubstantialknowledgeandexperienceinthebankingandfinancialservicessectors.14 TheBoardhasalsoconsideredViewPoint’splansforimplementingtheproposal.View- Pointisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepostacquisitionintegrationprocessforthisproposal.ViewPointwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,ViewPoint’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperates inasafeandsoundmanner,andViewPointplanstointegrateLegacyTexasBank’sexisting managementandpersonnelinamannerthataugmentsViewPoint’smanagement. ViewPoint’ssupervisoryrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin 13 Aspartoftheproposedtransaction,eachshareofLegacyTexascommonstockwouldbeconvertedintoaright toreceivecashandViewPointcommonstock,basedonanexchangeratio. 14 BoththechairmanandchiefexecutiveofficerofViewPointwouldcontinueintheirrolesfollowingconsummationoftheproposedtransaction.Inaddition,twocurrentmembersoftheboardofdirectorsofLegacyTexas wouldbecomedirectorsofViewPoint,withonebeingelectedasViceChairmanoftheboard.

LegalDevelopments:FourthQuarter,2014 59 theproposal,aswellastherecordsof effectivenessof ViewPointandLegacyTexasincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandundertheBankMergerAct, theBoardmustconsidertheeffectsof theproposalontheconvenienceandneedsof the communitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).15TheCRArequiresthefederal financialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation.16Inaddition,theCRArequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthe creditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.17 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof ViewPointBankandLegacyTexasBank,otherinformationprovided byViewPointandLegacyTexas,confidentialsupervisoryinformation,andthepubliccommentreceivedontheproposal.Thecommenterobjectedtotheproposalandallegedthat LegacyTexasBankhadengagedindiscriminatorylendingpracticesintheDallas,Texas area. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof thatinstitution.18TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting thecreditneedsof itsentirecommunity,includingLMIneighborhoods.19Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof ViewPointBank.ViewPointBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency(“OCC”)asof January14,2013(“ViewPointBankEvaluation”).20 ViewPointBankreceivedan“outstanding”ratingontheInvestmentTestanda“highsatisfactory”ratingonboththeLendingTestandtheServiceTest.21 15 12U.S.C.§§1842(c)(2)and1828(c)(5);12U.S.C.§2901etseq. 16 12U.S.C.§2901(b). 17 12U.S.C.§2903. 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (March11,2010). 19 12U.S.C.§2906. 20 TheViewPointBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromApril1,2008,throughSeptember30,2012,exceptforcommunitydevelopmentloans.TheevaluationperiodforcommunitydevelopmentloansandfortheInvestmentTest andtheServiceTestwasfromMay12,2008,throughJanuary14,2013. 21 TheViewPointBankEvaluationincludedafull-scopereviewoftheDallas,Texas,AssessmentArea(“Dallas AA”)andalimitedscopereviewoftheFortWorth,Texas,AssessmentAreaandtheJackCounty,Texas, AssessmentArea.Examinersplacedgreaterweightonthebank’sperformanceintheDallasAAbecausethis arearepresentedthebank’smostsignificantmarketintermsofdepositconcentrations,branchdistributions,andCRA-reportableloans.

60 FederalReserveBulletin|February2015 InevaluatingtheLendingTest,examinersobservedintheDallasAAthatthebank’soveralllendingandhomemortgagelendingactivitywasadequate,anditssmallbusinesslendingwasgood.22ExaminersnotedthatViewPointBank’sdistributionof loanstoborrowers of differentincomelevelsandbusinessesof differentsizeswasgood.Inparticular,the bank’sborrowerdistributionof homepurchaseloanswasfoundtobeexcellent,whilethe distributionof homemortgageimprovementloansandhomemortgagerefinanceloans wasadequate.Overall,thegeographicdistributionof loanswasfoundtobeadequate. ExaminersfoundthatViewPointBank’scommunitydevelopmentlendingintheDallasAA wassignificantandthatthebankoriginatedanexcellentlevelof communitydevelopment loansduringtheevaluationperiod.Examinersnotedthatthebankisaparticipantina numberof governmentalandprivatelysponsoredprogramsthataredesignedtoassistLMI individualsandtosmallbusinesses. InevaluatingtheInvestmentTest,examinersfoundthatViewPointBank’slevelof communitydevelopmentinvestmentsandgrantsintheDallasAAwasexcellentandthatthebank exhibitedgoodresponsivenesstothecommunitydevelopmentneedsintheDallasAA. Examinersnotedthattheseinvestmentshelpedfundseveralprojects,includingamulti-familyhousingcomplexandasenior-livingretirementcommunity. FortheServiceTest,examinersfoundthatViewPointBank’sperformanceintheDallas AAwasgood.ExaminersnotedthatViewPointBank’sretailservicesanddeliverysystems werereasonablyaccessibletoessentiallyallportionsof theDallasAAandthatthebank’s recordof openingandclosingbrancheshadnotadverselyaffectedtheaccessibilityof its deliverysystems,particularlyinLMIgeographiesortoLMIindividuals.Examinersfound ViewPointBanktobealeaderinprovidingcommunitydevelopmentservicesthatwere highlyresponsivetocommunityneeds. Examinersreportedthattheydidnotfindanyevidenceduringthecourseof theViewPoint BankEvaluationthatViewPointBankengagedindiscriminatoryorotherillegalcredit practices. CRAPerformanceof LegacyTexasBank.LegacyTexasBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserve Bankof Dallas(“ReserveBank”)asof January6,2014(“LegacyTexasBankEvaluation”). ExaminersnotedthatLegacyTexasBank’slendinglevelsreflectedreasonableresponsivenesstoassessmentareacreditneedsandthatthebankwasaleaderinmakingcommunity developmentloansandprovidingcommunitydevelopmentservices.23LegacyTexasBank receiveda“highsatisfactory”ratingfortheLendingTest,theInvestmentTest,andtheServiceTest.24 FortheLendingTest,examinersnotedthatLegacyTexasBank’slevelof homemortgage, smallbusiness,andconsumerlendingactivityreflectedgoodresponsivenesstoassessment 22 Examinersplacedmoreemphasisonthebank’shomemortgageloansthanthedistributionofsmallbusiness loansbecauseofthelargernumberofhomemortgageloansoverthereviewperiod.Withinthehomemortgage loancategory,greaterweightwasplacedonhomepurchaseandhomerefinanceloans. 23 TheLegacyTexasBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2011,throughDecember31,2012.Theevaluation periodforcommunitydevelopmentloansandtheInvestmentTestandServiceTestwasfromJanuary1,2010to December31,2013. 24 TheLegacyTexasBankEvaluationincludedafull-scopereviewofthebank’sperformancewithinitsassessmentarealocatedinCollin,Dallas,andDentonCountiesinTexas(“Collin-Denton-DallasAA”)andwithinits assessmentarealocatedinParkerandTarrantCountiesinTexas.Examinersplacedgreaterweightonthe bank’sperformanceintheCollin-Denton-DallasAAbecausethisarearepresentedthebank’smostsignificant marketintermsofdepositconcentrations,branchdistributions,andCRA-reportableloans.

LegalDevelopments:FourthQuarter,2014 61 areacreditneedsconsideringthebank’sresources,businessstrategy,communityneeds,and opportunitiesduringtheevaluationperiod.25Examinersfoundthatthebank’sgeographic distributionof loansreflectedgoodpenetrationthroughouttheassessmentarea,andthe borrowerdistributionreflectedgoodpenetrationamongborrowersof differentincomelevelsandbusinessesof differentrevenuesizes.ExaminersfurthernotedthatLegacyTexas Bankparticipatedinarelativelyhighlevelof communitydevelopmentloans. InevaluatingtheInvestmentTest,examinersobservedthatthebankmadeasignificant levelof qualifiedcommunitydevelopmentinvestmentsanddonations.Examinersfound thatLegacyTexasBankexhibitedexcellentresponsivenesstocreditandcommunitydevelopmentneedsbysupportingorganizationsthatprovidefinancingtosmallbusinessesand affordablehousingforLMIindividuals. InevaluatingtheServiceTest,examinersfoundthatthebank’sdeliverysystemswereaccessibletothebank’sgeographiesandindividualsof differentincomelevels.LegacyTexas Bank’srecordof openingandclosingbrancheshasgenerallynotadverselyaffectedthe accessibilityof itsdeliverysystems,particularlytoLMIgeographiesandindividuals. ExaminersobservedthatLegacyTexasBankwasaleaderinprovidingcommunitydevelopmentservices,especiallywithintheCollin-Dallas-DentonAA.Examinersdidnotfindany evidenceduringthecourseof theLegacyTexasEvaluationthatLegacyTexasBankengaged indiscriminatoryorotherillegalcreditpractices. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof ViewPointBankandLegacyTexasBankincomplyingwithfairlendingandotherconsumerprotectionlaws.Aspartof thisevaluation,the BoardreviewedtheViewPointBankEvaluation,theLegacyTexasBankEvaluation,anda comprehensivefairlendingandredliningreviewof LegacyTexasBankcompletedbyexaminerswiththeReserveBank.TheBoardalsoassessedViewPointBank’sandLegacyTexas Bank’sfairlendingpoliciesandprocedures,andconsideredconfidentialsupervisoryinformation,otherinformation,thecommentontheapplications,andViewPointBank’s responsetothecomment. FairLendingAnalysis.AcommenterallegedthatLegacyTexasBankdisfavorsAfrican AmericanneighborhoodsintheDallasassessmentareawithrespecttoaccesstoitsbankingproductsandservicesandthatthebankhasengagedinredlining.TheReserveBank recentlyconductedacomprehensivefairlendingandredliningreviewof LegacyTexasin DallasandTarrantcounties,Texas,andtheBoardhasreliedontheexaminationfindings inthiscase.ExaminersanalyzedLegacyTexasBank’sCRAassessmentarea,lending record,geographicdistributionof branches,andmarketingandoutreachefforts,anddid notfindillegalcreditdiscrimination. TheReserveBankfoundthattheLegacyTexasBank’sassessmentareadesignationsmet therequirementsof theCRA.ExaminersalsofoundthatLegacyTexasBankhadservice areaboundariesaroundeachbranchthatwerenarrowerthantheCRAassessmentarea. Thisledexaminerstoreviewtheseboundariestodetermineif LegacyTexasBankwasrelyingonthemtoavoidlendingandmarketinginminorityareaswithinthebank’sCRA assessmentarea.Onreview,examinersfoundnoevidencethatLegacyTexasBankwasrelyingontheseserviceareadesignationsinadiscriminatoryfashion.Inaddition,LegacyTexas Bankhastakenstepstoeliminateitsuseof theseserviceareaboundaries. 25 Examinersplacedequalweightonhomemortgageandsmallbusinessloansduetocomparablelendingvolume.

62 FederalReserveBulletin|February2015 TheReserveBankalsoreviewedthegeographicdistributionof LegacyTexasBank’s branches,thebank’smarketingactivities,andothercommunityoutreachefforts.Legacy- TexasBankoperatesfivefull-servicebranchesinTarrantCounty,withonelocatedina majority-minoritytractandfourlocatedinintegratedtracts.LegacyTexasBankoperates fourfullservicebranchesinDallasCountywiththreelocatedinintegratedtractsandone locatedinanon-minoritytract.Examinersfoundnodifferencesbetweenthelendingpolicy atLegacyTexasBankbranchofficeslocatedinareaswithconcentrationsof minorityresidentsandotherareas.26TheReserveBankalsofoundthatLegacyTexasBank’smarketing activitiesandcommunityoutreacheffortsincludedpartneringwithlocalnonprofitorganizationstoprovideoutreachtoLMIcommunitiesandprovidingfinancialeducationtoindividualsandsmallbusinesses. ExaminersalsoreviewedLegacyTexasBank’slendingpoliciesandprocedures,including thefairlendingpolicy.LegacyTexasBankhasinstitutedpoliciesandproceduresthatcover allrelevantfairlendinglawstohelpensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations.Thisincludesaformalfairlendingcomplianceprogramandanannualtrainingprogramforemployees.LegacyTexasBankalsoperforms bothinternalandexternalreviewsforaccuracyof HMDA,CRAreportingandfairlending risk,includingannualtestingof fairlendingcompliancebyindependentconsultants. ViewPoint’sFairLendingProgram.ViewPointBank’srisk-managementsystemsandits policiesandproceduresforensuringcompliancewithfairlendinglawswouldbe implementedatthecombinedorganizationimmediatelyuponconsummationof theproposedtransactions. ViewPointindicatedthatViewPointBankhasdetailed,comprehensiveCRA,fairlending, andconsumercomplianceprogramsaspartof itsoverallrisk-managementprogram,which appliesacrossallaspectsof thebank’soperations,includingmarketing,loanorigination, processing,underwriting,servicing,andcollectionactivities.Allextensionsof credit, includingloanstominorityandLMIindividuals,aresubjecttoaseparatesecond-review processbyseniorlendingstaff inthecaseof apotentialdenial.Inaddition,afairlending officermonitorsallHMDAloansandconductsaquarterlyreviewtoensurefullcompliancewithallpolicies,procedures,andfairlendinglawrequirements.ViewPointBankalso hasaCRAAdvisoryCommittee,whichexercisesdirectoversightovertheCRAcomplianceprogramandreviewsquarterlyassessmentsof performance. Additionally,ViewPointBank’slendingcompliancefunctionissubjecttobothinternal auditpoliciesestablishedbytheboardof directorsandanindependentexternalauditbya thirdparty,whichconductsquarterlyreviewsof fairlendinganalysesof HMDAdata,consumercompliance,andrelatedinternalauditactivities.ViewPointBankalsoconductsa comprehensiveriskassessmentandprovidescompliancetrainingforapplicableemployees annually. TheOCC,whichistheprimarysupervisorforViewPointBank,hasindicatedthatitdid notfindevidenceof discriminatoryorotherillegalcreditpracticesinitsreviewof View- PointBank’sfairlendingpoliciesandprocedures. 26 ViewPointhasrepresentedthatCRAproductswerenotavailableateveryLegacyTexasBranchlocation.Upon consummationoftheproposedmerger,ViewPointhasrepresentedthatCRAproductswillbeavailableatevery branchofthecombinedinstitution.

LegalDevelopments:FourthQuarter,2014 63 C.AdditionalInformationonConvenienceandNeedstoBeServedbytheCombined Organization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Thecommenterallegedthattheproposalwouldnotprovideaclearorsignificant publicbenefit. ViewPointindicatedthatitdoesnotintendtodiscontinueorsignificantlychangeanyservicesorproductsofferedbyeitherinstitutionasaresultof theproposedtransaction,other thanconsolidatelikeproducttypes.ViewPointalsoindicatedthattheconvenienceand needsof thecommunitywouldbeenhancedbytheincreasedsizeandstrengthof thecombinedinstitution,whichwouldincreasethebank’slendinglimit.ViewPointnotesthatthe combinedorganizationwouldbeabletoprovidecustomerswithbenefitsthroughmore efficientandcost-effectiveprovisionof bankingservicesandwouldbeabletodedicate additionalresourcestomeetingthebankingneedsof itscustomers. ViewPointrepresentsthattheproposalwouldoffercustomersconveniencethrougha broaderrangeof financialproducts.Forexample,ViewPointindicatesthatasaresultof themerger,customersof LegacyTexasBankwouldhaveaccesstohomeequitylinesof creditandeachof itsbrancheswouldbeabletotakeandsubmithomeimprovementloan applications.Additionally,ViewPointhasrepresentedthatcustomersof ViewPointBank wouldbeabletoaccesshomepurchasemortgagesandrefinancingproductsandthatall CRAloanproductswouldbeavailableatallbranchlocationsof thecombined organization. ViewPointrepresentsthatthemergerwouldbenefitcurrentcustomersof LegacyTexas Bankthroughaccesstoalargerbranchnetwork.ThebranchnetworkavailabletoView- PointandLegacyTexascustomerswouldincreaseto51branches,includingseveralLMI branches.ViewPointalsohasindicatedthatcustomersof LegacyTexasBankwouldalso gainaccesstoViewPoint’snetworkof bank-ownedATMsandtoextendedcallcenter hours. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyViewPointandLegacy- Texas,confidentialsupervisoryinformation,andthepubliccommentontheproposal. Basedontheabove,theBoardbelievesthattheconvenienceandneedsfactor,includingthe CRArecordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplications. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”27TheDodd- 27 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7).

64 FederalReserveBulletin|February2015 FrankActalsoamendedtheBankMergerActtorequiretheBoardtoconsider“theriskto thestabilityof theUnitedStatesbankingorfinancialsystem.”28 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.29These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.30 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,ViewPointwouldhaveapproximately$5.8billion inconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize,would notbeamongthe100largestU.S.financialinstitutions.TheBoardgenerallypresumesthat amergerthatinvolvesanacquisitionof lessthan$2billioninassets,orresultsinafirm withlessthan$25billioninconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthistransaction.Thecompanies engageandwouldcontinuetoengageintraditionalcommercialbankingactivities.The resultingorganizationwouldexperiencesmallincreasesinthemetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresulting firmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsintermsof those metrics.Forexample,ViewPoint’sintrafinancialassetsandliabilitieswouldconstitutea negligibleshareof thesystem-widetotal,bothbeforeandafterthetransaction.Theresultingorganizationwouldnotengageincomplexactivitiesorprovidecriticalservicesinsuch volumethatdisruptioninsuchserviceswouldhaveagreatimpactonthemacroeconomic conditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolution difficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. OtherConsiderations LegacyTexasBankalsohasappliedundersection9of theFRAtoestablishandoperate branchesatthelocationsof themainofficeandbranchesof ViewPointBank.TheBoard 28 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1602,codifiedat12U.S.C. §1828(c)(5). 29 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 30 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012).

LegalDevelopments:FourthQuarter,2014 65 hasassessedthefactorsitisrequiredtoconsiderwhenreviewinganapplicationundersection9of theFRAandfindsthosefactorstobeconsistentwithapproval.31 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyViewPointwithalltheconditions imposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthe commitmentsmadetotheBoardinconnectionwiththeapplications.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw.Theproposalmaynotbeconsummated beforethefifteenthcalendardayaftertheeffectivedateof thisOrder,orlaterthanthree monthsthereafter,unlesssuchperiodisextendedforgoodcausebytheBoardorReserve Bank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveDecember9,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchesinTexastoBeEstablishedbyLegacyTexasBank Addison 1. 4560BeltlineRoad WestAllen 2. 225CusterRoad Allen 3. 321EastMcDermott Carrollton 4. 1801KellerSprings NorthCarrollton 5. 4037OldDentonRoad Coppell 6. 687NorthDentonTapRoad PrestonRoyal 7. 10720PrestonRoad 31 12U.S.C.§322;12CFR208.6(b).

66 FederalReserveBulletin|February2015 OakCliff 8. 2498WestIllinois Preston-Forrest 9. 5941ForestLane PrestonMotor 10. 6801PrestonRoad PrestonCenter 11. 8411PrestonRoad LakeHighlands 12. 9625AudeliaRoad N.E.TarrantCounty 13. 3040StateHighway121 WestFrisco 14. 2975MainStreet Frisco 15. 3833PrestonRoad Garland 16. 2218NorthJupiterRoad GrandPrairie 17. 215NorthCarrierParkway Jacksboro 18. 201SouthMainStreet McKinney 19. 2500WestVirginiaParkway ResultingInstitutions’MainOffice 20. 1309West15thStreet,Suite400 EastPlano 21. 2501EastPlanoParkway WestPlano 22. 5400IndependenceParkway Tollroad 23. 5900WestParkBoulevard WestRichardson 24. 1280WestCampbellRoad RichardsonMotor 25. 1775NorthPlanoRoad

LegalDevelopments:FourthQuarter,2014 67 RunawayBay 26. 1055Highway380West Wylie 27. 3490FM544 FlowerMound 28. 1201FlowerMound Grapevine 29. 301SouthParkBoulevard PlanoCentral 30. 1201West15thStreet Richardson 31. 720EastArapaho McKinneyMotor 32. 231NorthChestnut Orders Issued Under Section 4 of the Bank Holding Company Act Midland States Bancorp, Inc. Effingham, Illinois OrderApprovingtheAcquisitionof aSavingsandLoanHoldingCompany,theMergerof Banks,andtheEstablishmentof Branches FRBOrderNo.2014–22(December11,2014) MidlandStatesBancorp,Inc.(“Midland”),Effingham,Illinois,afinancialholdingcompanywithinthemeaningof theBankHoldingCompanyAct(“BHCAct”),hasrequested theBoard’sapprovalundersections4(c)(8)and4(j)of theBHCAct1toacquirebymerger LoveSavingsHoldingCompany(“LSHC”)anditswhollyownedsubsidiary,Heartland Bank,FSB(“HeartlandBank”),bothof St.Louis,Missouri.2 Inaddition,Midland’ssubsidiarystatememberbank,MidlandStatesBank(“Midland Bank”),Effingham,Illinois,hasrequestedtheBoard’sapprovaltomergewithHeartland Bankpursuanttosection18(c)of theFederalDepositInsuranceAct(“BankMerger Act”),withMidlandBankasthesurvivingentity(the“Merger”).3MidlandBankhasalso appliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperate branchesatthelocationsof HeartlandBank’smainofficeandbranches.4 1 12U.S.C.§§1843(c)(8)and(j). 2 LSHCiscurrentlycontrolledbymembersoftheLovefamily.TheLovefamilycontrolsHeartlandBank throughdirectownershipandcontrolledentities.Fiveofthesevehiclesareregisteredsavingsandloanholding companies:TheLoveFamily1941Trust,TheLoveFamilyCharitableTrust,TheLoveFamilyTestamentary Trust,TheLoveGroupJointVenture,andTheLoveRealEstateCompany. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.Theselocationsarelistedintheappendixtothisorder.

68 FederalReserveBulletin|February2015 Noticeof theproposals,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(78Fed.Reg.61845(October4,2013))inaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.5Asrequiredbythe BankMergerAct,areportonthecompetitiveeffectsof theMergerwasrequestedfromthe UnitedStatesAttorneyGeneral.Thetimeforfilingcommentshasexpired,andtheBoard hasconsideredtheproposalsandallcommentsreceivedinlightof thefactorssetforthin section4of theBHCAct,theBankMergerAct,andtheFRA. Midland,withtotalconsolidatedassetsof approximately$1.7billion,isthe408thlargest depositoryorganizationintheUnitedStates,controllingdepositsof approximately $1.4billion,whichrepresentlessthan0.1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates(“nationaldeposits”).6MidlandBank operatesbranchesinIllinoisandMissouri.MidlandBankisthe32ndlargestinsured depositoryinstitutioninIllinois,withdepositsrepresentinglessthanonepercentof total depositsof insureddepositoryinstitutionsinthatstate.MidlandBankisthe296thlargest insureddepositoryinstitutioninMissouri,withdepositsrepresentinglessthan0.1percent of totaldepositsof insureddepositoryinstitutionsinthatstate(“statedeposits”).7 LSHC,withtotalconsolidatedassetsof approximately$845.0million,controlsdepositsof approximately$662.5million.HeartlandBankoperatesbranchesinMissouriandColoradoandisthe33rdlargestinsureddepositoryinstitutioninMissouri,withdepositsrepresenting0.4percentof thetotalamountof statedeposits. Onconsummationof theproposedtransactions,Midlandwouldbecomethe281stlargest depositoryorganizationintheUnitedStatesandwouldbecomethe32ndlargestdepositoryorganizationinMissouri.Midlandwouldcontroldepositsof approximately$2.1billionnationwideandapproximately$678.1millioninMissouri,representinglessthan 0.1percentof nationaldepositsand0.5percentof statedeposits. TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.8TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesconformtheirdirectandindirectactivitiestothosepermissibleforbankholding companiesundersection4of theBHCAct.9Midlandhasrepresentedthatallactivitiesof LSHCwill,uponconsummation,bepermissibleforabankholdingcompanytoconduct. InterstateandDepositCapAnalyses TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection4of theBHCAct10andtheBankMergerAct11toprovidethat,ingeneral,theBoardmaynotapproveanapplicationbyabankholdingcompanytoacquirean insureddepositoryinstitution,oranapplicationbyoneinsureddepositoryinstitutionto acquireanotherinsureddepositoryinstitution,if thehomestateof thetargetinsured depositoryinstitutionisastateotherthanthehomestateof theapplicantandtheapplicantcontrolsorwouldcontrolmorethan10percentof thetotalamountof depositsof 5 12CFR262.3(b). 6 AssetandnationwidedepositrankingdataareasofDecember31,2013.Inthiscontext,insureddepository institutionsincludeinsuredcommercialbanks,savingsbanks,andsavingsassociations. 7 StatemarketshareandrankingdataareasofJune30,2013. 8 12CFR225.28(b)(4)(ii). 9 12CFR225.28(b)(4)(ii). 10 Dodd-FrankAct§623(b),codifiedat12U.S.C.§1843(i)(8). 11 Dodd-FrankAct§623(a),codifiedat12U.S.C.§1828(c)(13).

LegalDevelopments:FourthQuarter,2014 69 insureddepositoryinstitutionsintheUnitedStates(collectively,“nationwidedeposit caps”).12Theintendedpurposeof thenationwidedepositcapswastohelpguardagainst undueconcentrationsof economicpower.13Forpurposesof theBHCActandtheBank MergerAct,thehomestateof MidlandisIllinoisandthehomestateof HeartlandBankis Missouri.14 Basedonthelatestavailabledatareportedbyallinsureddepositoryinstitutionsinthe UnitedStates,thetotalamountof depositsof insureddepositoryinstitutionsis$11.0trillion.15Onconsummationof theproposedtransaction,Midlandwouldcontrollessthan 0.1percentof thetotalamountof depositsininsureddepositoryinstitutionsintheUnited States.Accordingly,inlightof allthefactsof record,theBoardisnotrequiredtodenythe proposalsundersection4(i)of theBHCActorundertheBankMergerAct. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.16TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.17Inaddition,theBoardmustconsiderthecompetitiveeffectsof aproposaltoacquireasavings associationunderthepublicbenefitsfactorof section4(j)of theBHCAct.18 MidlandBankandHeartlandBankcompetedirectlyintheSt.Louis,Missouri,banking market.19TheBoardhasreviewedthecompetitiveeffectsof theproposalsinthisbanking marketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthe numberof competitorsthatwouldremaininthebankingmarket,therelativesharesof the 12 Foradetaileddiscussionofthenationwidedepositcap,seeBankofAmericaCorporation/LaSalle,93Federal ReserveBulletinC109,C109-C110(2007);BankofAmericaCorporation/Fleet,90FederalReserveBulletin217, 219-220(2004)(“FleetOrder”). 13 FleetOrderat219. 14 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.12U.S.C.§1841(o)(4)(C).Forastatebank,thehomestateisthestatebywhichthebankis chartered.12U.S.C.§1828(c)(13)(C)(ii)(II).Forafederalsavingsassociation,thehomestateisthestatein whichthehomeofficeofthesavingsassociationislocated.12U.S.C.§1828(c)(13)(C)(ii)(III);12U.S.C. §1841(o)(4)(E). 15 SeeFleetOrderat219.Depositdataarecalculatedbasedonreportsfiledbyinsureddepositoryinstitutions andareasofDecember31,2013.EachbankandsavingsassociationinsuredbytheFederalDepositInsurance Corporation(“FDIC”)intheUnitedStatesmustreportdataregardingitstotaldepositsinaccordancewiththe definitionof“deposit”undertheFederalDepositInsuranceAct,12U.S.C.§1813(l),ontheinstitution’sConsolidatedReportofConditionandIncome.DepositdataforFDIC-insuredU.S.branchesofforeignbanksand federalbranchesofforeignbanksareobtainedfromtheReportofAssetsandLiabilitiesofU.S.Branchesand AgenciesofForeignBanks.ThesedataarereportedquarterlytotheFDICandarepubliclyavailable. 16 12U.S.C.§1828(c)(5). 17 12U.S.C.§1828(c)(5)(B). 18 12U.S.C.§1843(j)(2)(A). 19 TheSt.Louis,Missouri,bankingmarketconsistsofthecityofSaintLouis;Franklin,Jefferson,Lincoln,Saint Charles,SaintLouis,WarrenandWashingtoncounties;Roark,Boeuf,CanaanandBrushCreektownships, includingthecitiesofHermannandOwensville,inGasconadeCounty;BoonetownshipinCrawfordCounty; LoutretownshipinMontgomeryCounty,allinMissouri;alsoBond,Calhoun,Clinton,Jersey,Macoupin, Madison,MonroeandSt.Claircounties;thewesternpartofRandolphCounty,definedbyRoute3ontheeast andtheKaskaskiaRiveronthesouth,includingthecitiesofRedBud,RumaandEvansville;Washington County(minusAshleyandDuBoistownships);andtheentirecityofCentralia,allinIllinois.

70 FederalReserveBulletin|February2015 totaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)that MidlandBankwouldcontrol,20theconcentrationlevelsof marketdepositsandthe increaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)underthe Departmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMerger Guidelines”),21andothercharacteristicsof themarket. Consummationof theproposedtransactionswouldbeconsistentwithBoardprecedent andwithinthethresholdsintheDOJBankMergerGuidelinesinthebankingmarket.On consummationof theproposal,theSt.Louis,Missouri,bankingmarketwouldremain unconcentrated,asmeasuredbytheHHI.ThechangesintheHHI’smeasureof concentrationwouldbeminimal,andnumerouscompetitorswouldremaininthebankingmarket.22 TheDOJhasconductedareviewof thepotentialcompetitiveeffectsof theproposedtransactionsandhasadvisedtheBoardthatconsummationof thetransactionswouldnotbe likelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket. Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposals. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposed transactionswouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheSt.Louis,Missouribankingmarketoranyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsare consistentwithapproval. Financial,Managerial,andOtherSupervisoryFactors Inadditiontoassessingcompetitiveeffectsof themerger,ineverycaseundertheBank MergerAct,theBoardmusttakeintoconsiderationthefinancialandmanagerialresources andfutureprospectsof theexistingandproposedinstitutions,theconvenienceandneeds of thecommunitiestobeserved,recordsof compliancewithanti-money-launderinglaws, andtherisktothestabilityof theUnitedStatesbankingorfinancialsystem.23TheBoard 20 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2013,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsare included.TheBoardhaspreviouslyindicatedthatthriftinstitutionshavebecome,orhavethepotentialto become,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserve Bulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoard regularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g., FirstHawaiian,Inc.,77FederalReserveBulletin53(1991). 21 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthattheDOJBankMergerGuidelines,whichwereissuedin1995,werenot modified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 22 TheHHIwoulddecreaseinthemarketby5points.Thisdecreaseresultsfromapre-mergerweightingof HeartlandBank’smarketdepositsat50percentandapost-mergerweightingat100percent.SeeNorwestCorporation,78FederalReserveBulletin452(1992);FirstBanks,Inc.,76FederalReserveBulletin669(1990)(depositsofthriftsareincludedinpre-mergermarketsharecalculationsona50percentweightedbasisbutincluded at100percentinthecalculationofproformamarketsharebecausethedepositswouldbeacquiredbyacommercialbankingorganization).TheproformamarketshareofMidlandBankwouldbe1.11percent,and 142competitorswouldremain. 23 12U.S.C.§1828(c)(5).

LegalDevelopments:FourthQuarter,2014 71 alsoconsidersthesefactorsinweighingthepossibleadverseeffectsagainstthepublicbenefitsof thetransaction,asrequiredbysection4(j)of theBHCAct.24 Inevaluatingfinancialconditionandfutureprospectsof theproposal,theBoardconsiders avarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransactions.TheBoardconsidersthefutureprospectsof the organizationsinvolvedintheproposalsinlightof theirfinancialandmanagerialresources andtheproposedbusinessplan.TheBoardalsoconsiderstheabilityof theorganizationto absorbthecostsof theproposalsandtheproposedintegrationof theoperationsof the institutions.Inassessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobeespeciallyimportant. MidlandandMidlandBankarewellcapitalizedandwouldremainsoonconsummationof theproposedtransactions.MidlandwouldacquireLSHCinexchangeforacombinationof cashandMidlandcommonshares.25Midlandwouldfundthetransactionthroughacombinationof cashonhandandadditionalfundraising.Theassetquality,earningsprospects, andliquidityof Midlandareconsideredconsistentwithapproval.Midlandappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof MidlandBank’sandHeartlandBank’soperations.Futureprospectsalsoareconsidered consistentwithapproval.Basedonitsreviewof therecord,theBoardfindsthatMidland hassufficientfinancialresourcestoeffecttheproposedtransactions. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand hasreviewedsupervisoryinformationandtheexaminationrecordsof MidlandandMidlandBank,includingassessmentsof theirmanagement,risk-managementsystems,and operations.Inaddition,theBoardhasconsidereditssupervisoryexperienceswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws.TheBoardalsohasconsideredMidland’splansforimplementingtheproposed transactions.Inaddition,theBoardhasconsideredcommentssubmittedaspartof the publiccommentprocess.ThesecommentsallegeweaknessesinMidland’scompliancemanagementasitrelatestoconsumerprotectionpractices.CommenterscriticizedMidland’s consumercompliancepractices,particularlyrelatedtofairlendinglawsandtheCRA. MidlandandMidlandBankareconsideredtobewellmanaged,andtheirboardsof directorsandseniormanagementhavesignificantbankingexperience.Midlandhasademonstratedrecordof successfullyintegratingorganizationsintoitsoperationsandrisk-managementsystemsfollowingacquisitions,havingsuccessfullycompletedseveralacquisitions 24 Section4(j)(2)(A)oftheBHCActrequirestheBoardtoconsiderwhethertheproposedacquisitionofLSHC “canreasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationofresources, decreasedorunfaircompetition,conflictsofinterests,unsoundbankingpractices,orrisktothestabilityofthe UnitedStatesbankingorfinancialsystem.”12U.S.C.§1843(j)(2)(A).Aspartofitsevaluationofthesefactors, theBoardreviewsthefinancialandmanagerialresourcesofthecompaniesinvolved,theeffectoftheproposal oncompetitionintherelevantmarkets,therisktothestabilityoftheUnitedStatesbankingorfinancial system,recordsofcompliancewithanti-money-launderinglaws,andthepublicbenefitsoftheproposal.See 12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrder2012-2(February14,2012)(“Capital OneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008);Wachovia Corporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83FederalReserveBulletin602 (1997).Inactingonanoticetoacquireasavingsassociation,theBoardreviewstherecordsofperformanceof therelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).12U.S.C.§2901 etseq. 25 Uponconsummation,shareholdersofLSHCwouldacquireasignificantnumberofMidlandcommonshares. TheLovefamilyhasfiledanoticeundertheChangeinBankControlActof1978,asamended,12U.S.C. 1817(j),withrespecttothisshareacquisition.TheBoardisactingseparatelyonthisnotice.

72 FederalReserveBulletin|February2015 of bankingorganizationssince2007.Midlandwouldimplementatthecombinedorganizationitsexistingpolicies,procedures,andcontrols,whichareconsideredtobesatisfactory. Midland’smanagementhastheexperienceandresourcesthatshouldallowthecombined organizationtooperateinasafeandsoundmanner.TheBoardexpectsthatMidlandwill ensurethatitsriskmanagementframeworkandmethodologies,includingitscompliance functions,arecommensuratewithitsnewsizeandcomplexity. Basedonallthefactsof record,includingareviewof thecommentsreceived,theBoard hasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresourcesof the organizationsinvolved,aswellastherecordsof effectivenessof MidlandandMidland Bankincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof the relevantdepositoryinstitutionsundertheCRA.26Asnoted,theBoardalsomustreviewthe recordsof performanceundertheCRAof therelevantinsureddepositoryinstitutions whenactingonanoticeundersection4of theBHCActtoacquireasavingsassociation. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,27andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.28 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof MidlandBankandHeartlandBank,datareportedbyMidlandBank andHeartlandBankundertheHomeMortgageDisclosureActof 1975,asamended (“HMDA”),29otherinformationprovidedbyMidland,confidentialsupervisoryinformation,andthepubliccommentsreceivedontheproposals.Twocommentersexpressedconcernoverlevelsof lendingbasedondatareleasedundertheHMDAortheCRA.Theyalso assertedthattherecordfailedtoestablishsufficientpublicbenefittowarrantapproval. EachcommenterrequestedthattheBoardrequirespecificcommitmentsfromMidlandto improveservicestounderservedcommunities.Athirdcommenterwithdrewitsinitialoppositiontotheproposalandurgedapprovalof theproposedtransactionsafteranaffiliateof thecommenterreachedanagreementwithMidlandtoenhanceitscommunitydevelopmentactivitiesandservicestopredominantlyminoritycommunitiesinspecificwaysover thenextfewyears. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorof theCRAperformanceof therelevantinstitution.30TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting 26 12U.S.C.§2901etseq. 27 12U.S.C.§2901(b). 28 12U.S.C.§2903. 29 12U.S.C.2801etseq. 30 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010).

LegalDevelopments:FourthQuarter,2014 73 thecreditneedsof itsentirecommunity,includingLMIneighborhoods.31Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof MidlandBank.MidlandBankwasassignedanoverall“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof St. Louis(“ReserveBank”)followinganexaminationthatcommencedinOctober2013and wasdeliveredtoMidlandBankinJuly2014(“MidlandBankEvaluation”).32Thiswasthe firstCRAexaminationforMidlandBankconductedundertheInteragencyProceduresfor LargeInstitutions;thepreviousCRAexaminationwasconductedunderproceduresfor intermediatesmallinstitutions.Becausetheoperationsof MidlandBankareconcentrated inIllinois,witharelativelysmallpresenceintheSt.LouisMetropolitanStatisticalArea (“MSA”),examinersgaveprimaryconsiderationtoMidlandBank’sperformanceinIllinois.TheCRAexaminationwasconductedduringthependencyof thisapplication andwasinformedbythepubliccommentsontheproposal. ExaminersassignedMidlandBankoverallcomponentratingsof “highsatisfactory”onthe LendingTest,“lowsatisfactory”ontheInvestmentTest,and“lowsatisfactory”onthe ServiceTest.ExaminersdescribedMidlandBank’srecordof lendingasadequatebutwith opportunitiesforimprovementincertainareas.MidlandBankwasdescribedashavinga lendingrecordthatreflectedgoodresponsivenesstoassessmentareacreditneedsanda geographicallyadequatedistributionof loansamongcustomersof differentincomelevels andamongbusinessesof differentsizes.ExaminersidentifiedMidlandBankasaleaderin makingcommunitydevelopmentloansintheSt.LouisMSAassessmentarea,withan overalladequatelevelof communitydevelopmentlendingduetolowlevelsinIllinois. Examinersdescribedthebankasmaintainingasignificantlevelof communitydevelopmentinvestmentsandgrants,andmakingnumerousgrantsto,communitydevelopmentorganizationsincertainassessmentareas,butnocommunitydevelopmentinvestmentsinoneassessmentareainIllinois. ExaminersfoundthatMidlandBank’srecordof openingandclosingbranchesinits assessmentareashadnotadverselyaffectedtheaccessibilityof itsdeliverysystems,but notedthatbranchhoursandservicesgenerallydidnotvarytoaccommodatecustomers withvariableworkschedules.ExaminerspraisedMidlandBank’scommunitydevelopment servicesandsystemsaccessibilityinIllinois,whilestatingthatitsdeliverysystems,including branches,intheSt.LouisMSAassessmentareawerelocatedprincipallyoutsidetheSt. LouisMissouri-Illinoisurbanarea(asdeterminedbythe2010UnitedStatesCensus),makingitdifficulttoservetheurbanareasof theassessmentareawherethemajorityof LMI censustractsarelocated.ExaminersalsofoundthatMidlandBankmadeuseof innovative and/orflexibleproductsinitsassessmentareas. Thus,MidlandBankreceivedamixtureof praiseandsuggestionsforimprovementfrom examinersinconnectionwiththedeterminationbyexaminersthatitsoverallperformance was“satisfactory.”Duringthecourseof theMidlandBankEvaluation,examinersdidnot findanyevidencethatMidlandBankengagedindiscriminatoryorotherillegalcredit practices. 31 12U.S.C.§2906. 32 TheevaluationperiodsfortheMidlandBankEvaluationwereJanuary1,2011,toDecember31,2012,for HMDAandsmallfarmlending;June4,2011,toDecember31,2012,forsmallbusinesslending;andAugust22, 2011,toOctober15,2013,forcommunitydevelopmentloans,investment,andserviceactivities.

74 FederalReserveBulletin|February2015 CRAPerformanceof HeartlandBank.HeartlandBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency(“OCC”)followinganexaminationthatcommencedinAugust2013 (“HeartlandBankEvaluation”).HeartlandBankreceiveda“satisfactory”ratingfor theLendingTestandan“outstanding”ratingfortheCommunityDevelopmentTest.33In evaluatingtheLendingTestintheSt.Louisassessmentarea,OCCexaminersconcluded thatHeartlandBank’slendingtoindividualswithdifferentincomelevelswasexcellentand thatlendingtobusinessesof differentsizeswasreasonable.Examinersfoundthatthegeographicdistributionof loansintheSt.Louisassessmentareareflectedreasonabledispersion.ExaminersalsofoundthatHeartlandBankmadeahighlevelof communitydevelopmentloansthatreflectedexcellentresponsivenesstotheneedforaffordablehousinginthe assessmentarea.ExaminersfoundthatHeartlandBank’scommunitydevelopment investmentsreflectedadequateresponsiveness,whileitscommunitydevelopmentservices reflectedreasonableresponsivenesstotheneedsof theassessmentarea.Inparticular, examinersnotedthatHeartlandBank’sbranchandATMnetwork,alongwithonlineand mobilebanking,madeitreasonablyaccessibletogeographiesandindividualswithdifferent incomelevels. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof MidlandBankandHeartlandBankincomplying withfairlendingandotherconsumerprotectionlaws.Aspartof thisconsideration,the BoardreviewedtheMidlandBankEvaluationandtheHeartlandBankEvaluation, assessedtherecordsof MidlandBankandHeartlandBankinhelpingtomeetthecredit needsof theircommunities,andconsideredthecommentsreceivedontheproposalsaswell asotheragencies’viewsontherecordsof performanceof MidlandBankandHeartland Bankunderfairlendinglaws.TheBoardalsoconsideredMidlandBank’sfairlendingpoliciesandprocedures.Asnoted,theMidlandBankEvaluationwasconductedduringthe pendencyof thisapplicationandwasinformedbythepubliccommentsontheproposals. Inaddition,inresponsetothepubliccommentsontheproposal,theReserveBankconductedafairlendingexaminationduringthependencyof thisapplication,includinga redliningreviewacrossMidlandBank’sassessmentareas.TheBoardhasreliedonthefindingsof thatexaminationaspartof itsanalysis. HMDADataandFairLendingAnalysis.ThecommenterscriticizedMidlandBank’srecord of mortgagelendingtominorityindividualsbasedgenerallyontheirreviewof 2011and 2012HMDAdataforthebank’sfiveCRAassessmentareas,withemphasisonthebank’s St.LouisMSAassessmentarea.34ThecommentersassertedthatMidlandBank’svolume of mortgageloanstoAfricanAmerican,Hispanic,andAsianindividualsandtominority communitieshasbeenextremelylowcomparedtothevolumeof loansoriginatedtothese populationsandcommunitiesbytheaggregateof alllendersandcomparedtothedemographicsof thoseareas.35 MidlandBank’sbranchesintheSt.LouisMSAassessmentareaareinsuburbanorrural areasontheoutskirtsof theMSA.MidlandBankarguedthatitslendingactivitiesin 33 TheHeartlandBankEvaluationwasconductedusingSmallBankCRAevaluationproceduresinHeartland Bank’stwoassessmentareasofSt.Louis,Missouri,andDenver,Colorado.FortheLendingTest,examiners revieweddatafromJanuary1,2011,toDecember31,2012.FortheCommunityDevelopmentTest,examiners revieweddatafromJune17,2008,toAugust29,2013. 34 Onecommenter’sdiscussionofMidlandBank’sHMDAdatacoveredtheyears2009through2012. 35 Aggregatelendingisdefinedasthenumberofloansoriginatedandpurchasedbyallreportinglendersasapercentageoftheaggregatenumberofloansoriginatedandpurchasedbyallreportinglendersinthemetropolitan orassessmentarea.Inthiscontext,aggregatelendingisconsideredanindicatorofthelendingopportunitiesin thegeographicareainwhichthebankislocated.

LegalDevelopments:FourthQuarter,2014 75 theSt.LouisMSAassessmentareawereappropriategivenitsrelativelysmalleconomic presenceinthemarket.MidlandBankidentifiedcommunitydevelopmentorganizations andprojectswithwhichitwasinvolved,aswellasorganizationsandprojectswithwhich Heartlandwasinvolved.MidlandhasstatedthatitexpectstocontinueHeartlandBank’s participationincommunity-basedprograms. TheBoardanalyzedMidlandBank’sHMDAdatafor2011,2012,and2013intheSt. LouisMSA,Champaign-UrbanaMSA,Chicago-Naperville-MichiganCityCSA,Central Illinois,andNorthernIllinoisassessmentareas.TheBoardanalyzeddatarelatedto HMDA-reportableloanstodevelopaviewof MidlandBank’soveralllendingpatterns,as wellasthesubsetsof thosedatarelatedspecificallytothepubliccommentsreceivedonthe proposedtransactions.TheBoardanalyzedeachbank’scombinedassessmentareasand thespecificmarketareasaddressedinthepubliccomments.Withinthosedatasets,the Boardfocuseditsreviewondatarelatedtoconcernshighlightedbythepubliccomments, includinglendingtominorityindividualsandcommunitiesandtoLMIindividualsand communities. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherthebank excludedordeniedcredittoanygrouponaprohibitedbasis.36Fullyevaluatingabank’s compliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof the bank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. TheBoard’sreviewgenerallyconfirmedthelevelsof lendingbyMidlandBanktoAfrican American,Hispanic,Asian,andLMIborrowersandthedenialdisparityratiosnotedby thecommenters.TheBoardnotesthatMidlandBank’srecordof lendingtoLMItracts andtomajority-minoritytractsgenerallyexceedsthatof theaggregate,butthatthevolume of applicationsislowcomparedtotheaggregate.Aspartof theMidlandBankEvaluation, examinersfoundthatMidlandBankhadgoodlendingactivityandahighpercentageof loansinitsassessmentareas,andthatitmakesuseof innovativeand/orflexibleproducts throughoutitsassessmentareas.MidlandBank’spercentageof applicationsfromand loanstoLMIborrowersfortheseloantypesgenerallyexceededtheaggregateintheSt. LouisMSAassessmentarea.However,withrespecttoconventionalhomepurchase,refinancing,andhomeimprovementloans,MidlandBank’slendingdataintheSt.LouisMSA assessmentareashowedlowlevelsof applicationsfromminorityindividuals,aswellasa lowlevelof loanstothoseinpredominantlyminorityandLMIcensustracts.37 36 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,informationoncredithistory problems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestate collateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)isnotalwaysavailablefrom HMDAdata. 37 TheBoardanalyzedHeartlandBank’s2011,2012,and2013HMDAdatainitsprimarymarket,theSt.Louis MSAassessmentarea.CommentersfocusedontheSt.LouisMSAassessmentareaandweregenerallyfavorablewhendiscussingHeartlandBank’smortgagelendingrecordrelativetotheaggregate.Commenters expressedconcernthattheacquisitionofHeartlandBankbyMidlandwouldremoveanaboveaveragelender fromthemarketwhileincreasingthepresenceofalenderwithaninferiorrecordofservingtheneedsofthe community.TheBoardreviewedHeartlandBank’sHMDAdataandconfirmedthatin2011,2012,and2013,

76 FederalReserveBulletin|February2015 TheBoardconsideredandplacedgreatemphasisoninformationcollectedby,andonthe assessmentof,theReserveBank’sfairlendingexaminers.Asnoted,contemporaneously withtheMidlandBankEvaluation,ReserveBankexaminersconductedafairlendingand redliningreviewatMidlandBank,includingareviewof mattersrelatedtotheconcerns raisedbythecommenters.Whileexaminersnotedalowvolumeof applicationsfrom minorityindividuals,examinersfoundnosignificantdisparitiesindenialsinareaswith highminoritypopulations. ExaminersfocusedtheirreviewonMidlandBank’sbranchingandmarketingpracticesin eachof MidlandBank’sassessmentareas.CommentersexpressedconcernsoverMidland Bank’sbranchlocations,currentlyandwhencombinedwithHeartlandBank’sbranches. Specifically,commentersstatedthatnoneof MidlandBank’s32branchesisinamajorityminoritytractoralow-incometract,whiletwoareinmoderate-incometracts.FortheSt. LouisMSAassessmentarea,commentersobservedthatnoneof MidlandBank’s11currentbranchesislocatedinthecityof St.Louis,whichcontainsahighpercentageof the assessmentarea’sLMItractsandmajority-minoritytracts,andthatnoneof Heartland Bank’s11Missouribranchesislocatedinmajority-minoritytracts.Examinersgenerally observedthatMidlandBankhasexpandeditsgeographicreachoutwardfromasmallcore presenceinIllinois,primarilythroughaseriesof acquisitions.Examinersfoundthatthe geographicexpansionappearedtohavebeenundertakenwithoutdeliberateavoidanceof majority-minoritycensustracts. Forinstance,intheSt.LouisMSA,mostof MidlandBank’sbranchesarelocatedinsouthwesternIllinois,technicallywithintheMSAbutonitssuburbanandruraloutskirts.The acquisitionof thesebrancheswaspartof anoutwardaccretionof Midland’spresencein thatarea.OnebranchcurrentlywithintheSt.LouisMSAwasnotintheMSAwhenMidlandBankacquiredthebranch,buttheMSAwaslaterexpanded.MidlandBank’stwo brancheswithintheurbanportionsof theSt.LouisMSAareontheouteredgesof theurbanarea.Examinersfurthernotedthat,althoughitsbranchesweregenerallyinrural orsuburbanareas,MidlandBank’spatternof branchingsuggestsmovementtowardsthe majority-minoritycensustractsatthecoreof theSt.LouisMSA.Branchingpatternsin MidlandBank’sotherassessmentareas,includingtheJoliet-KankakeeandChampaign MSAs,weresimilartoMidlandBank’sexpansionintheSt.LouisMSA. ExaminersconcludedthatMidlandBank’spoliciesandprocedurestoaddressfairlending risks,andtheimplementationof thosepoliciesandprocedures,weresatisfactory.Examinersidentifiedseveralareasforimprovement,includingopportunitiestoexpandmarketing;toenhancefairlendingcompliancemanagementandmonitoring;andtoevaluateits marketing,outreach,andbranchingpracticestoensurethatmajority-minorityareasand customersarebeingadequatelyserved. MidlandBankisaddressingtheidentifiedareasforimprovementand,inconnectionwith thistransaction,hascommittedtocontinuedoingso.Forexample,MidlandBankrecently hiredaCommunityDevelopmentandCRAOfficerwithexperienceintheSt.Louisarea, hasbegunworkingmorecloselywithcommunitygroupsinitsassessmentareas,andhas enhanceditsfairlendingpoliciesandproceduresasdirected.MidlandBankhasalsodevelopedacommunitydevelopmentplanandbegunitsimplementation,includingupdating productsandservicestobetterservelow-andmoderate-incomeborrowersandpreparing toopenabranchinamajority-minority,low-incomecensustractinJoliet,Illinois. HeartlandBank’spercentagesofloanstoAfricanAmericansexceededthoseoftheaggregateand,forHispanics,generallyexceededthoseoftheaggregate.Inaddition,HeartlandBank’spercentagesofloanstoLMIborrowersconsistentlyexceededthoseoftheaggregate.Asdiscussedabove,MidlandBankhasstatedthatitwill continueHeartlandBank’sparticipationincommunity-basedprograms.

LegalDevelopments:FourthQuarter,2014 77 MidlandBank’sSmallBusinessLendingRecord.CommentersgenerallynotedthatMidland Bank’srecordof originatingsmallbusinessloansinLMItractsimprovedsignificantly from2011to2012.However,commentersarguedthatthebank’slendingvolumecouldbe improvedinLMIareas,particularlyintheSt.LouisMSAassessmentarea.TheMidland BankEvaluationfoundMidlandBank’srecordof lendingtobusinessesof differentsizes tobeadequateorgoodinitsassessmentareas.Inaddition,MidlandBank’svolumeof loanstoLMItractsgenerallymetorexceededtheaggregatefortheperiodsreviewed. MidlandBank’sFairLendingProgram.MidlandBankhasestablishedpoliciesandprocedurestohelpensurecompliancewithallfairlendingandotherconsumerprotectionlaws andregulations,andtheseareconsideredsatisfactoryfromasupervisoryperspective.MidlandBank’scomplianceprogramisincludedaspartof itsoverallriskmanagementand involvesparticipationof thecompliancedepartment,committeesof theboardof directors, seniormanagement,andemployees.MidlandBank’spubliccommunitydevelopmentplan statesthatitwillcontinuetomaintainfairlendingpoliciesandpracticesthatmeetalllegal requirements,includingcontinuingtoconductasecondreviewof allloansinitiallydenied, continuingtorequireallemployeesanddirectorsinvolvedinlendingtocompleteannual fairlendingtraining,andseekingtoensurethatthird-partyagentsinvolvedinMidland Bank’slendingactivitiesreceiveappropriatefairlendingtraining. Seniorstaff atMidlandBankconductquarterlycompliancetesting,andMidlandBank hasretainedanindependentthird-partyvendortoconductannualcompliancetesting. MidlandBankalsoperiodicallyretainsthirdpartiestoconductcomprehensivereviewsof itsloanoperations.Asnoted,MidlandBankhashiredanewCommunityDevelopment andCRAOfficerandisintheprocessof addingpersonneltoitscompliancestaff andconsideringenhancementstoitscompliancesystems. Certainlinesof businesshaveenhancedcomplianceoversight.Underwriting,pricing,and policyexceptionsforresidentialmortgagesarereviewedbyseniorstaff,withdenialssubjectedtoasecondreview.MidlandBank’sLoanCommitteereceivesreportsonexceptions onamonthlybasis.Similarly,MidlandBankhastakenstepstomorecloselymonitordealersinvolvedinitsindirectautolendingprogram.MidlandBank’srisk-managementsystemsanditspoliciesandproceduresforassuringcompliancewithfairlendinglawswould beimplementedatthecombinedorganization,withmodificationsMidlandBankhasbeen makinginanticipationof theproposedtransactions. C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Asnoted,commentersassertedthattheproposedtransactionswouldnotproduct sufficientpublicbenefitstowarrantapprovalof theproposedtransactions. TheBoardhasconsideredthattheproposedtransactionswouldallowMidlandtoexpand therangeof financialproductsandservicesavailabletoexistingcustomersof Heartland Bank.Followingconsummationof theproposedtransactions,HeartlandBank’scustomers wouldgainaccesstoadditionalservicesprovidedbyMidlandBank,suchasinvestment management,trustservices,privatebanking,brokerageservices,andexpandedcardproducts.Inaddition,customersof bothinstitutionswouldbenefitfromamoreexpansive branchandATMnetwork.Theproposedtransactionswouldprovidetheopportunityfor operationalefficiencies,costsavings,andrevenueenhancementforthecombined organization.

78 FederalReserveBulletin|February2015 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyMidland,confidential supervisoryinformation,thepubliccommentsontheproposals,andcommitmentsmade byMidland.BasedontheBoard’sassessmentof theCRAperformanceandconsumer complianceprogramsof MidlandBankandHeartlandBank,itsreviewof examination reports,itsanalysisof theHMDAdata,anditsconsultationswithotheragencies,the Boardconcludesthattheconvenienceandneedsfactor,includingtheCRArecordsof the insureddepositoryinstitutionsinvolvedintheproposedtransactions,isconsistentwith approvalof theproposals. TheBoardexpectsMidlandtocontinuetomakeprogressinaddressingareasidentifiedfor improvement.InordertoensurethatMidlandcontinuestodoso,Midlandhascommitted totheBoardthatitwillmakespecificenhancementsrelatedtoitsmarketingandoutreach, compliancemanagementandmonitoring,andbranchingbeforeundertakinganyfuture expansion. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct,andas afactorthatmustbeconsideredundertheBankMergerAct.38 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.39In additiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchasthe opaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthat canberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.40 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummationof theproposedtransactions,Midland wouldhaveapproximately$2.6billioninconsolidatedassetsandwouldbeoutsidethelargest100financialinstitutionsintheUnitedStates.TheBoardgenerallypresumesthata mergerthatinvolvesanacquisitionof lessthan$2billioninassets,orresultsinafirmwith lessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultina 38 Dodd-FrankAct,§604(e)and(f),codifiedat12U.S.C.§§1843(j)(2)(A)and1828(c)(5).Otherprovisionsofthe Dodd-FrankActimposeasimilarrequirementthattheBoardconsiderorweightheriskstofinancialstability posedbyamerger,acquisition,orexpansionproposalbyafinancialinstitution.Seesections163,173,and 604(d)oftheDodd-FrankAct. 39 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 40 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrderat28.

LegalDevelopments:FourthQuarter,2014 79 significantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentintheproposedtransactions.Thecompaniesengage,andMidlandwouldcontinuetoengage,intraditionalbankingactivities. TheresultingorganizationwouldexperiencesmallincreasesinthemetricsthattheBoard considerstomeasureaninstitution’scomplexityandinterconnectedness,withtheresulting firmgenerallyrankingoutsideof thetop100U.S.financialinstitutionsintermsof those metrics.Forexample,Midland’sintrafinancialassetsandliabilitieswouldconstituteanegligibleshareof thesystem-widetotal,bothbeforeandafterthetransaction.Theresulting organizationwouldnotengageincomplexactivitiesorprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,theproposedtransactionswouldnotappearto resultinmeaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingorfinancialsystem.Basedontheseandallotherfactsof record,theBoardhasdeterminedthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. AdditionalPublicBenefitsof theProposals 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.”41Asnoted, commentersassertedthattheproposedtransactionswouldnotproducesufficientpublic benefitstowarrantapprovalof theproposedtransactions.Asdiscussedabove,theBoard hasconsideredthattheproposedtransactionswouldallowMidlandBanktoexpandthe rangeof financialproductsandservicesavailabletoexistingcustomersof HeartlandBank. TheBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithin theframeworkof RegulationY,Boardprecedent,andthisorderisnotlikelytoresultin significantadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem. Onthebasisof theentirerecord,includingcommitmentsmadeinthiscaseandconditions notedinthisorder,andforthereasonsdiscussedabove,theBoardbelievesthatthebalance of benefitsandpotentialadverseeffectsrelatedtocompetition,financialandmanagerial resources,convenienceandneeds,financialstability,andotherfactorsweighinfavorof approvalof theseproposals.Accordingly,theBoardhasdeterminedthatthebalanceof the publicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwith approval. Establishmentof Branches Asnoted,MidlandBankhasappliedundersection9of theFRAtoestablishbranchesat thecurrentlocationsof HeartlandBank,andtheBoardhasconsideredthefactorsitis requiredtoconsiderwhenreviewinganapplicationunderthatsection.42Specifically,the 41 12U.S.C.§1843(j)(2). 42 12U.S.C.§322;12CFR208.6.

80 FederalReserveBulletin|February2015 BoardhasconsideredMidlandBank’sfinancialcondition,management,capital,actionsin meetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfinds thosefactorstobeconsistentwithapproval.43 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalsshouldbe,andherebyare,approved.44Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof theproposalsisspecificallyconditionedoncompliancebyMidlandwithallcommitments madeinconnectionwiththeseproposalsandtheconditionssetforthinthisorder.The commitmentsandconditionsaredeemedtobeconditionsimposedinwritingbytheBoard and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposedtransactionsmaynotbeconsummatedbeforethefifteenthcalendardayafter theeffectivedateof thisorderorlaterthanthreemonthsafterthedateof thisorderunless suchperiodisextendedforgoodcausebytheBoardorbytheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember11,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchesinMissouritoBeEstablishedbyMidlandBank St.Louis 1. 7818BonhommeAvenue 2. 1McKnightPlace 3. 9925ClaytonRoad 4. 9877ManchesterandBerryRoads 43 Undersection9oftheFederalReserveAct,statememberbanksaresubjecttothebranchingrestrictionsthat applytonationalbanks.Thus,statememberbanksarepermittedtoestablishbranchesatlocationsacquired throughacquisitionifthebranchesarelocatedinstateswherethestatememberbankhadapresencepriorto theacquisition.12U.S.C.§36(e).Inaddition,Dodd-FrankActsection341providesauthorityforsavingsassociationsthatbecomebankstocontinuetooperatebranchesthattheyoperatedimmediatelybeforebecoming banks.Dodd-FrankAct§341,codifiedat12U.S.C.§5451. 44 SeveralcommentersrequestedthattheBoardholdapublichearingontheproposedtransactions.TheBoard’s regulationsprovideforahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissues ofmaterialfactthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoard alsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunityto providerelevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhas consideredthecommenters’requestsinlightofallthefactsofrecord.IntheBoard’sview,thecommenters havehadampleopportunitytosubmitcommentsontheproposalsand,infact,submittedwrittencomments thattheBoardhasconsideredinactingontheproposals.Thecommenters’requestsfailtoidentifydisputed issuesoffactthatarematerialtotheBoard’sdecisionandwouldbeclarifiedbyapublichearing.Inaddition, therequestsfailtodemonstratewhythewrittencommentsdonotpresentthecommenters’viewsadequatelyor whyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsof record,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly, therequestsforapublichearingontheproposalsaredenied.

LegalDevelopments:FourthQuarter,2014 81 5. 11670GravoisRoad 6. 13402ClaytonRoad 7. 212SouthCentralAvenue Arnold 8. 1920RichardsonRoad Chesterfield 9. 14125ClaytonRoad O’Fallon 10. 2341HighwayK St.Charles 11. 5991SouthHighway94 St.Clair 12. 815NorthCommercialAvenue BranchinColoradotoBeEstablishedbyMidlandBank Denver 13. 100GarfieldStreet,Suite100 Southside Bancshares, Inc. Tyler, Texas OrderApprovingtheAcquisitionof aSavingsandLoanHoldingCompany FRBOrderNo.2014–21(December10,2014) SouthsideBancshares,Inc.(“Southside”),Tyler,Texas,abankholdingcompanywithinthe meaningof theBankHoldingCompanyAct(“BHCAct”),hasrequestedtheBoard’s approvalundersections4(c)(8)and4(j)of theBHCActandsection225.24of theBoard’s RegulationY1toacquireOmniAmericanBancorp,Inc.(“OmniAmerican”),andthereby indirectlyacquireitssubsidiarysavingsassociation,OmniAmericanBank,bothof Fort Worth,Texas.Immediatelyfollowingtheproposedacquisition,OmniAmericanBank wouldbemergedintoSouthside’ssubsidiarybank,SouthsideBank,Tyler,Texas.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(79Fed.Reg.33918(June13,2014)).Thetime forfilingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection4of theBHCAct. Southside,withtotalconsolidatedassetsof approximately$3.5billion,isthe230thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$2.6billion inconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsintheUnitedStates.SouthsideBankoperatesbranchesonlyinTexas.SouthsideBankis the22ndlargestdepositoryinstitutioninTexas,controllingdepositsof approximately 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 2 ThemergerofOmniAmericanBankintoSouthsideBankissubjecttoapprovalbytheFederalDepositInsuranceCorporation(“FDIC”)undertheFederalDepositInsuranceActandbytheTexasDepartmentofBanking(“State”)understatelaw.TheFDICapprovedthemergeronNovember7,2014,andStateapprovedthe mergeronDecember5,2014.

82 FederalReserveBulletin|February2015 $2.6billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsinthestate.3 OmniAmerican,withtotalconsolidatedassetsof approximately$1.3billion,isthe502nd largestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $837millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsintheUnitedStates.OmniAmericanBankisasavingsassociationthat operatesbranchesonlyinTexas.OmniAmericanBankisthe67thlargestinsureddepositoryinstitutioninTexas,controllingdepositsof approximately$837million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. Onconsummationof theproposal,Southsidewouldbecomethe18thlargestdepository organizationinTexas,withtotalconsolidatedassetsof approximately$4.8billion,which representlessthan1percentof thetotalamountof assetsof insureddepositoryinstitutionsintheUnitedStates.InTexas,SouthsideBankwouldcontroltotalconsolidated depositsof approximately$3.6billion,whichwouldrepresentlessthan1percentof the totaldepositsof insureddepositoryinstitutionsinthestate. FactorsGoverningBoardReviewof theTransaction TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.4TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesorfinancialholdingcompaniesconformtheirdirectandindirectactivitiesto thosepermissibleforbankholdingcompaniesundersection4(c)(8)of theBHCAct.5 Southsidehascommittedthatalltheactivitiesof OmniAmericanandthenonbankingsubsidiariesof OmniAmericanthatitproposestoacquireengageinactivitiesthatwillconform tothosepermissibleundersection4of theBHCActandRegulationYorbedivested. Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof OmniAmerican“canreasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.”6Aspartof itsevaluationof thesefactors,the Boardreviewsthefinancialandmanagerialresourcesof thecompaniesinvolved,theeffect of theproposaloncompetitionintherelevantmarkets,therisktothestabilityof the UnitedStatesbankingorfinancialsystem,andthepublicbenefitsof theproposal.7Inactingonanoticetoacquireasavingsassociation,theBoardreviewstherecordsof perfor- 3 DepositdataareasofJune30,2014.AssetdataareasofJune30,2014.Inthiscontext,insureddepository institutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 4 12CFR225.28(b)(4)(ii). 5 Asavingsassociationoperatedbyabankholdingcompanymayengageonlyinactivitiesthatarepermissible forbankholdingcompaniesundersection4(c)(8)oftheBHCAct.12CFR225.28(b)(4).Inthisinstance, SouthsidewillimmediatelymergeOmniAmericanBankintoSouthsideBankandwillnotoperatethesavings associationindependently. 6 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankWallStreetReformandConsumerProtectionAct of2010(“Dodd-FrankAct”),Pub.L.No.111-203,124Stat.1601(2010),added“risktothestabilityofthe UnitedStatesbankingorfinancialsystem”tothelistofpossibleadverseeffects. 7 See12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrder2012-2(February14,2012) (“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008); WachoviaCorporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83FederalReserveBulletin602(1997).

LegalDevelopments:FourthQuarter,2014 83 manceof therelevantinsureddepositoryinstitutionsundertheCommunityReinvestment Act(“CRA”).8 CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardhasevaluatedthecompetitiveeffectsof Southside’sacquisitionof OmniAmericanin lightof allthefactsof record.SouthsideandOmniAmericancompetedirectlyintheDallas andFortWorthbankingmarkets,bothinTexas.9TheBoardhasconsideredthecompetitiveeffectsof theproposalinthesebankingmarketsinlightof allthefactsof record.In particular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthe bankingmarkets,therelativesharesof totaldepositsininsureddepositoryinstitutionsin themarkets(“marketdeposits”)controlledbySouthsideandOmniAmerican,10theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”),11andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesinboththeDallasandFortWorthbanking markets.Onconsummationof theproposal,theDallasbankingmarketwouldremain highlyconcentratedandtheFortWorthbankingmarketwouldremainunconcentrated. TheHHIchangewouldbeminimalandwoulddecreaseinbothmarkets.Numerouscompetitorswouldremaininbothmarkets.12 8 TheDodd-FrankActamendedsection4oftheBHCActtoprovidethat,ingeneral,theBoardmaynot approveanapplicationbyabankholdingcompanytoacquireaninsureddepositoryinstitutionifthehome stateofthetargetinsureddepositoryinstitutionisastateotherthanthehomestateofthebankholdingcompanyandtheapplicantcontrols,orwouldcontrol,morethan10percentofthetotalamountofdepositsof insureddepositoryinstitutionsintheUnitedStates.Dodd-FrankAct§623(b),codifiedat12U.S.C. §1843(i)(8). ForpurposesoftheBHCAct,thehomestateofbothSouthsideandOmniAmericanisTexasand,therefore, section4(i)(8)oftheBHCActdoesnotapplytothistransaction. Also,asnoted,consummationoftheproposalwouldresultinSouthsidecontrollinglessthan1percentofthe depositsofU.S.insureddepositoryinstitutions. 9 TheDallasbankingmarketisdefinedasDallasandRockwallcounties;thesoutheasternquadrantofDenton County,includingDentonandLewisville;thesouthwesternquadrantofCollinCounty,includingMcKinney andPlano;thecommunitiesofForneyandTerrellinKaufmanCounty;andMidlothian,Waxahachie,andFerrisinEllisCounty,allinTexas(the“Dallasbankingmarket”).TheFortWorthbankingmarketisdefinedas Tarrant,Johnson,andWisecounties;ParkerCounty(minusMineralWells);andthesouthwesternquadrantof DentonCounty,includingRoanoke,allinTexas(the“FortWorthbankingmarket”). 10 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). 11 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),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 12 TheHHIwoulddecreaseineachmarketasfollows:1pointto1807intheDallasbankingmarketand15points to929intheFortWorthbankingmarket.Thosedecreasesresultfromapre-mergerweightingofOmniAmerican’smarketdepositsat50percentandapost-mergerweightingat100percent.SeeNorwestCorporation,78 FederalReserveBulletin452(1992);FirstBanks,Inc.,76FederalReserveBulletin669(1990)(depositsofthrifts areincludedinpre-mergermarketsharecalculationsona50percentweightedbasisbutincludedat100percent

84 FederalReserveBulletin|February2015 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposed transactionwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthebankingmarketsinwhichSouthsideandOmniAmericancompetedirectlyorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsweighinfavorof approval. 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.SouthsideandSouthside Bankarewellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisstructuredasacashandshareexchange,andtotalconsiderationfor thetransactionwouldbeapproximately$307million.Southsidehastheresourcestofund theproposedtransaction.Southsideisinsatisfactorycondition,andtheassetquality,earnings,andliquidityof SouthsideBankandOmniAmericanBankweighinfavorof approval. Basedonitsreviewof therecord,theBoardfindsthattheorganizationshavesufficient financialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof Southside,SouthsideBank,OmniAmerican,andOmniAmericanBank,includingassessmentsof theirmanagementexpertise,internalcontrols,risk-managementsystems,and operations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheorganizations’ recordsof compliancewithapplicablebankinglawsandwithanti-money-launderinglaws. SouthsideandSouthsideBankareconsideredtobewellmanaged.Southside’sexisting risk-managementprogramanditsdirectorateandseniormanagementareconsideredsatisfactory.Thecurrentandproposeddirectorsandseniorexecutiveofficersof Southsidehave substantialknowledgeof,andexperiencein,thebankingandfinancialservicessectors. Therewillbenochangesintheseniormanagementof Southsidefollowingconsummation of theproposal.13 inthecalculationofproformamarketsharebecausethedepositswouldbeacquiredbyacommercialbanking organization).TheresultingproformasharesofSouthside’smarketdepositswouldbeasfollows:lessthan 1percentintheDallasbankingmarketand2.75percentintheFortWorthbankingmarket. 13 Onconsummation,Southside’sboardofdirectorswillincludetwoadditionaldirectorsfromOmniAmerican’s currentboardofdirectors.

LegalDevelopments:FourthQuarter,2014 85 TheBoardalsohasconsideredSouthside’splansforimplementingtheproposal.Southside isdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.Southsidewouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization.Southside’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperates inasafeandsoundmanner,andSouthsideplanstointegrateOmniAmerican’sexisting managementandpersonnelinamannerthataugmentsSouthsideBank’smanagement team. Southside’sintegrationrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionsafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsweighinfavorof approval.Basedonallthefactsof record,the Boardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerialresources andfutureprospectsof theorganizationsinvolved,aswellastherecordof effectivenessof theorganizationsincombattingmoney-launderingactivities,onbalanceweighinfavorof approval. Recordof PerformanceundertheCRA TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeinstitutions’safeandsoundoperation.14TheCRArequiresthe appropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepository institution’srecordof meetingtheconvenienceandneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.15 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformancerecordsof SouthsideBankandOmniAmericanBank,datareportedby SouthsideBankandOmniAmericanBankundertheHomeMortgageDisclosureAct (“HMDA”),16otherinformationprovidedbySouthside,confidentialsupervisoryinformation,andthepubliccommentreceivedontheproposal.Thecommenterobjectedtothe proposalonthebasisof themortgagelendingrecordsof SouthsideBankandOmniAmericanBankasreflectedin2012HMDAdata. A.CRAPerformanceEvaluations AsprovidedintheCRA,theBoardhasevaluatedtheproposalinlightof theexaminations bytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevant insureddepositoryinstitutions.17TheCRArequiresthattheappropriatefederalfinancial supervisoryagencyforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.18Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-site evaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. 14 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 15 12U.S.C.§2903. 16 12U.S.C.§2801etseq. 17 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75Fed.Reg.11642at11665 (March11,2010). 18 12U.S.C.§2906.

86 FederalReserveBulletin|February2015 CRAPerformanceof SouthsideBank.SouthsideBankwasassignedan“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,inJuly2013(“Southside Evaluation”).ExaminersconcludedthatSouthsideBankdemonstratedanexcellentresponsivenesstothecreditneedsof itsassessmentareas.19SouthsideBankreceiveda“highsatisfactory”ratingontheLendingTest,andan“outstanding”ratingontheInvestmentTest andtheServiceTest.20FortheLendingTest,theFDICnotedthatthebank’slendingactivitylevelandgeographicdistributionof loansweregood.SouthsideBankrankedasthe largestsmallbusinesslenderandthirdlargestmortgagelenderintheTylerMSA,which hadthegreatestweightof allareasintheanalysis.Examinersalsonotedthattheinstitution displayedextensiveuseof innovativeandflexiblelendingpractices.Examinersnotedthat SouthsideBankwasaleaderinmakingcommunitydevelopmentloans.Examinersfurther highlightedSouthsideBank’sissuanceof communitydevelopmentloansintheTylerMSA. ExaminersnotedthatSouthsideBankhadactivelyparticipatedinanEconomicDevelopmentProgramsponsoredbytheFederalHomeLoanBankof Dallas,fundedFHAandVA loans,andparticipatedinseveralaffordablehousingprograms. ConcerningtheInvestmentTest,examinershighlightedSouthsideBank’ssignificantlevel of qualifiedcommunitydevelopmentinvestmentsandgrantsinitsassessmentareas.SouthsideBankalsowasnotedasbeingexcellentinrespondingtothecommunityneedsbothin itsassessmentareaandstatewide.Inaddition,SouthsideBankhadasignificantrecordof participatingininvestmentsnotroutinelyprovidedbyprivateinvestors. FortheServiceTest,examinersnotedSouthsideBank’sstrongperformance,fromitsreadilyaccessibledeliverysystemstoitstailoredretailbankingservices.Theaccessibilityof retailbankingserviceshasimprovedwithintheTylerMSA.Examinersfurtheremphasized thatSouthsideBankprovidedarelativelyhighlevelof communitydevelopmentservices thatwereresponsivetoavarietyof communitydevelopmentneeds. TheFDICreviewedSouthsideBank’sCRAperformanceinitsreviewof therelatedBank MergerActapplication,includingpubliccommentssimilartothosesubmittedtothe Board,and,inapprovingtheapplicationundertheBankMergerAct,foundtheproposal consistentwiththepurposesof theCRA. CRAPerformanceof OmniAmericanBank.TheOfficeof theComptrollerof theCurrency (“OCC”)assignedOmniAmericanBankanoverallCRAratingof “satisfactory”atits mostrecentCRAexaminationonApril2,2012(“OmniAmericanEvaluation”).21ExaminersconcludedthatOmniAmericanBankdemonstratedagoodresponsivenesstothecredit needsof itsassessmentareas.22OmniAmericanBankreceivedratingsof “highsatisfactory”fortheLendingTestandtheServiceTestand“lowsatisfactory”fortheInvestment Test.WithrespecttotheLendingTest,examinersnotedthatOmniAmericanBank’slendingactivityreflectedgoodresponsiveness,andamajorityof homemortgageloans, OmniAmericanBank’sprimaryloanproduct,weremadewithinitsassessmentarea.The 19 Examinersfocusedonsmallbusinessandhomemortgageloans,giventheseareamajorityofSouthsideBank’s loans,andputmarginallymoreweightonSouthsideBank’ssmallbusinessloans.Inaddition,examiners focusedontheTylerMetropolitanStatisticalAreaassessmentarea(“TylerMSA”)becauseofSouthsideBank’s significantpresenceinthatarea. 20 TheevaluationperiodfortheLending,Investment,andServiceTestsintheSouthsideEvaluationwasApril26, 2010,toJuly29,2013,exceptforcommunitydevelopmentloans,forwhichtheevaluationperiodwasfrom January1,2012,throughDecember31,2012. 21 TheevaluationperiodfortheLending,Investment,andServiceTestsintheOmniAmericanEvaluationwas fromJanuary1,2009,throughDecember31,2011,exceptforcommunitydevelopmentloans,forwhichthe evaluationperiodwasfromMay13,2008,throughApril1,2012. 22 Examinersfocusedonhomemortgageloans,giventhatthesecompriseamajorityofOmniAmericanBank’s loans.Inaddition,examinersfocusedontheFortWorthMetropolitanStatisticalAreaassessmentarea(“Fort WorthMSA”)becauseofOmniAmericanBank’ssignificantpresenceinthatarea.

LegalDevelopments:FourthQuarter,2014 87 geographicdistributionof homemortgageproductswasgoodandthedistributionof loans tosmallbusinesseswasexcellent.Theborrowerdistributionof suchloansamongborrowersof differentincomeswasadequate.Theexaminersnotedthattheydidnotdetectany conspicuousorunexplainedgapsinthebank’slendingpatterns. Concerningcommunitydevelopmentlending,examinersfoundthatOmniAmericanBank’s levelof communitydevelopmentactivitieswasadequategivenitssize,capacity,andthe communitydevelopmentneedsandopportunitiesof itsassessmentareas.ExaminershighlightedOmniAmericanBank’sparticipationinspecializedloanprogramssponsoredbythe Cityof Arlington,Texas,includinghomebuyerassistanceandneighborhoodstabilization programs.Theseareassistanceprogramsforfirst-timeorLMIborrowers. WithrespecttotheInvestmentTest,examinersnotedthatalthoughOmniAmericanBank’s qualifiedinvestmentswerenotparticularlyinnovativeorcomplex,theywereresponsiveto thecommunitydevelopmentneedsintheFortWorthMSA.OmniAmericanBank’sinvestmentswerefocusedinaCommunityCapitalCRAqualifiedInvestmentFund,whichconsistsof variousmortgage-backedsecuritiesthatarefullyallocatedtoloansbenefittingLMI neighborhoodswithinthebank’sassessmentareasandsmallbusinessesbywayof SBA loans. Examinersalsoreviewedthebank’slendingpoliciesandprocedures,includingthefair lendingpolicy.VeritexBankhasinstitutedpoliciesandprocedurestohelpensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations.VeritexBank hasaformalfairlendingcomplianceprogram,whichincludesatrainingprogramanda fairlendingcompliancewebinarforallemployees.VeritexBankalsohasacentralizedconsumercomplaintsprocessforresolvinganycomplaints.Veritexbankcompletesinternal fairlendingauditsandcontractswithanexternalfirmtoperformsemi-annualaudits. FairLendingRecord,HMDAAnalysis,andPublicCommentontheProposal TheBoardhasalsoconsideredtherecordsof SouthsideBankandOmniAmericanBankin complyingwithfairlendingandotherconsumerprotectionlaws.Thisincludesareviewof theirperformanceasdetailedintheSouthsideEvaluationandtheOmniAmericanEvaluation.Thisalsoincludesanevaluationof SouthsideBank’sandOmniAmericanBank’sfair lendingpoliciesandproceduresandconsiderationof otheragencies’viewsonSouthside Bank’sandOmniAmericanBank’srecordof performanceunderfairlendinglaws.The Boardalsohastakenintoaccountthecommentontheproposal. Thecommenterallegedthat2012HMDAdataindicatethat,intheTylerMSA,Southside BankmadefewerconventionalhomepurchaseloanstoAfricanAmericanthantowhite applicants,fewerrefinancingloanstoAfricanAmericanandHispanicapplicantsthanto whiteapplicants,andfewerhomeimprovementloanstoAfricanAmericanthantowhite applicants.Thecommenteralsoassertedthat,intheTylerMSA,SouthsideBankdisproportionatelydeniedapplicationsbyAfricanAmericanapplicantsforconventionalhome purchaseloansandrefinancingloansandbyHispanicapplicantsforrefinancingloans.In addition,thecommenterallegedthatOmniAmericanBankmadefewerconventionalhome purchaseandrefinancingloanstoAfricanAmericanapplicantsintheFortWorthMSA. ThecommenteralsoassertedthatOmniAmericanBankdisproportionatelydeniedapplicationsbyAfricanAmericanapplicantsforconventionalhomepurchaseloansandrefinancingloansandbyHispanicapplicantsforrefinancingloans. TheBoardhasreviewedHMDAdatafrom2012and2013reportedbySouthsideBankand OmniAmericanBank,themostrecentpubliclyavailabledata.TheBoardanalyzeddata relatedtoallHMDA-reportableloansintheTylerandFortWorthmarketstodevelopa

88 FederalReserveBulletin|February2015 viewof overalllendingpatterns,aswellasthesubsetof thatdatarelatedspecificallyto conventionalhomepurchase,homeimprovement,andrefinancingloans,whichwerethe subjectsof thepubliccommentreceivedontheproposal.Withinthosedatasets,theBoard focuseditsreviewondatarelatedtoloansmadeordeniedtoborrowersof theracesand ethnicitieshighlightedbythepubliccomment,i.e.,AfricanAmericansandHispanics. WithrespecttoSouthsideBankandOmniAmericanBank,theBoardgenerallyconfirmed theHMDAdataregardinglevelsof loansandthedenialdisparityratiosassociatedwith conventionalhomepurchase,homeimprovement,andrefinanceloansnotedbythecommenter.TheBoardisconcernedwhenHMDAdataforaninstitutionindicatedisparitiesin lendingandbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlending practicesarebasedoncriteriathatensurenotonlysafeandsoundlending,butalsoequal accesstocreditbycreditworthyapplicantsregardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherSouthsideBankorOmniAmericanBankhasexcludedordeniedcredittoanygrouponaprohibitedbasis.23 Becauseof thelimitationsof HMDAdata,theBoardalsohasconsideredotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof complianceby SouthsideBankandOmniAmericanBankwithfairlendinglawsandregulations.The BoardhasconsideredthatSouthsideBank’s2012HMDAdatawerereviewedandconsideredbyexaminersintheFDIC’sJuly2013CRAperformanceevaluation.Thisreview allowedexaminerstoconsiderspecificlendinginformationbeyondthedatareportedin HMDA.Thisevaluationbyexaminersfoundnoevidenceof discriminatorylendingpracticesandresultedinan“outstanding”rating.TheBoardalsoconsultedwiththeFDIC withrespecttoSouthsideBank’srecordof fairlendingperformancesincetheSouthside Evaluation,includingitsoperationsandcomplianceprogram,policiesandprocedures, trainingefforts,monitoringpractices,underwritingguidelines,andresponsestoconsumer complaints.TheBoardalsoconsideredtheFDIC’sanalysisof thecommentsagainst SouthsideBank’sbankmergerfiling,whichwasreviewedandapprovedbytheFDIC. WithrespecttoOmniAmericanBankHMDAdataonconventionalhomepurchaseorrefinanceloanscitedbythecommenter,theBoardconsultedwiththeOCC,whichfoundno evidenceof disparatetreatmentinitsreviewof OmniAmericanBank’sactuallendingpractices.Thelendingpolicies,processes,andpracticeswerefoundbytheOCCtosupporta lendingculturewhereinOmniAmericanBankwasensuringfairtreatmenttoallapplicants. Southside’sFairLendingProgram.SouthsideBank’srisk-managementsystems,policies, andproceduresforassuringcompliancewithfairlendinglawswouldbeimplementedatthe combinedorganization,andtheseareconsideredtobesatisfactoryfromasupervisoryperspective.Southsidehasrepresentedthatithasadetailedandcomprehensiveconsumer complianceandfairlendingprogram.Thisincludesasecondaryreviewof alldeniedloan applicationstoensurethatthereasonsfordenialarewelldocumented,supportedbythe applicant’sapplicationdata,andoutsideof Southside’sunderwritingguidelines.Southside hasalsoindicatedthatitperformsamonthlyanalysistohelpidentifyanypatternsof dis- 23 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofwhetheranapplicantwhowasdeniedcreditwas,infact,creditworthy.In addition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothe valueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)are notavailablefromHMDAdata.

LegalDevelopments:FourthQuarter,2014 89 criminationandthatitconductsweeklytrackingof pricingexceptionsforallconsumer loansanddailytrackingforallmortgageloans.Inaddition,Southsidehasindicatedthatit performsanannualfairlendingriskassessment,theresultsof whicharepresentedtoits boardof directors,andthatallSouthsideemployeeswhoacceptloanapplicationsor answerloanquestionsarerequiredtoparticipateinfairlendingtrainingannually. A.ConclusiononCRA,FairLending,andHMDAReview TheBoardhasconsideredallof thefactsof record,informationprovidedbySouthside, confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedon theBoard’sanalysisof theHMDAdata,itsevaluationof SouthsideBank’sand OmniAmericanBank’smortgagelendingoperationsandcomplianceprograms,itsreview of examinationreports,theCRArecordsof theinstitutionsinvolved,anditsconsultations withtheFDICandOCC,theBoardconcludesthattheCRAandfairlendingrecordsof SouthsideBankandOmniAmericanBankonbalanceweighinfavorof approval. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringproposalsundersection4(j)of theBHCAct.24To 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.25In additiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchasthe opaquenessandcomplexityof aninstitution’sinternalorganization,whichareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthat canberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.26 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummation,Southsidewouldhaveapproximately $4.8billionintotalconsolidatedassets,andbyanyof anumberof alternativemeasuresof firmsize,Southsidewouldbeoutsidethe100largestU.S.financialinstitutions.TheBoard generallypresumesthatamergerthatinvolvesanacquisitionof lessthan$2billionin assets,orresultsinafirmwithlessthan$25billionintotalconsolidatedassets,willnot posesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthe transactionwouldresultinasignificantincreaseininterconnectedness,complexity,crossborderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthis transaction.TheBoard,therefore,concludesthatfinancialstabilityconsiderationsrelating tothisproposalweighinfavorof approval. 24 Dodd-FrankAct,§604(e),codifiedat12U.S.C.§1843(j)(2)(A).OtherprovisionsoftheDodd-FrankAct imposeasimilarrequirement,thattheBoardconsiderorweightheriskstofinancialstabilityposedbya merger,acquisition,orexpansionproposalbyafinancialinstitution.Seesections163,173,and604(d)and (f)oftheDodd-FrankAct. 25 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 26 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrderat28.

90 FederalReserveBulletin|February2015 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.”27 TheBoardhasalsoconsideredtheextenttowhichtheproposalwouldbenefitthecustomersof SouthsideBankandOmniAmericanBank.Amongotherthings,suchbenefitscan includemerger-relatedcostsavings,improvementsinthequalityof existingproductofferings,andtheavailabilityof productsthatwerenotpreviouslyavailabletocustomersof any of theparties. Southsideexpectsthat,asaresultof themerger,SouthsideBank’scustomerswouldhave accesstoavarietyof consumerandbusinessservices.Themergerwouldextendthebranch andATMfootprintsof SouthsideBankwithintheDallasandFortWorthbankingmarkets.Thiswouldincludefull-servicebranchesinfivecounties,allowingcustomersgreater geographicflexibilityinaccessingbankingservices.SouthsideBankwillcontinuetooffer itsproductsandservices,whicharesubstantiallythesameas,andinmanycasesbroader than,productsandservicesofferedbyOmniAmericanBank. TheBoardhasdeterminedthattheconductof theproposednonbankingactivitieswithin theframeworkof RegulationY,Boardprecedent,andthisOrderarenotlikelytoresultin significantadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interest,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.Onthebasisof theentirerecord,includingthe commitmentsmadeinthiscaseandconditionsnotedinthisOrder,andforthereasonsdiscussedabove,theBoardbelievesthatthebalanceof benefitsandpotentialadverseeffects relatedtocompetition,financialandmanagerialresources,convenienceandneeds, financialstability,andotherfactorsweighsinfavorof approvalof thisproposal.Accordingly,theBoardhasdeterminedthatthebalanceof thepublicbenefitsunderthestandard of section4(j)(2)of theBHCActisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalshouldbe,andherebyis,approved.28Inreachingitsconclusion,theBoardhascon- 27 12U.S.C.§1843(j)(2). 28 ThepubliccommenterrequestedthattheBoardholdapublichearingontheproposal.TheBoard’sregulations provideforahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissuesofmaterial factthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoardalsomay,in itsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsidered thecommenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,thecommenterhashadample opportunitytosubmitcommentsontheproposaland,infact,submittedawrittencommentthattheBoardhas consideredinactingontheproposal.Thecommenter’srequestdoesnotidentifydisputedissuesoffactthatare materialtotheBoard’sdecisionandwouldbeclarifiedbyapublichearing.Inaddition,therequestdoesnot demonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequatelyorwhyahearing otherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoard hasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestfora publichearingontheproposalisdenied.

LegalDevelopments:FourthQuarter,2014 91 sideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebySouthsidewiththeconditionsimposedinthisOrderandthecommitments madetotheBoardinconnectionwiththenotice.TheBoard’sapprovalalsoissubjecttoall theconditionssetforthinRegulationY,includingthoseinsections225.7and225.25(c),29 andtotheBoard’sauthoritytorequiresuchmodificationorterminationof theactivities of abankholdingcompanyoranyof itssubsidiariesastheBoardfindsnecessaryto ensurecompliancewith,andtopreventevasionof,theprovisionsof theBHCActandthe Board’sregulationsandordersissuedthereunder.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardin connectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisOrder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederal ReserveBankof Dallasactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveDecember10,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Orders Issued Under Federal Reserve Act Central Bank of Audrain County Mexico, Missouri OrderApprovingtheAcquisitionof Assets,Assumptionof Liabilities,andtheEstablishment of aBranch FRBOrderNo.2014–17(October17,2014) CentralBankof AudrainCounty(“AudrainBank”),Mexico,Missouri,1astatemember bank,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct2(“BankMergerAct”)toacquirecertainassetsandassumecertainliabilitiesof FirstStateCommunityBank(“FirstState”),Farmington,Missouri,astatenonmember bank.3Inaddition,AudrainBankhasappliedundersection9of theFederalReserveAct (“FRA”)4toestablishandoperateabranchatthelocationof theacquiredbranchof First State. 29 12CFR225.7and225.25(c). 1 AudrainBankisawhollyownedsubsidiaryofCentralBancompany,Inc.(“CentralBHC”),ofJeffersonCity, Missouri,abankholdingcompanywithtotalconsolidatedassetsofapproximately$10.8billion(asofJune30, 2014)thathasoperationsinMissouriandOklahoma.OnJuly16,2014,theFederalReserveBankofSt.Louis approvedAudrainBank’sapplicationtoconverttoastatememberbank,andAudrainBankchangeditsname fromFirstNationalBankofAudrainCounty. 2 12U.S.C.§1828(c). 3 Inparticular,AudrainBankseekstoacquiretheVandalia,Missouri,branchofFirstStatelocatedat1000West Highway54,Vandalia,Missouri63382.FirstStateisasubsidiaryofCooperInvestments,Inc.,Farmington, Missouri. 4 12U.S.C.§321.

92 FederalReserveBulletin|February2015 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.5Thetimeforfilingcommentshasexpired.AsrequiredbytheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral.TheBoardhasconsideredtheapplicationandallcommentsreceivedinlight of thefactorssetforthintheBankMergerActandtheFRA. AudrainBank’sholdingcompany,CentralBHC,isthesixthlargestdepositoryorganizationinMissouri,controllingdepositsof approximately$7.0billion,whichrepresent approximately4.6percentof thetotalamountof depositsininsureddepositoryinstitutionsinMissouri(“statedeposits”).6AudrainBankproposestoacquireapproximatelyall of thedepositsfromtheVandaliabranchof FirstState,whichtotalapproximately $13.7million.Onconsummationof theproposal,CentralBHCwouldremainthesixth largestdepositoryorganizationinMissouri,controllingdepositsof approximately$7.0billion,whichrepresentapproximately4.6percentof thetotalamountof statedeposits. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.7TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.8 AudrainBankandFirstStatecompetedirectlyintheMexico,Missouri,bankingmarket (the“Mexicobankingmarket”),andthebranchthatAudrainBankproposestoacquireis locatedinthatmarket.9TheBoardhasreviewedthecompetitiveeffectsof theproposalin thisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket,therelative shareof thetotaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatAudrainBankwouldcontrol,10theconcentrationlevelsof marketdepositsand theincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”),11andothercharacteristicsof themarket. 5 12CFR262.3(b). 6 DataareasofJune30,2013.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks, savingsbanks,andsavingsassociations. 7 12U.S.C.§1828(c)(5)(A). 8 12U.S.C.§1828(c)(5)(B). 9 TheMexico,Missouri,bankingmarketisdefinedasAudrainCounty,Missouri. 10 DepositandmarketsharedataareasofJune30,2013,andarebasedondatareportedbyinsureddepository institutionsintheFederalDepositInsuranceCorporation’sSummaryofDepositsdata. 11 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.

LegalDevelopments:FourthQuarter,2014 93 IntheMexicobankingmarket,AudrainBankisthesecondlargestinsureddepository institution,controllingdepositsof approximately$123.9million,whichrepresentapproximately32.6percentof marketdeposits.ThebranchthatAudrainBankproposestoacquire currentlycontrolsapproximately$13.7millioninmarketdeposits.Onconsummationof theproposal,AudrainBankwouldbecomethelargestinsureddepositoryinstitutioninthe Mexicobankingmarket,controllingdepositsof approximately$137.6million.Whenthe initialcompetitivescreeningdataareused,thecombinedentitywouldrepresent36.2percentof marketdepositsandtheHHIwouldincreaseby215points,from2777to2992. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheMexicobankingmarket.12Inparticular,theBoardconsideredthecompetitiveinfluenceof twoactivecommunitycreditunionsintheMexicobankingmarket, UnitedCreditUnionandShowMeCreditUnion.Eachoffersawiderangeof consumer bankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathat includealmostallof theresidentsintheMexicobankingmarket.13Thesecreditunions controlapproximately$62.4millioninmarketdeposits,whichrepresentapproximately 7.6percentof marketdepositsona50percentweightedbasis.Withthesedeposits weightedat50percent,afterconsummation,AudrainBankwouldcontrolapproximately 33.5percentof themarketdeposits,andtheHHIwouldincreaseby183points,from 2402to2585.Furthermore,onconsummation,atotalof sixcompetitorswouldcontinueto operateinthemarket,includingthetwocreditunionsandtwobanksthateachcontrol morethan20percentof themarket’sdeposits.TheBoardhasconcludedthatthesefactors mitigatethepotentialcompetitiveeffectsof theproposal. TheDOJconductedareviewof thecompetitiveeffectsof theproposalandhasadvisedthe Boardthatconsummationwouldnotbelikelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshave beenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposalis unlikelytohaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheMexicobankingmarketorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingthisproposalundertheBankMergerAct,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolvedandcertain othersupervisoryfactors.Initsevaluation,theBoardconsidersavarietyof information, includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof theproformaorganization,includingitscapitalposition, assetquality,liquidity,andearningsprospects,andtheimpactof theproposedfundingof 12 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 13 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththosefeaturesasa mitigatingfactor.Seee.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); RegionsFinancialCorporation,93FederalReserveBulletinC16(2007);PassumpsicBancorp,92FederalReserve BulletinC175(2006);WachoviaCorporation,92FederalReserveBulletinC183(2006).

94 FederalReserveBulletin|February2015 thetransaction.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedin theproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan.TheBoardalsoconsiderstheabilityof theacquiringorganizationtoabsorbthecosts of theproposalandtheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsistentlyhasconsideredcapitaladequacytobe especiallyimportant. AudrainBankiswellcapitalizedandwouldremainsoonconsummationof theproposal. TheproposalwouldbefundedbyacapitalcontributionfromCentralBHC,andneither AudrainBanknorCentralBHCwouldincuranydebtasaresultof thetransaction.The assetquality,earnings,liquidity,andfutureprospectsof AudrainBankareconsistentwith approval.AudrainBankappearstohaveadequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof thetargetbranchintoAudrainBank’soperations. Basedonitsreviewof therecord,theBoardfindsthatAudrainBankhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof AudrainBankandhasreviewed theexaminationrecordsof AudrainBank,includingassessmentsof itsmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experiencesandAudrainBank’srecordof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredAudrainBank’splansforimplementingtheproposal. AudrainBankisconsideredtobewellmanaged,anditsboardof directorsandseniormanagementhavesignificantbankingexperience.AudrainBankwouldoperatetheacquired branchof FirstStateunderAudrainBank’sexistingpoliciesandprocedures,whichare consideredtobesatisfactory.AudrainBank’ssupervisoryrecord,managerialandoperationalresources,andplansforoperatingtheproformainstitutionprovideareasonable basistoconcludethatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof AudrainBank,aswellasAudrainBank’srecordof effectivenessincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).14The CRArequiresthefederalfinancialsupervisoryagenciestoencouragefinancialinstitutions tohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistent withtheirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof its entirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankacquisitionproposals. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof AudrainBankandFirstState,informationprovidedbyAudrain Bank,andconfidentialsupervisoryinformation. 14 12U.S.C.§2901etseq.

LegalDevelopments:FourthQuarter,2014 95 A.Recordof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.15TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.16Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailedon-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof AudrainBank.AudrainBankreceivedanoverallratingof “satisfactory”atitsmostrecentCRAperformanceexaminationbytheOfficeof theComptrollerof theCurrency,asof January2010.17Examinersdeterminedthatthebank’sloan-to-deposit ratiowasreasonablegiventhebank’ssize,financialcondition,andassessmentareacredit needs.Inaddition,examinersnotedthatthedistributionof loansrepresentedreasonable dispersionamongborrowersof differentincomelevelsandtofarmsandbusinessesof differentsizes.Examinersfoundnoevidenceof discriminatoryorotherillegalcreditpractices. InconnectionwithAudrainBank’sapplicationtoconverttoastatememberbank,the FederalReserveBankof St.LouisinMay2014conductedalimited,off-sitereviewof its- CRAperformanceandfoundnoevidenceof discriminatoryorotherillegalcreditpractices. CRAPerformanceof FirstState.FirstStatereceivedanoverallratingof “satisfactory”at itsmostrecentCRAperformanceexaminationbytheFederalDepositInsuranceCorporation(“FDIC”),asof February2014.18FirstStatereceivedan“outstanding”ratingforthe ServiceTestand“highsatisfactory”ratingsforboththeInvestmentTestandtheLending Test. InevaluatingtheServiceTest,FDICexaminersnotedthatFirstState’sdeliverysystemsare readilyaccessibletoallportionsof thebank’sassessmentareasandthatservicesdonot varyinawaythatinconveniencescertainportionsof theassessmentareas.Theexaminers concludedthatFirstStatecouldbeconsideredaleaderincommunitydevelopment services. InevaluatingtheInvestmentTest,examinersfoundthatFirstStateexhibitedgoodresponsivenesstocreditandcommunityeconomicdevelopmentneedsandoccasionallyusedcomplexorinnovativeinvestmentstosupportcommunitydevelopmentinitiatives.TheexaminersnotedthatgiventheopportunitiesinFirstState’sassessmentareas,thebankhasa significantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsinwhichit occasionallyhasaleadershipposition,andinparticular,providesinvestmentsandgrants thatarenotroutinelyprovidedbyprivateinvestors. InevaluatingtheLendingTest,examinersfoundthatFirstState’soveralllendingactivity reflectedgoodresponsivenesstothecreditneedsof itsassessmentareasandthatFirst Stateoriginatedasubstantialmajorityof itsloans,duringtheperiodreviewed,initsassessmentareas.Inaddition,examinersnotedthatthegeographicdistributionof loansrepre- 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642,11,665 (2010). 16 12U.S.C.§2906. 17 AudrainBank’sCRAevaluationwasconductedusingSmallInstitutionCRAExaminationProcedures,and examinersreviewedthebank’slendingactivityfromJanuary1,2007,throughDecember31,2009. 18 FirstState’sCRAevaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures,and examinersreviewedthebank’slendingactivityfromNovember1,2010,throughFebruary24,2014.

96 FederalReserveBulletin|February2015 sentedgoodpenetrationthroughouttheassessmentareasandamongretailcustomersof differentincomelevelsandamongbusinessandfarmcustomersof differentrevenuesizes. TheexaminersconcludedthatFirstStateexhibitedagoodrecordof servingthecredit needsof themosteconomicallydisadvantagedareasof itsassessmentareas,low-income individuals,andverysmallbusinessesandfarms,consistentwithsafeandsoundbanking practices. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. AudrainBankrepresentsthatthisproposalwouldresultinFirstState’scurrentcustomers continuingtohaveaccesstobankingservicesintheirimmediatecommunities.Moreover, AudrainBankstatesthatitwouldexpanditsservicesandgrowitsbusinessinAudrain County.Inparticular,theacquiredbranchwouldbeenhancedwithadrive-upATM,additionalstaff,andnewon-siteservices,allof whichwouldbenefitFirstState’scurrentcustomers.AudrainBankplanstoconsolidateitsexistingbranchinVandaliaintothebranch acquiredfromFirstState,whichislocatedoneblockawayonthesamestreet.19 C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyAudrainBank,and confidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof AudrainBankandFirstState,itsreviewof examinationreports,anditsconsultationswithotheragencies,theBoardconcludesthat theconvenienceandneedsfactor,includingtheCRArecordsof theinsureddepository institutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStabiliy TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”20 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.21These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas 19 AudrainBankrepresentsthattheclosingofitsVandaliabranchwillbecompletedinaccordancewiththe bank’sbranchclosingpolicyandapplicablelawsandregulations. 20 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 21 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

LegalDevelopments:FourthQuarter,2014 97 theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.22 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,CentralBHCwould haveapproximately$10.8billioninconsolidatedassetsandwouldbeoutsidethetop100 largestfinancialinstitutionsintheUnitedStatesasmeasuredbyassets.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStates absentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactors arenotpresentinthistransaction.AudrainBankwouldcontinuetoengageintraditionalcommercialbankingactivities.Theresultingorganizationwouldonlyexperiencevery smallincreasesinthemetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmrankingoutsideof thetop100U.S. financialinstitutionsintermsof thosemetrics.Forexample,AudrainBank’sintrafinancial assetsandliabilitieswouldcompriseanegligibleshareof thesystemwidetotal,bothbefore andafterthetransaction,andtheresultingfirmwouldcontrollessthan0.1percentof the assetsof allU.S.depositoryinstitutions.Theresultingorganizationwouldnotengagein complexactivities,norwoulditprovidecriticalservicesinsuchvolumethatdisruptionin thoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof the UnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branch AudrainBankhasappliedundersection9of theFRAtoestablishandoperateabranchat thelocationof theacquiredbranchof FirstState,andtheBoardhasconsideredthefactors itisrequiredtoconsiderwhenreviewinganapplicationunderthatsection.23Specifically, theBoardhasconsideredAudrainBank’sfinancialcondition,management,capital, actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,the Boardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyAudrainBankwithallthecommitmentsmadeinconnectionwiththisproposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare 22 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 23 12U.S.C.§322;12CFR208.6.

98 FederalReserveBulletin|February2015 deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Thetransactionmaynotbeconsummatedbeforethe15thcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorderunless suchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBankof St. Louis,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveOctober17,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Veritex Community Bank Dallas, Texas OrderApprovingEstablishmentof aBranch FRBOrderNo.2014–9(December8,2014) VeritexCommunityBank(“VeritexBank”),astatememberbanksubsidiaryof Veritex Holdings,Inc.,bothof Dallas,Texas,hasrequestedtheBoard’sapprovalundersection9 of theFederalReserveAct(“Act”)1andtheBoard’sRegulationH2toestablishabranchat 2700OakLawnAvenue,Dallas,Texas(the“OakLawnbranch”). Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.3Thetimeforfiling commentshasexpired,andtheBoardhasconsideredthenoticeandallcommentsreceived inlightof thefactorsspecifiedintheAct. VeritexBankisthe89thlargestdepositoryinstitutioninTexas,controllingapproximately $613millionindeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.4VeritexBank’smainofficeisinDallas, andthebankhaseightadditionalbranchesthroughoutDallasandCollincounties. UndertheBoard’sRegulationH,whichimplementssection9of theAct,5thefactorsthat theBoardmustconsiderinactingonbranchapplicationsinclude(1)thefinancialhistory andconditionof theapplyingbankandthegeneralcharacterof itsmanagement;(2)the adequacyof thebank’scapitalanditsfutureearningsprospects;3)theconvenienceand needsof thecommunitytobeservedbythebranch;(4)inthecaseof brancheswith deposit-takingcapability,thebank’sperformanceundertheCommunityReinvestmentAct (“CRA”);6and(5)whetherthebank’sinvestmentinbankpremisesinestablishingthe branchsatisfiescertaincriteria.7 1 12U.S.C.§321etseq. 2 12CFRpart208. 3 12CFR262.3(b). 4 DataareasofJune30,2014,themostrecentavailable,andareupdatedtoreflectmergersthroughthatdate.In thiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 5 12CFR208.6(b). 6 12U.S.C.§2901etseq. 7 12CFR208.6(b).

LegalDevelopments:FourthQuarter,2014 99 TheBoardhasconsideredtheapplicationinlightof thesefactorsandpubliccomment receivedontheproposal.AcommenterobjectedtotheproposalandallegedthatVeritex BankdiscriminatesagainstAfricanAmericansandredlinesAfricanAmericanneighborhoods,particularlyinDallas.8 Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof VeritexBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,informationprovided byVeritexBank,andthecommentreceived.VeritexBankiswellcapitalizedandwould remainsoonconsummationof theproposal.Aftercarefullyconsideringallthefactsof record,theBoardhasconcludedthatthefinancialhistoryandcondition,capitaladequacy, andfutureearningsprospectsof VeritexBankareconsistentwithapprovalof theproposal. TheBoardalsohasreviewedVeritexBank’sproposedinvestmentintheOakLawnbranch andconcludedthatitsinvestmentisconsistentwithregulatorylimitationsoninvestmentin bankpremises.9 InconsideringVeritexBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithVeritex Bankandthebank’srecordof compliancewithapplicablebankinglaws,includingantimoney-launderinglaws.VeritexBankisconsideredtobewellmanaged.Basedonthis reviewandallthefactsof record,theBoardhasconcludedthatthecharacterof Veritex Bank’smanagement,aswellastherecordsof effectivenessof VeritexBankincombatting moneylaunderingactivities,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations TheBoardalsohasconsideredtheconvenienceandneedsof thecommunitytobeserved, takingintoaccountthecommentreceivedandthebank’sperformanceundertheCRA. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation.10Inaddition,theCRArequiresthe appropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepository institution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.11 TheBoardhasconsideredallthefactsof record.TheOakLawnbranchwouldbelocated inanLMIareaandanareawherethemajorityof theresidentsareminority.TheBoard hasalsoconsideredreportsof examinationof theCRAperformanceof VeritexBank,data reportedbyVeritexBankundertheHomeMortgageDisclosureAct(“HMDA”),12other informationprovidedbyVeritexBank,confidentialsupervisoryinformation,thepublic commentreceivedontheproposal,andotherinformation.Asnotedabove,acommenter objectedtotheproposalandallegedthatVeritexBankhadengagedindiscriminatorylendingpracticesintheDallasarea. 8 Redliningisthepracticeofdenyingacreditworthyapplicantaloanorserviceinacertainneighborhoodeven thoughtheapplicantmayotherwisebeeligiblefortheloanorservice. 9 12CFR208.21(a). 10 12U.S.C.§2901(b). 11 12U.S.C.§2903. 12 12U.S.C.§2801etseq.

100 FederalReserveBulletin|February2015 A.Recordof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof thatinstitution.13TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting thecreditneedsof itsentirecommunity,includingLMIneighborhoods.14Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.15 VeritexBankreceiveda“satisfactory”ratingbytheFederalReserveBankof Dallas (“ReserveBank”)atitsmostrecentCRAperformanceevaluation,asof November12, 2013(“2013CRAEvaluation”).VeritexBankreceived“satisfactory”ratingsfortheLendingTestandtheCommunityDevelopmentTest.16ExaminersnotedthatVeritexBankhas beenreasonablyresponsivetothecreditneedsandcommunitydevelopmentneedsof its assessmentareas.ExaminersnotedthatVeritexBankextendedthemajorityof itsloans insideitsassessmentareaandthatitsdistributionof loanstoLMIborrowersandtobusinessesof differentsizeswasreasonable.Morespecifically,theexaminersfoundthatthe geographicdistributionof thebank’slendingreflectedexcellentpenetrationthroughoutthe assessmentarea,includingLMIgeographies,giventhelocationof thebank’sbranchesand thecompetitivelocalbankingenvironment.Inaddition,examinersfoundnoevidenceof discriminatoryorotherillegalcreditpracticesandfoundthatthebankwasincompliance withthesubstantiveprovisionsof relevantanti-discriminationlawsandregulations.The proposedbranchwouldbelocatedinanLMIareaandisexpectedtoprovideasourceof lendingandotherbankingservicestominoritiesandLMIresidentsinthatarea. Examinersnotedthatthebank’sresponsivenesstocommunitydevelopmentneedswas adequateconsideringitscapacity,thoseneeds,andavailableopportunities.Accordingto examiners,VeritexBankapplieditscommunitydevelopmentresourcestomeetcommunity needs,primarilythroughcommunitydevelopmentlendinginitiativesandsocialservicestargetedtoLMIindividualsinitscommunity. VeritexBankrepresentsthat,sincethe2013CRAEvaluation,ithasbecomeamemberof theDallasMortgageAssistanceProgram,whichassistshomebuyerswithtotalhousehold incomeof lessthan80percentof theDallasAreamedianfamilyincometopurchasea homewithintheDallascitylimits.VeritexBankrepresentedthatitisworkingtolaunch financialliteracyandmortgageawarenessprogramsinLMIareas.Inaddition,thebank representsthatitisworkingtoincreasemortgagelendinginLMIareas,particularlysouthernDallasCounty,andisworkingtowarddevelopingrelationshipswithnon-profitand othersmallbusinessassistanceentitiestodeveloppotentialloanrelationships. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordof VeritexBankincomplyingwithfairlendingand otherconsumerprotectionlaws.Aspartof thisevaluation,theBoardreviewedVeritex Bank’s2013CRAEvaluationandacomprehensivefairlendingandredliningreviewcom- 13 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665. 14 12U.S.C.§2906. 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642(2010). 16 The2013CRAEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,asampleofsmallbusinessloansoriginatedfromJuly1,2012,throughDecember31, 2012wasevaluated,aswellasVeritexBank’s2011and2012HMDAdata.

LegalDevelopments:FourthQuarter,2014 101 pletedbytheReserveBankatVeritexBank;assessedVeritexBank’sHMDAdataandfair lendingpoliciesandprocedures;andconsideredconfidentialsupervisoryinformation, otherinformation,thecommentontheapplication,andthebank’sresponsetothe comment. TheBoardalsoconsideredthatthelocationof theOakLawnbranchisinanLMIareaand anareawherethemajorityof theresidentsareminority.Theproposedbranchwillbe locatednearWestDallas,atraditionallyunderservedcommunity,andthebankintendsto usetheproposedbranch’slocationtoestablishnewdepositandlendingrelationshipswith customersinthearea.VeritexBankalsorepresentsthattheOakLawnbranchwillbenefit depositorsbyimprovingcustomerconvenience,creatingefficiency,andexpandingthe availabilityof productsandservicestobankingcustomerswithintheunderservedcommunityof WestDallas. FairLendingAnalysis.TheReserveBankconductedacomprehensivefairlendingand redliningreviewatVeritexBankcontemporaneouslywiththe2013CRAEvaluationof VeritexBank.Basedontheirentirereview,examinersdidnotfindevidenceof illegalcredit discrimination. Withrespecttothebank’sbranchingstrategy,examinersfoundthatthemajorityof Veritex Bank’sbrancheswerelocatedintractsinwhich25-50percentoramajorityof thepopulationisminority.Examinersnotedthatanumberof thebank’sbrancheswereaddedasa resultof recentacquisitionsandthatmostof thedenovobrancheshavestayedwithinthe footprintestablishedbytheacquiredbanks,withhalf of suchbranchesbeingintracts where25-50percentof thepopulationisminorityatthetimeof theexamination.Examinersdidnotfindanydisparityinaccesstoproductsandservicesbetweenbranchesintracts thatdonothaveasubstantialpopulationof minoritiesandthoseinwhicheither25-50percentoramajorityof thepopulationisminority.Examinersfurtherfoundthebank’s branchinglocationstobereasonable. Examinersalsoreviewedthebank’slendingpoliciesandprocedures,includingthefair lendingpolicy.VeritexBankhasinstitutedpoliciesandprocedurestohelpensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations.VeritexBank hasaformalfairlendingcomplianceprogram,whichincludesatrainingprogramanda fairlendingcompliancewebinarforallemployees.VeritexBankalsohasacentralizedconsumercomplaintsprocessforresolvinganycomplaints.Veritexbankcompletesinternal fairlendingauditsandcontractswithanexternalfirmtoperformsemi-annualaudits. HMDAData.TheBoardanalyzedVeritexBank’sHMDAdatarelatedtoallHMDAreportableloansfrom2011,2012,and2013foritsassessmentareatodevelopaviewof the bank’soveralllendingpatterns.Inparticular,asdescribedfurtherbelow,theBoard reviewedthedatadevelopedbyReserveBankexaminersintheirrecentredliningreviewof thebank.VeritexBank’sassessmentarea,atthetimeof the2013CRAEvaluation, includedportionsof DallasandCollincounties.Theassessmentareaincludedsubstantiallyallof thecensustractsinCollinCountyinwhichAfricanAmericansand/orHispanic residentscomposedamajorityof thepopulationinthosetracts.Theassessmentareaalso includednearlyhalf of suchtractsinDallasCounty.17 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities. TheBoardbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlending practicesarebasedoncriteriathatareconsistentwithsafeandsoundlending,butalsoto 17 Followingthe2013CRAEvaluationVeritexBankexpandedtheDallasCountyportionofitsassessmentarea toincludeallofDallasCounty.

102 FederalReserveBulletin|February2015 provideequalaccesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.AlthoughHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,HMDAdataalonedonotprovideasufficientbasisonwhichtoconclude whetherabankexcludesordeniescredittoanygrouponaprohibitedbasis.18Fullyevaluatingabank’scompliancewithfairlendinglawsandregulationsrequiresathorough reviewof thebank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccess toinformationcontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. Incomparingthepercentageof VeritexBank’sHMDAapplicationsandoriginationsin censustractsinwhichamajorityof thepopulationisAfricanAmericanand/orHispanicto theaggregateof alllendersortheadjustedaggregatefor2011and2012,examinersdidnot findstatisticallysignificantdisparitiesfortheportionof thebank’sassessmentarealocated inCollinCountyin2011or2012orfortheportionlocatedinDallasCountyin2011. Examinersfoundsomestatisticallysignificantdisparitiesinthebank’spercentageof applicationsfromsuchtractscomparedtotheaggregateandtheadjustedaggregatein2012in DallasCounty.However,thebank’spercentageof originationsfromcensustractsinwhich amajorityof thepopulationisAfricanAmericanand/orHispanicdidnotdifferinastatisticallysignificantwaycomparedwiththeaggregateandadjustedaggregateinDallas Countyin2012. C.ConclusiononConvenienceandNeedsConsiderations Asnoted,theReserveBankconductedacomprehensivefairlendingandredliningreview atVeritexBankcontemporaneouslywiththe2013CRAEvaluationof VeritexBankand, basedontheirentirereview,didnotfindevidenceof illegalcreditdiscrimination.Moreover,theOakLawnbranchwouldbelocatedinanLMIareaandanareawherethemajorityof theresidentsareminority,whichisexpectedtoallowVeritexBanktoestablishnew depositandlendingrelationshipswith,andbetterserve,customersinthearea.Basedonall thefactsof record,andforthereasonsdescribedinthisorder,theBoardconcludesthatthe convenienceandneedsfactor,includingVeritexBank’sCRArecord,isconsistentwith approvalof theapplication. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.TheBoard’sapprovalisspecificallyconditioned onVeritexBank’scompliancewithallcommitmentsmadetotheBoardinconnectionwith theproposalaswellasallconditionsimposedinthisorder.ThecommitmentsandconditionsreliedonbytheBoardaredeemedtobeconditionsimposedinwritinginconnection withitsfindingsanddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBank,actingunderauthoritydelegatedbytheBoard. 18 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,credithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

LegalDevelopments:FourthQuarter,2014 103 Byorderof theBoardof Governors,effectiveDecember8,2014. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

105 Federal Reserve BULLETIN May 2015 Vol. 101, No. 2 Legal Developments: First Quarter, 2015 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act IBERIABANK Corporation Lafayette, Louisiana OrderApprovingtheAcquisitionof aBankHoldingCompany,theMergerof Banks,and Establishmentof Branches FRBOrderNo.2015–05(February13,2015) IBERIABANKCorporation(“IBKC”),Lafayette,Louisiana,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquire FloridaBankGroup,Inc.(“FBG”),andtherebyindirectlyacquireitssubsidiarybank, FloridaBank,bothof Tampa,Florida.Inaddition,IBKC’ssubsidiarystatememberbank, IBERIABANK,Lafayette,Louisiana,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewith FloridaBank,withIBERIABANKasthesurvivingentity.2IBERIABANKalsohas appliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperate branchesatthemainofficeandbranchesof FloridaBank.3 Noticeof theproposals,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister65659-65660(2014)).4AsrequiredbytheBank MergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromthe UnitedStatesAttorneyGeneral.Thetimeforsubmittingcommentshasexpired,andthe Boardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorsset forthinsection3of theBHCAct,theBankMergerAct,andtheFRA. IBKC,withconsolidatedassetsof approximately$15.5billion,isthe85thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$12.3billionin deposits.5IBKCcontrolsIBERIABANK,whichoperatesinFlorida,Alabama,Arkansas, Louisiana,Tennessee,andTexas.IBERIABANKisthe26thlargestdepositoryinstitution inFlorida,controllingdepositsof approximately$2.2billion,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6 1 12U.S.C.§1842. 2 12U.S.C.§1828(c). 3 12U.S.C.§321.Thesebranchesarelistedintheappendix. 4 12CFR262.3(b). 5 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutions includecommercialbanks,savingsassociations,andbanks.

106 FederalReserveBulletin|May2015 FBG,withconsolidatedassetsof approximately$518million,isthe1,289thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$394millionin deposits.FBGcontrolsFloridaBank,whichoperatesonlyinFlorida.FloridaBankisthe 81stlargestinsureddepositoryinstitutioninFlorida,controllingdepositsof approximately $406million,whichrepresentlessthan1percentof thetotaldepositsof insureddepository institutionsinthatstate. Onconsummationof thisproposal,IBKCwouldbecomethe83rdlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$16.0billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.IBKCwouldcontroltotaldepositsof approximately$12.8billion,which representlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InFlorida,IBKCwouldbecomethe25thlargestdepository organization,controllingdepositsof approximately$2.6billion,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanitshomestatewithoutregardtowhetherthetransactionisprohibitedunderstatelaw.7Underthissection,theBoardmaynotapproveanapplicationthat wouldpermitanout-of-statebankholdingcompanytoacquireabankinahoststateif the bankhasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof time orfiveyears.8Inaddition,theBoardmaynotapproveaninterstateacquisitionif thebank holdingcompanycontrolsorwouldcontrolmorethan10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates,or30percentormoreof thetotal depositsof insureddepositoryinstitutionsinthetargetbank’shomestateorinanystatein whichtheacquirerandtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof IBKCisLouisiana,andFBG’shome stateisFlorida.10IBKCiswellcapitalizedandwellmanagedunderapplicablelawandhas asatisfactoryCommunityReinvestmentAct(“CRA”)11rating.Floridahasnominimum agerequirement,andFloridaBankhasbeeninexistenceformorethanfiveyears. Onconsummationof theproposedtransaction,IBKCwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.Inaddition,thecombinedorganizationwouldcontrollessthan1percentof the totalamountof depositsof insureddepositoryinstitutionsinFBG’shomestateof Florida,theonlystateinwhichIBKCandFBGhaveoverlappingbankingoperations. Accordingly,inlightof allthefactsof record,theBoardisnotprohibitedfromapproving theproposalundersection3(d)of theBHCAct. 7 12U.S.C.§1842(d)(1)(A). 8 12U.S.C.§1842(d)(1)(B). 9 12U.S.C.§1842(d)(2)(A),(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See 12U.S.C.§1841(o)(4)–(7). 10 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 11 12U.S.C.§§2901–2908.

LegalDevelopments:FirstQuarter,2015 107 CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.12 IBKCandFBGhavesubsidiarydepositoryinstitutionsthatcompetedirectlyintheSarasotaarea,Floridabankingmarket(“Sarasotamarket”).13TheBoardhasconsideredthe competitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record. Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremainin thebankingmarket;therelativeshareof totaldepositsininsureddepositoryinstitutionsin themarket(“marketdeposits”)thatIBKCwouldcontrol;14theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-Hirschman Index(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);15andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheSarasotamarket.Onconsummation of theproposal,theSarasotamarketwouldremainunconcentrated,asmeasuredbythe HHI.TheHHIchangewouldbeminimal,andnumerouscompetitorswouldremaininthe market.16 Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketinwhichIBKCandFBGcompeteorinanyotherrel- 12 12U.S.C.§§1842(c)(1)and1828(c)(5). 13 TheSarasotamarketisdefinedasManateeandSarasotacountieslessthatportionthatisbotheastofthe MyakkaRiverandsouthofInterstate75(currentlythetownsofNorthportandPortCharlotte)plusthepeninsularportionofCharlotteCountywestoftheMyakkaRiver(currentlythetownsofEnglewood,Englewood Beach,NewPointComfort,GroveCity,CapeHaze,Rotonda,RotondaWestandPlacida),plusGasparilla Island(thetownofBocaGrande)inLeeCounty,allwithinFlorida. 14 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percent weightedbasis.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,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html. 16 BKCoperatesthe9thlargestdepositoryinstitutionintheSarasotamarket,controllingapproximately$467millionindeposits,whichrepresent2.7percentofmarketdeposits.FBGoperatesthe42ndlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$12million,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,IBKCwouldremainthe9thlargest depositoryinstitutioninthemarket,controllingdepositsofapproximately$480million,whichrepresent 2.8percentofmarketdeposits.TheHHIfortheSarasotamarketwouldincreasebyonepointto908,and42 competitorswouldremaininthemarket.

108 FederalReserveBulletin|May2015 evantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders thefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved. Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-onlyandconsolidatedbasis,aswellasthefinancial conditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information, includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluates thefinancialconditionof thecombinedorganization,includingitscapitalposition,asset quality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of thefinancialandmanagerialresourcesandtheproposedbusinessplan. IBKCandIBERIABANKarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisabankholdingcompanymergerthat isstructuredasacashandshareexchangeandasubsequentmergerof thesubsidiary depositoryinstitutions.17Theassetquality,earnings,andliquidityof IBERIABANKand FloridaBankareconsistentwithapproval,andIBKCappearstohaveadequateresources toabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwithapproval.Basedonits reviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresources toeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.Acommenterobjectedtotheproposal,alleging thatboththechairmanof FBGandthepresidentandchief executiveofficer(“CEO”)of FBG18mismanagedtheorganizationandviolatedtheirfiduciaryduties,andthattheCEO receivedexcessivecompensationandincentives.19TheBoardhasreviewedtheexamination recordsof IBKC,FBG,andtheirsubsidiarydepositoryinstitutions,includingassessments of theirmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyIBKC,theBoard’ssupervisoryexperienceswithIBKC andthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheir recordsof compliancewithapplicablebankingandanti-money-launderinglaws.Finally, theBoardhasconsideredexaminers’viewsof thechairmanof FBGandtheCEOof FBG andFloridaBank. IBKC,FBG,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.IBKC’sexistingriskmanagementprogram,anditsdirectorateandseniormanagement,areconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof 17 Aspartoftheproposedtransaction,eachshareofFBGcommonstockwouldbeconvertedintoarightto receivecashandIBKCcommonstock,basedonanexchangeratio.IBKChasthefinancialresourcestofund theexchange. 18 TheCEOofFBGisalsothechairman,president,andchiefexecutiveofficerofFloridaBank. 19 Thecommenter,ashareholderofFBG,alsoallegedthattheproposedtransactionisfraudulentunderstateand federalcorporateandsecuritieslaws.Theseallegationsrelatetoashareholderdisputeandmaybeadjudicated byacourtofcompetentjurisdiction.SeeWesternBancshares,Inc.v.BoardofGovernors,480F.2d749(1973).

LegalDevelopments:FirstQuarter,2015 109 IBKChavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors.20 TheBoardalsohasconsideredIBKC’splansforimplementingtheproposal.IBKCis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.IBKCwouldimplementitsriskmanagement policies,procedures,andcontrolsatthecombinedorganization,andtheseareconsidered acceptablefromasupervisoryperspective.Inaddition,IBKC’sandFBG’smanagement hastheexperienceandresourcestoensurethatthecombinedorganizationoperatesina safeandsoundmanner,andIBKCplanstointegrateFBG’sexistingmanagementandpersonnelinamannerthataugmentsIBKC’smanagement. Basedonallthefactsof record,includingIBKC’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof IBKCandFBGincombattingmoney-launderingactivities,are consistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardmustconsidertheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCRA.21TheCRArequiresthefederalfinancialsupervisoryagenciesto encourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,22andrequires theappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglowandmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.23 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof IBERIABANKandFloridaBank,datareportedbyIBERIABANK andFloridaBankundertheHomeMortgageDisclosureAct(“HMDA”),24otherinformationprovidedbyIBERIABANK,confidentialsupervisoryinformation,andthepublic commentreceivedontheproposal.Acommenterobjectedtotheproposalonthebasisof IBERIABANK’slendingrecordtoLMIborrowersandtominorityindividualsintheNew Orleans,Louisiana,andBirmingham,Alabama,MetropolitanStatisticalAreas(“MSAs”), asreflectedin2013HMDAdata. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof 20 IBKC’sandIBERIABANK’sboardofdirectorsandseniormanagementwouldremainthesameafterconsummatingtheacquisition. 21 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 22 12U.S.C.§2901(b). 23 12U.S.C.§2903. 24 12U.S.C.§2801etseq.

110 FederalReserveBulletin|May2015 therelevantinstitutions.25TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.26Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof IBERIABANK.IBERIABANKwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBank of Atlanta(“ReserveBank”)asof August2013(“IBERIABANKEvaluation”),which includedfull-scopeevaluationsof thebank’sperformanceinboththeNewOrleansand Birminghamassessmentareas.27IBERIABANKreceived“highsatisfactory”ratingsfor eachof theLendingTest,InvestmentTest,andServiceTest.Examinersfoundthat IBERIABANKmakesarelativelyhighlevelof communitydevelopmentloans,thatithasa goodlevelof qualifiedinvestments,andthatthebankprovidesanexcellentlevelof communitydevelopmentservices. InevaluatingtheLendingTest,examinersfoundthatIBERIABANKoriginatedasubstantialmajorityof itsloanswithinitsassessmentareas,reflectingexcellentassessmentarea penetration.Examinersfoundthatthebank’spenetrationof loansamongborrowers of differentincomelevelsandbusinessesof differentsizeswasadequate.Examinersnoted thatthebankmadeahighlevelof communitydevelopmentloansduringthereviewperiod. Thecommunitydevelopmentloanswereforavarietyof purposes,includingfinancing affordablehousingforLMIindividuals,promotingeconomicdevelopmentbyfinancing smallbusinessesthatresultedinjobcreationand/orretention,revitalizingand/orstabilizing targetedLMIcensustractsorotherqualifiedgeographies,andcommunityservicestargetedtoLMIindividuals.28 IntheNewOrleansassessmentarea,examinersnotedthatIBERIABANK’slendingwas goodoverall.Thegeographicdistributionof thebank’sloansreflectedadequatepenetrationthroughouttheassessmentarea,andthedistributionof loansbyborrowerincomewas consideredtoreflectadequatepenetrationamongindividualsof differentincomelevelsand businessesof differentrevenuesizes.Inaddition,examinersnotedthatthebankwasa leaderinmakingcommunitydevelopmentloansintheNewOrleansassessmentarea,makingloansandinvestmentsinsupportof LMIindividualsandcommunitydevelopment efforts,aswellasprovidinggrantstoassistqualifiedLMIhomebuyerswithdownpayment andclosingcosts.IBERIABANKalsomadesignificantcontributionstosupportentrepreneurship,youthworkforcedevelopment,charterschoolsandfinancialeducation.Examinersnotedthatthebank’sinvestmentsandcontributionsexhibitedresponsivenesstosev- 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 26 12U.S.C.§2906. 27 TheIBERIABANKEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.ExaminersreviewedloansreportableunderHMDAandsmallbusinessloansfortheperiodJanuary1,2011,through December31,2012.TheevaluationperiodforcommunitydevelopmentloansandinvestmentswasJune1, 2011,throughMarch31,2013.DuetoIBERIABANK’ssignificantexpansionandgrowthduringthereview period,thebank’sperformancein2012wasweightedslightlymorethanitsperformancein2011indetermining thefinalratingforlending.TheIBERIABANKEvaluationincludedafull-scopereviewofnineassessment areas:NewOrleans-Metairie-KennerMSA;LafayetteMSA;LittleRock-NorthLittleRock-ConwayMSA; Fayetteville-Springdale-RogersMSA;NorthPort-Bradenton-SarasotaMSA;Naples-MarcoIslandMSA;Birmingham-HooverMSA;Houston-SugarLand-BaytownMSA;Memphis-ForrestCityCombinedStatistical Area. 28 ExaminersfoundthatIBERIABANK’scommunitydevelopmentlendingwasparticularlystronginLouisiana, thebank’shomestate,notingthatthebankpartnerswithacommunitydevelopmentfinancialinstitutionto originateflexiblemortgageproductsforLMIborrowersthroughoutthestate.

LegalDevelopments:FirstQuarter,2015 111 eralidentifiedneeds,includingthedevelopmentof affordablehousingandfinancial stabilityof LMIindividuals. IntheBirminghamassessmentarea,examinersconsideredIBERIABANK’slendingperformancetobegood.Thegeographicdistributionof loansreflectedgoodpenetration throughouttheassessmentareaandthedistributionof borrowersreflectedadequatepenetrationamongindividualsof differentincomelevelsandbusinessesof differentrevenue sizes.Thebankwasalsoconsideredaleaderinmakingcommunitydevelopmentinvestments.ExaminersnotedthatIBERIABANKprovidedarelativelyhighlevelof community developmentservicesintheBirminghamassessmentarea,inwhichbankemployeesprovidedservicehoursinvariouscapacitiesforcommunitydevelopmentorganizations. ExaminersfoundIBERIABANK’sinvestmentperformancetobeexcellentinonestate, goodinthreestates,andadequateintwostates.29Mostof thebank’squalifiedinvestments supportedaffordablehousingthroughthepurchaseof securitiesbackedbygovernmentguaranteedmortgagestoqualifiedLMIborrowers.ThebankinvestedinseveralLow-IncomeHousingTaxCreditprojectsthatprovideaffordablerentalhousingtoLMIindividuals.ExaminersalsonotedthatthebankwasveryinvolvedwithrecoveryeffortsinNew OrleansandacrosstheGulf CoastafterHurricaneKatrina,makinginvestmentsthrough theNewMarketTaxCreditprogramtohelpstabilizeandrevitalizeLMIandothercommunitiesthatwereaffectedbythehurricane.Inaddition,IBERIBANKmadegrantsto providedownpaymentandclosingcostassistancetoLMIborrowers. InevaluatingtheServiceTest,examinersfoundthatIBERIABANK’sperformancewas goodinfourstatesandadequateintwostates.30Examinersfoundthebank’sretaildelivery systemstobereasonablyaccessibletogeographiesandtoindividualsof differentincome levels.Examinersnotedthatthebankoffersseveralretailproductsdesignedtomeetthe financialneedsof lower-incomecustomersandsmallbusinessesandthatthebankparticipatesinorganizedprogramsandotheroutreacheffortstoexpandbankingaccesstoLMI customersacrossitsentirebankingfootprint.Examinersalsofoundthatthebankprovided anexcellentlevelof communitydevelopmentservicesthroughoutitsassessmentareas. Duringthereviewperiod,thebankanditsemployeesprovidedover10,000hoursof communitydevelopmentservicesthroughserviceactivitiesaimedatpromotingorfacilitating affordablehousingforLMIindividuals,economicdevelopment,andtherevitalizationof LMIareas. CRAPerformanceof FloridaBank.FloridaBankwasassignedanoverall“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheReserveBankinOctober2013 (“FloridaBankEvaluation”).31Thebankreceiveda“satisfactory”ratingfortheLending TestandCommunityDevelopmentTest. InevaluatingtheLendingTest,examinersnotedthatasubstantialmajorityof thebank’s loansweremadewithinitsassessmentareas,demonstratingthebank’swillingnesstomeet thecreditneedsof itsassessmentareas.Examinersfoundthatthebank’sgeographicdistri- 29 Examinersfoundthatthebank’sperformanceundertheInvestmentTestwas“excellent”inLouisiana,“good” inAlabama,Arkansas,andTexas,and“adequate”inFloridaandTennessee. 30 Examinersfoundthatthebank’sperformanceundertheServiceTestwas“good”inArkansas,Florida,Louisiana,andTennessee,and“adequate”inAlabamaandTexas. 31 TheFloridaBankEvaluationwasconductedusingIntermediateSmallInstitutionCRAExaminationProcedures.ExaminersreviewedloansreportableunderHMDAandsmallbusinessloansfortheperiodJanuary1, 2012,throughDecember31,2012.Theevaluationperiodforcommunitydevelopmentloans,investments,and serviceactivitieswasAugust1,2011,throughAugust1,2013.TheFloridaBankEvaluationincludedafullscopeevaluationoftheTampa-St.Petersburg-ClearwaterMSA.

112 FederalReserveBulletin|May2015 butionof loansandthedistributionof loansbybusinessincomeandborrowerincome werereasonable.Examinersalsocommentedfavorablyonthebank’sloan-to-depositratio. ExaminersfoundthatFloridaBankdemonstratedadequateresponsivenesstocommunity developmentneedsinitsassessmentareasthroughacombinationof communitydevelopmentloans,qualifiedinvestments,andcommunitydevelopmentservices.Thebank’scommunitydevelopmentlendingwasaimedatprovidingaffordablehousingandpromoting economicdevelopmentbyfinancingsmallbusinesses. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof IBERIABANKandFloridaBankincomplying withfairlendingandotherconsumerprotectionlaws.Aspartof itsevaluation,theBoard reviewedtheIBERIABANKandFloridaBankEvaluations,assessedtherecordsof IBE- RIABANK’sHMDAdata,andconsideredthecommentreceivedontheproposalas wellasotheragencies’viewsontherecordsof performanceof IBERIABANKandFlorida Bankunderfairlendinglaws.TheBoardalsoconsideredIBERIABANK’sfairlending policiesandprocedures.Inaddition,theReserveBankconcludedafairlendingexaminationof IBERIABANKduringthependencyof thisapplication,includingaredlining reviewacrossIBERIABANK’sassessmentareas.32TheBoardhasconsideredthefindings of thatexaminationinitsanalysis. HMDADataandFairLendingAnalysis.ThecommentercriticizedIBERIABANK’srecord of mortgagelendingtominorityindividualsandtominoritycensustractsbasedon2013 HMDAdataforthebank’sNewOrleansandBirminghamassessmentareas.ThecommenterassertedthatIBERIABANK’svolumeof mortgageloanstominoritycommunities, particularlyAfricanAmericans,islowcomparedtothevolumeof loansoriginatedtothese populationsandcommunitiesbytheaggregateof alllendersandcomparedtothedemographicsof theseareas.33 IBERIABANKrespondedbynotingthatintheNewOrleansMSA,its2013HMDAlendinglevelsgenerallyexceededorwerecomparabletothoseof aggregatelenders.Of the25 branchesIBERIABANKoperatesintheNewOrleansassessmentarea,fivearelocatedin LMItracts,andanadditional15branchesarewithincloseproximityof LMItracts.Four of thosebranchesarelocatedintractsinwhichamajorityof thepopulationareminority individuals(“majorityminoritytracts”).Thebankstatedthatitisservingthecommunity reinvestmentneedsinNewOrleansthroughcommunitydevelopmentlending,investments, andservices,particularlyinareasaffectedbyHurricaneKatrina.Thebankreportedthatit madecommunitydevelopment-relatedloansin2013and2014,suchastofinancethe acquisitionanddevelopmentof aformerpublicschoolbuildinginalow-incomecensus tractintoanaffordablemulti-familyrentalpropertyforlow-incomeseniorcitizens.The bankalsoreportedthatitmadeinvestmentsinCRA-eligiblemortgagebackedsecurities andtaxcreditqualifyinginvestments.Inaddition,IBERIABANKstatedthatitsemployees donatedtimetocommunityserviceorganizationsandcharitiesthatserveLMIandminorityindividualsandareasasboardmembers,homebuyereducationcounselors,andfinancialliteracyinstructors. 32 Duringaredliningreview,examinersassesstheriskthataninstitutionisprovidingunequalaccesstocredit, becauseoftherace,color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareain whichthepropertyislocated. 33 Aggregatelendingisdefinedasthenumberofloansoriginatedandpurchasedbyallreportinglendersasapercentageoftheaggregatenumberofloansoriginatedandpurchasedbyallreportinglendersinthemetropolitan orassessmentarea.Inthiscontext,aggregatelendingisconsideredanindicatorofthelendingopportunitiesin thegeographicareainwhichthebankislocated.

LegalDevelopments:FirstQuarter,2015 113 WithrespecttotheBirminghamMSA,IBERIABANKstatedthatin2013itspercentage of loanstominorityindividualsandmajorityminoritycensustractsexceededthoseof the aggregate.Of theninebranchesIBERIABANKoperatesintheBirminghamassessment area,twoareinLMItracts,andanothertwobranchesarewithincloseproximitytoLMI tracts.Twobranchesarelocatedinmajorityminoritytracts.IBERIABANKrepresents that,intheBirminghamassessmentarea,itfundedcommunitydevelopmentloansto financetheconstructionof alow-incomehousingcomplexandtorefinanceanaffordable multifamilyrentalpropertyinamoderate-incomecensustractneardowntownBirmingham.Thebankalsoreportedthatitsemployeesdonatedtimetoavarietyof community organizationsintheBirminghamarea,includinglocalhousingauthorities,publicschools, UnitedWayoffices,andotherserviceorganizations. IBERIABANKstatedthatitmaintainsanactiveoutreachprogramforLMIandminority individualsandcommunitiesacrossallof itsassessmentareas.Thebankhasengagedin directmarketingcampaignstoimprovethevolumeof mortgageapplicationsforLMIand minorityindividuals,androutinelyplacesadvertisementsinlocalpublicationsthatserve minoritycommunities.Inaddition,IBERIABANKemployeesdonatedtimein2014to promotefinancialliteracyintheircommunities.Thebankhasalsojoinedthenationwide “BankOn”initiativeinsixof itsbankingmarkets,includingBirmingham.34Thebankhas createdafinancialproductinconnectionwithitsparticipationinBankOninitiatives,and anticipatesexpandingitsinvolvementinthefuture.IBERIABANKalsoprovidesspecial loanprogramsthatprovidemoreflexibleunderwritingcriteriaforLMIborrowers,and loanclosingassistance. TheBoardbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlending practicesarebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequalaccesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity. AlthoughtheHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,HMDAdataalonedoesnotprovideasufficientbasisonwhichtoconclude whetherthebankexcludedordeniedcredittoanygrouponaprohibitedbasis.35Fully evaluatingabank’scompliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof thebank’sapplicationandunderwritingpoliciesandprocedures,aswellas accesstoinformationcontainedintheloanapplicationfiles,todeterminewhetherthe observedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwriting factors. TheBoardconsideredandplacedgreatemphasisoninformationcollectedby,andonthe assessmentof,theReserveBank’sfairlendingexaminersduringtheirrecentFairHousing Act(“FHA”)fairlendingreviewatIBERIABANK.Examinersfocusedtheirreviewon IBERIABANK’sresidentialmortgagelendingpractices,includingareviewof underwriting,pricing,redlining,andsteeringrisks.ExaminersdeterminedthatIBERIABANKhasa satisfactoryfairlendingcompliancemanagementprogramthathassufficientpoliciesand 34 “BankOn”programsarevoluntarypartnershipsbetweenlocalorstategovernment,financialinstitutions,and community-basedorganizationsthatprovidelow-incomeunbankedandunder-bankedindividualswithfreeor low-coststarteror“secondchance”bankaccountsandaccesstofinancialeducation.InadditiontotheBirminghammarket,IBERIABANKparticipatesintheBankOninitiativeintheBatonRouge,Lafayette,Shreveport,Sarasota,andSouthwestFloridabankingmarkets. 35 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,informationoncredithistory problems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestate collateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)isnotalwaysavailablefrom HMDAdata.

114 FederalReserveBulletin|May2015 proceduresinplaceandiseffectivelyoverseenbythebank’sboardandseniormanagement. Thebank’sinternalcontrolfunctionswereconsideredindependentfromitsbusinesslines, withanappropriateseparationof duties.Thebank’sfairlendingtrainingprogramwas foundtobeeffective,withproceduresinplacetoidentify,report,andresolvefairlending risks. Examinersalsoconductedaredlininganalysis,whichconsideredtheallegationsmadeby thecommenter,innineof IBERIABANK’sassessmentareas,includingNewOrleansand Birmingham.Examinersconductedafour-prongedanalysisforeachassessmentarea,in whichtheyconsideredthelevelof redliningriskbasedonareviewof theappropriateness of thebank’sCRAassessmentarea;thebank’slendingrecord;thebank’sbranchingpattern;andthebank’smarketingandoutreachefforts. FortheNewOrleansassessmentarea,examinersreviewedthebank’s2011,2012,and2013 HMDAdata.Inmajorityminoritycensustracts,IBERIABANK’sloanapplicationsand loanoriginationsgenerallyexceededorwerecomparabletotheaggregate,confirming theinformationprovidedbythebank.Examinersalsoviewedfavorablythebank’soutreacheffortstomajorityminorityareasinthemarket,andfoundthatthebank’sbranching patternsexhibitlowredliningrisk.Overall,examinersconcludedthatthebank’sredlining riskintheNewOrleansassessmentareaislow. FortheBirminghamassessmentarea,examinersreviewedthebank’s2011,2012,and2013 HMDAdata.Inmajorityminoritycensustracts,IBERIABANK’sloanapplicationsand loanoriginationsexceededtheaggregateineachyear,insomecasessignificantly.Examinersfoundthatthebank’slendingpatterniscloselyalignedwiththelocationof itsbranches, andthatitsHMDAlendingisclusteredinthecenterof theassessmentareawherethe majorityminoritytractsareconcentrated.Overall,examinersconcludedthatthebank’s redliningriskintheBirminghamassessmentareaislow. IBERIABANK’sFairLendingProgram.IBERIABANKhasestablishedpoliciesandprocedurestohelpensurecompliancewithallfairlendingandotherconsumerprotectionlaws andregulations,andtheseareconsideredsatisfactoryfromasupervisoryperspective. Thebank’sComplianceDepartmentisresponsibleforestablishingandmaintainingthe bank’sfairlendingpolicyandmanagingitsfairlendingcomplianceprogram.TheComplianceDepartment,togetherwithotherbusinessunits,identifies,plansforandimplements newandrevisedregulations;evaluatesnewandexistingproducts;developsandupdates policiesandprocedures;reviewsadvertisingandmarketingmaterialanddisclosures;identifiescompliancerisksandassistswithriskmitigation;assistswithinternalcompliance auditsandregulatoryexaminations;anddevelops,coordinates,andoverseesthebank’s compliancetrainingprogram,whichisrequiredforallstaff,management,andboard members. TheComplianceDepartmentconductsanannualglobalriskassessmentthatidentifiesand measuresriskinherentinthebank’slendingprocessesanddeterminestheappropriate controlsandmonitoringnecessarytomitigatethoserisks.Thebankusessoftwaretoconductstatisticalreviewsandanalysesthatgenerallyincludefocalpointanalysis,regression analysis,comparativefilereviews,mapping,andredlininganalyses.Theseanalyses,which areconductedseparatelyforHMDAdata,creditcards,smallbusinessloans,andother products,includedatapointssuchascreditscores,loan-to-valueratiosanddebt-to-value ratios.Pricing-andunderwriting-overridereviewsarealsoanalyzedtodeterminewhether individuals’protectedclassattributesaffecttheabilitytoreceiveanoverride.

LegalDevelopments:FirstQuarter,2015 115 IBERIABANKmaintainsasecondaryreviewprocessforallloandenials.Thesecond reviewisconductedtoensurethatthebank’slendingstandardsareappliedfairlyanduniformlytoallapplicants,thatallpossibleavenuesof approvalhavebeenexploredpriorto formaldenial,andthattheapplicationwasnotdeniedbasedontheapplicant’srace, sex,sexualorientation,color,nationalorigin,religion,age,maritalstatus,disabilityorother prohibitedbasis.Thesecondreviewisconductedbyanunderwriterwithin10daysof the originalloandenial,andthedenialandsecondreviewarebothdocumentedintheloanfile. If thesecondreviewconcludesthattheapplicantqualifiesfortheloanortheremaybe alternativeloanoptions,theapplicationisredirectedforfurtherprocessing. TheComplianceDepartmentalsoconductsreviewsanalyzingthepoliciesgoverningthe bank’slendingactivitiesandtheuseandappropriatenessof itsloanproducts.Theanalysis includesareviewtodeterminewhetherthepoliciesandprocedurescouldresultinlending discriminationacrossthebank’slendingareasandwhetherthepoliciesandprocedures provideconsistencythroughouttheapplicationandcreditapprovalprocess. C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. IBKCrepresentsthattheproposalwouldprovidecustomersof thecombinedorganization accesstoanexpandedbranchnetworkandwouldofferadditionalorexpandedservicesto currentFloridaBankcustomers,includingexpandedinternetandmobilebankingservices andcustomerserviceavailability.Thecombinedorganizationwouldalsoofferconsumer loanandretaildepositproductsnotcurrentlyofferedtoFloridaBankcustomers.Several of theseloanproductsarespecificallytargetedtoLMIcustomers,includinghomeimprovementloans,creditbuilderloans,andexpandedhomemortgageoptions,includingFHA andVAproductlinesandotherlowdownpaymentprogramstargetedtofirst-timehomebuyers.Thebankwouldalsoofferanexpandedlineof low-costretaildepositaccount options,includinga“secondchance”depositaccountdesignedtoprovideanentry-level accountforunbankedandunderbankedindividuals. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyIBERIABANK,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonthe Board’sevaluationof theHMDAdata,evaluationof thelendingoperationsandcomplianceprogramsof IBERIABANKandFloridaBank,reviewof examinationreports, andallthefactsof record,theBoardbelievesthattheconvenienceandneedsfactor,includingtheCRArecordof theinsureddepositoryinstitutionsinvolvedinthistransaction,is consistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha

116 FederalReserveBulletin|May2015 proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof 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,IBERIABANKwouldhaveapproximately $16billioninconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.TheBoard generallypresumesthatamergerresultinginafirmwithlessthan$25billioninconsolidatedassetswillnotposesignificantriskstothefinancialstabilityof theUnitedStates absentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactors arenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches IBERIABANKhasappliedundersection9of theFRAtoestablishbranchesatthecurrentbranchlocationsof FloridaBank.TheBoardhasassessedthefactorsitisrequiredto considerwhenreviewinganapplicationundersection9of theFRA.39Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobeconsistentwithapproval. 36 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 37 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 39 12U.S.C.§322;12CFR208.6.Specifically,theBoardhasconsideredIBERIABANK’sfinancialcondition, management,capital,actionsinmeetingtheconvenienceandneedsofthecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Inaddition,uponconsummationoftheproposedtransaction, IBERIABANK’sinvestmentsinbankpremiseswouldremainwithinlegalrequirementsunder12CFR208.21.

LegalDevelopments:FirstQuarter,2015 117 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.40Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyIBKCandIBERIABANKwithall theconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals, andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposed inwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch, maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary13,2015. Votingforthisaction:ChairYellen,GovernorsTarullo,Powell,andBrainard.Absentand notvoting:ViceChairmanFischer. MargaretMcCloskeyShanks DeputySecretaryof theBoard Hillister Enterprises, II, Inc. Beaumont, Texas Umphrey II Family Limited Partnership Beaumont, Texas CBFH, Inc. Orange, Texas OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2015–02(January15,2015) CBFH,Inc.(“CBFH”),Orange,anditstop-tierandimmediateparentcompanies,Hillister Enterprises,II,Inc.(“Hillister”)andUmphreyIIFamilyLimitedPartnership (“Umphrey”),bothof Beaumont,allof Texas(collectively,“Applicants”),haverequested 40 AcommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCActdoes notrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR 225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities. Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.IntheBoard’s view,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitteda writtencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons, andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

118 FederalReserveBulletin|May2015 theBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to acquireMCBancshares,Inc.(“MCBancshares”)andtherebyindirectlyacquireitssubsidiary,MemorialCityBank,bothof Houston,Texas.Undertheproposal,MCBancshares wouldbemergedintoCBFH,andMemorialCityBankwouldbemergedintoCBFH’s whollyownedsubsidiary,CommunityBankof Texas,NationalAssociation(“Community- Bank”),Beaumont,Texas;CBFHandCommunityBankwouldbethesurvivingentities.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(79FederalRegister21930(2014)).3Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. CBFH,withconsolidatedassetsof approximately$2.6billion,isthe295thlargestinsured depositoryorganizationintheUnitedStates,controllinglessthan1percentof nationwide deposits.CBFHcontrolsCommunityBank,whichoperatesonlyinTexas.CommunityBank isthe28thlargestinsureddepositoryinstitutioninTexas,controllingapproximately $2.2billionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.4 MCBancshares,withconsolidatedassetsof approximately$289million,controlslessthan 1percentof nationwidedeposits.MCBancsharescontrolsMemorialCityBank,which operatesonlyinTexas.MemorialCityBankisthe206thlargestinsureddepositoryinstitutioninTexas,controllingapproximately$259millionindeposits,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof theproposal,CBFHwouldbecomethe278thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$2.8billion, whichrepresentlessthan1percentof thetotalamountof assetsof insureddepository institutionsintheUnitedStates.InTexas,CBFHwouldbecomethe26thlargestdepositoryorganization,withtotaldepositsof approximately$2.5billion. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.5 1 12U.S.C.§1842.HillisterandUmphreydonothaveanyoperations,employees,orinvestmentsotherthanthe controllingownershipofCBFH. 2 ThemergerofMemorialCityBankintoCommunityBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”)undertheBankMergerAct.12U.S.C.§1828(c).TheOCCapprovedthebank mergeronMay22,2014(LetterfromKarenH.Bryant,DeputyDirectorforDistrictLicensing,SouthernDistrict,toPatrickR.Hanchey,BracewellandGiulianiLLP(May22,2014)).OnMay20,2014,acommenterprotestedtheapprovaloftheholdingcompanyapplicationbutnotthebankmergerapplication. 3 12CFR262.3(b). 4 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,cooperativebanks,industrialbanks,andsavingsbanks. 5 12U.S.C.§1842(c)(1).

LegalDevelopments:FirstQuarter,2015 119 CommunityBankandMemorialCityBankcompetedirectlyintheHouston,Texasbankingmarket(the“Houstonbankingmarket”).6TheBoardhasconsideredthecompetitive effectsof theproposalinthisbankingmarketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebanking market;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket (“marketdeposits”)controlledbyApplicantsandMCBancshares;7theconcentrationlevelsof marketdepositsandtheincreaseinthoselevels,asmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”);8andothercharacteristicsof the market. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothparent-only andconsolidatedbases,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,theBoardconsiders capitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerial resourcesandtheproposedbusinessplan. Inthiscase,CBFHandCommunityBankarebothwellcapitalizedandwouldremainsoon consummationof theproposedacquisition.Theproposedtransactioninvolvestheacquisitionandmergerof abankholdingcompanyanditssubsidiarybankandisstructuredasa cashtransaction.Theassetquality,earnings,andliquidityof CommunityBankandMemorialCityBankareconsistentwithapproval,andCBFHappearstohaveadequateresources toabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’ operations.Basedonitsreviewof therecord,theBoardfindsthattheCBFHorganization hassufficientfinancialresourcestoeffecttheproposal.9 6 TheHoustonbankingmarketincludesAustin,Brazoria,Chambers,FortBend,Galveston,Harris,Liberty, Montgomery,SanJacinto,andWallercounties. 7 Deposit,marketshare,andrankingdataareasofJune30,2014,and,unlessotherwisenoted,arebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989),andNationalCity Corporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsin themarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserve Bulletin52(1991). 8 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. 9 Theaggregatecashconsiderationtobepaidinconnectionwiththeproposalisapproximately$56.4million, andCBFHhassufficientresourcestofundtheproposedtransaction.

120 FederalReserveBulletin|May2015 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of CBFH,MCBancshares,andtheirinsureddepositoryinstitutionsubsidiaries,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbank supervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws. CBFH,MCBancshares,andtheirinsureddepositoryinstitutionsubsidiariesareeachconsideredtobewellmanaged.CBFH’sexistingrisk-managementprogramanditsdirectorate andseniormanagementareconsideredtobesatisfactory.Theseniorexecutiveofficersof CBFHandMCBancshareshavesubstantialknowledgeof andexperienceinthebanking sector. TheBoardalsohasconsideredCBFH’splansforimplementingtheproposal.CBFHhasa demonstratedrecordof successfullyintegratingorganizationsintoitsoperationsandriskmanagementsystemsfollowingacquisitions.CBFHwouldimplementitsrisk-management policies,procedures,andcontrolsatthecombinedorganization,andtheseareconsidered acceptablefromasupervisoryperspective.Inaddition,CBFH’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsound manner,andCBFHisproposingtointegratetheMCBancsharesorganization’sexisting managementandpersonnelinamannerthataugmentsCommunityBank’smanagement.10 CBFH’ssupervisoryrecord,managerialandoperationalresources,andplansforoperating thecombinedinstitutionafterconsummationprovideareasonablebasistoconcludethat managerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof CBFHandMCBancsharesincombattingmoney-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 CommunityBankandMemorialCityBank,otherinformationprovidedbyApplicants,confidentialsupervisoryinformation,andthepubliccomment 10 Onconsummation,fiveindividualscurrentlyservingasmanagementofficialsoftheMCBancsharesorganizationwillbeaddedtoCommunityBank’smanagementteam. 11 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 12 12U.S.C.§2901(b). 13 12U.S.C.§2903.

LegalDevelopments:FirstQuarter,2015 121 receivedontheproposal.TheBoardreceivedonecommentthatobjectedtotheproposal, allegingboththattheproposedacquisitiondoesnothaveclearlydemonstratedpublicbenefitsandthatCommunityBankisnotmeetingtheneedsof LMIandminoritycommunities intheBeaumont-PortArthurMetropolitanStatisticalArea(“Beaumont-PortArthur MSA”)asreflectedin2012HMDAdata. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.14TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.15Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof CommunityBank.CommunityBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheOCCinJanuary2013 (“CommunityBankEvaluation”).CommunityBankreceiveda“highsatisfactory”rating fortheLendingTestand“lowsatisfactory”ratingsforboththeInvestmentTestandthe ServiceTest.16 WithrespecttotheLendingTest,examinersobservedthatCommunityBank’sprimary lendingfocuswasoncommercialandsmallbusinessloans17andfoundthatthebank’s smallbusinesslendingactivityinboththeBeaumontandHoustonassessmentareaswas good.Thebankhadgoodperformanceinfundingsmallloans(lessthanorequalto$1million)tobusinessesinmoderate-incomecensustractsfortheBeaumontassessmentareaand excellentperformanceintheHoustonassessmentarea. ExaminersnotedthatCommunityBank’soveralldistributionof homepurchaseloansby census-tractincomelevelwasadequate.IntheHoustonassessmentarea,CommunityBank hadadequatetogoodperformanceinLMIcensustractswithrespecttooriginationsof homepurchase,improvement,andrefinanceloans.IntheBeaumontassessmentarea, examinersnotedareasforimprovementinoriginationsforhomepurchaseandhome improvementloanstoborrowerslocatedinLMIcensustracts. Examinersdidnotidentifyanyunexplainedorconspicuousgapsingeographicdistribution of CommunityBank’shomemortgageandsmallbusinessloanproducts.Further,examinersnotedthatthebank’scommunitydevelopmentlending,whichincludedaffordablehous- 14 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 15 12U.S.C.§2906. 16 Theevaluationwaspreparedusingtheinteragencyevaluationproceduresforlargeinstitutions.Theevaluation periodfortheLendingTestwasfromJanuary1,2009,throughDecember31,2011,exceptforcommunity developmentloans.TheInvestmentTest,theServiceTest,andthereviewofcommunitydevelopmentloans coveredtheperiodfromJuly13,2009,throughJanuary28,2013.Theevaluationincludedafull-scopereviewof boththeBeaumontandHoustonassessmentareasandalimited-scopereviewoftheBeaumontNon-MetropolitanStatisticalArea. 17 Atthetimeoftheevaluation,commercialrealestateloansandcommercialloansrepresentedapproximately 70percentofCommunityBank’sloanportfolio.One-tofour-familyandmultifamilylendingrepresented 12percentoftheportfolio,andconstructionandlanddevelopmentloansrepresented11percent.Consumer lendingrepresents4.7percent.Allotherloanoriginationsaccountedforlessthan1percentofthebank’sloan portfolio.

122 FederalReserveBulletin|May2015 ingloansthatbenefitedlow-andmoderate-incomefamiliesinbothassessmentareas,wasa positivecontributingfactortoexaminers’overallassessmentof theLendingTest. WithrespecttotheInvestmentTest,OCCexaminersfoundthatCommunityBank’slevelof qualifiedcommunitydevelopmentinvestmentswasadequateinboththeBeaumontand Houstonassessmentareas.Examinersnotedthatqualifyinginvestmentshelpedfundseveralprograms,includingaffordablehousing,socialandhealthservices,andeconomicdevelopment.Examinersnotedroomforimprovementbythebankinmakingmorecomplex andinnovativeinvestmentsandinmakinginvestmentsintheHoustonassessmentarea. WithrespecttotheServiceTest,OCCexaminersconcludedthatCommunityBankdemonstratedlowsatisfactoryperformanceinprovidingcommunitydevelopmentservicesinthe BeaumontandHoustonassessmentareas.Nevertheless,examinersdeemedthebank’s deliverysystemstobereasonablyaccessibletobusinessesandindividualsof different incomelevelsanddifferentgeographiesintheassessmentareas.Inaddition,examiners notedthatCommunityBank’seffortsdemonstratedacommitmenttocommunitydevelopmentthroughitsprovisionof technicalassistanceonfinancialandbanking-relatedmatters tocommunitygroupsintheBeaumontassessmentarea. MemorialCityBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheFederalDepositInsuranceCorporation(“FDIC”)inFebruary2013(“MemorialCityBankEvaluation”).18 CRAPerformanceof MemorialCityBank.Theevaluationassessedthefollowingperformancefactors:loan-to-depositratio,lendingconcentrationinsidetheassessmentarea,borrowerprofileloandistribution,geographicloandistribution,andresponsetoconsumer complaints.FDICexaminersconcludedthatMemorialCityBankdemonstratedareasonablerecordregardingitsaveragenetloan-to-depositratio;anadequaterecordof concentratingitsloansinsideitsassessmentarea,whichwassupportedbyanadequaterecordof smallbusinessloans;areasonablerecordregardingitsborrowerprofileloandistribution, basedonitsreasonablerecordregardingsmallbusinessloans;andcouldimproveitsrecord of geographicallydistributingitsloans,particularlywithrespecttothedispersionof small businessloansthroughouttheassessmentarea.FDICexaminersalsonotedthatthebank didnotreceiveanyCRA-relatedcomplaintssincethepreviousevaluation. B.FairLendingRecordandPublicCommentontheProposal TheBoardhasconsideredtherecordof CommunityBankincomplyingwithfairlending andotherconsumerprotectionlaws.Aspartof thisevaluation,theBoardreviewedthe CommunityBankandtheMemorialCityBankEvaluationsandconsideredthecomment ontheapplication,theApplicants’response,andtheOCC’sviewonCommunityBank’s recordof performanceunderthefairlendinglaws.TheBoardconsideredCommunity- Bank’sfairlendingpoliciesandproceduresandconfidentialsupervisoryinformation,and conferredwiththeOCCconcerningthecommentreceivedontheproposal. Thecommenterexpressedconcerns,basedon2012HMDAdata,thatCommunityBank wasnotmeetingthecreditneedsof LMIandminoritycommunitiesintheBeaumont-Port ArthurMSA.Inparticular,thecommenterallegedthat,comparedtotheaggregateof all lendersintheBeaumont-PortArthurMSA,CommunityBankmadealesserproportionof 18 TheMemorialCityBankEvaluationwasconductedusingSmallBankCRAevaluationproceduresinMemorialCityBank’ssingleassessmentarea,whichcomprisesthemajorityofthewesternportionofHarrisCounty intheHouston-SugarLand-BaytownMSAinTexas.TheevaluationcoveredtheperiodfromJanuary19,2010, throughFebruary4,2013.

LegalDevelopments:FirstQuarter,2015 123 primehomemortgageloanstoAfricanAmerican,Hispanic,andLMIborrowersandborrowersinLMIcensustracts.19 ApplicantscontendthatHMDAlendingdatadonotfairlyrepresentCommunityBank’s CRAperformancebecausehomemortgageloansmakeuponlyapproximately14percent of thebank’slendingactivities,while70percentof itslendingistosmallandmedium-sized businesses.ApplicantsalsorepresentthatCommunityBankhasnotreceivedanyconsumer complaints,comments,orotherallegationsfromlocalcommunity-basedorganizations regardingthebank’sCRAperformanceornon-compliancewithfairlendinglawsor regulations. ApplicantsalsonotethatCommunityBankengagedinmarketingcampaignsin2013and 2014toreachhistoricallyunderserveddemographicsforbusinessandmortgagelendingin theHoustonandSoutheastTexasmarketsservedbythebank.20Thebankaddedseveral loanproductstoassistinservingLMIandruralmarketsinthefirsthalf of 2014.Inaddition,CommunityBankhaspurchasednewlyoriginatedLMIwhole-loanmortgages. TheBoardnotesthattheCRAdoesnotrequireinsureddepositoryinstitutionstoengage inanyparticulartypeof creditactivity,andinsteadencouragesinstitutionstoservethe creditneedsof theentirecommunity.TheBoardhasrecognizedthatinstitutionsmaymeet theseresponsibilitiesbyprovidingcredittosmallbusinessesthroughouttherelevant community. Nevertheless,theBoardisconcernedwhenHMDAdataforaninstitutionmayindicate lendingdisparitiesandbelievesthatalllendinginstitutionsareobligatedtoensurethat theirlendingpracticesarebasedoncriteriathatareconsistentwithsafeandsoundlending butalsoprovideequalaccesstocreditbycreditworthyapplicants,regardlessof theirrace orethnicity.AlthoughtheHMDAdatamayreflectcertaindisparitiesintheratesof loan applications,originations,anddenialsamongmembersof differentracialorethnicgroups incertainlocalareas,HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherCommunityBankexcludedordeniedcredittoanygrouponaprohibited basis.21 Becauseof thelimitationsof HMDAdata,theBoardalsohasconsideredotherinformation,includingexaminationreportsthatprovideon-siteevaluationsof complianceby CommunityBankwithfairlendinglawsandregulations.TheBoardhasconsideredthat CommunityBank’sHMDAdatawerereviewedandconsideredbyexaminersintheOCC’s 19 ThecommenteralsoassertedthatCommunityBank’slendingactivitiesdidnotreflectanappropriatebalance betweenprimeandhigh-pricedloans.Inresponse,ApplicantsexplainedthatCommunityBankhadformeda mortgagedepartmenttoservecommerciallendingclientsthatrequestedresidentialmortgages,ratherthan referringsuchclientstocompetitors,andthathigh-pricedmortgageloanshadresultedfromthefactthatthe bankpreviouslyhadofferedonlyonemortgageloanproductthatitretainedinitsloanportfolio(“portfolio product”),whichCommunityBankstoppedofferinginAugust2013.Currently,CommunityBankoffers twomortgageportfolioproductsthataredesignednottogeneratehigh-pricedloans.Applicantsalsoindicated thattheydonotintendtoallowtheseproductstobecomeHigherPricedCoveredTransactions(i.e.,high-priced loans)undertheConsumerFinancialProtectionBureau’sAbility-to-RepayandQualifiedMortgage regulations. 20 ThecampaignsincludeddirectmailandprintadsinpublicationsthatspecificallytargetedHispanicandAfrican-Americancommunities. 21 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthandootherinstitutions,anddonotprovideabasisfor anindependentassessmentofanapplicant’screditworthiness.Inaddition,dataoncredithistoryproblems, excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral (thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data.

124 FederalReserveBulletin|May2015 January2013CRAperformanceevaluation.Thisevaluationbyexaminersfoundnoevidenceof discriminatorylendingpractices. TheBoardalsohasconsultedwiththeOCCwithrespecttoCommunityBank’srecordof fairlendingperformancesincetheCommunityBankEvaluation.Inthisregard,sinceits January2013CRAexamination,CommunityBankhasundertakenanumberof measures toincreaseitshomemortgagelendingtoLMIandminorityindividualsandcommunities, includingdirect-mailmarketingcampaignstothesecommunitiespromotingthebank’s homemortgageproducts,printadvertisementsinpublicationstargetingHispanicandAfricanAmericancommunities,andthedevelopmentof anew“CommunityDevelopment HomeImprovementLoan”productdesignedtomeettheneedsof LMIhomeowners.In addition,asnotedabove,thebankreplacedaportfolioproductthatgeneratedhigherpricedmortgageloanswithportfoliohomemortgageproductsthataredesignednotto generatehigher-pricedloans.Thebankalsohasaugmenteditsconsumercompliance, includingitsfairlending,infrastructure.Forexample,thebankrecentlyhiredachief complianceofficerwithextensivelargebankexperience.Inaddition,thebankhasapprovedor hiredadditionalexperiencedcomplianceofficers. CommunityBank’sFairLendingProgram.ApplicantsindicatethatCommunityBankhas institutedaconsumercomplianceandfairlendingprogram,withpolicies,procedures,and practicestoensurecompliancewithfairlendinglawsandthatcreditstandardsandpolices arefairandresponsivetoallapplicants.Thisincludesasecond-levelreviewprocessforall approvals,declines,andcounteroffersrelatedtoallconsumerloansandalldeclined mortgageloans.Inaddition,thebank’spoliciesrequireallconsumerloanstohavestandardizedterms,underwritingcriteria,andpricing,withnodiscretionbyloanofficersto varytheterms.Applicantsindicatedthatanyexceptionsmustbejustified,documented, andapprovedbythebank’sfairlendingofficer,andtheexceptionsaremonitoredand reportedtotheboardof directorsonaquarterlybasis.22CommunityBank’srisk-managementsystemsanditspoliciesandproceduresforassuringcompliancewithfairlendinglaws wouldbeimplementedatthecombinedorganization. C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Thecommenterallegedthattheproposedacquisitiondoesnothaveclearlydemonstratedpublicbenefits. Applicantsrepresentthatthecombinedorganizationwouldhavetheabilitytodelivera morein-depthmenuof productsandservicestocustomerscurrentlyservedbyMemorial CityBank,thusprovidingcustomersgreaterconveniencethroughaccesstoabroader rangeof financialproductsandservices.MemorialCityBank’scustomersalsowouldhave accesstoCommunityBank’scallcenterandmobileapplications,whichwouldincrease accesstobankingservices;significantlylargerbranchandATMnetworks;andalarger legallendinglimit.Moreover,Applicantsstatethattheproposalwouldprovideopportunitiestoachievecostsavingsforthecombinedorganizationbyconsolidatingredundantfunctions,includingretailcreditunderwritinganddataprocessing.Applicantsalsonotethat thecombinedorganizationwouldbeabletoprovidecustomerswithbankingbenefits throughmoreefficientandcost-effectiveprovisionsof bankingservicesandwouldbeable 22 Mortgageloanexceptions,inparticular,aremonitoredandreportedtotheDirectorsLoanCommittee quarterly.

LegalDevelopments:FirstQuarter,2015 125 todedicateadditionalresourcestomeetingthebankingneedsof MemorialCityBank customers. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,informationprovidedbyApplicants,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonthe Board’sreviewof examinationreportsandtheCRArecordsof theinsureddepository institutionsinvolvedinthistransaction,andonitsconsultationswiththeOCC,theBoard concludesthattheconvenienceandneedsfactor,includingtheCRArecordsof theinstitutionsinvolved,isconsistentwithapprovalof theapplication.TheBoardencouragesCommunityBanktocontinuetoseekopportunitiestoassistinmeetingthecreditneedsof the communitiesitserves. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”23 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.24These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.25 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,CBFHwouldhave approximately$2.8billioninconsolidatedassets,andbyanyof anumberof alternative measuresof firmsize,CBFHwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStates absentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactors arenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor 23 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 24 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 25 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

126 FederalReserveBulletin|May2015 financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.26Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebytheApplicantswithalltheconditionsimposedinthisOrder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicable law. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Dallasactingpursuanttodelegated authority. Byorderof theBoardof Governors,effectiveJanuary15,2015. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard KSRS, LLC Osceola, Missouri OrderApprovingtheFormationof aBankHoldingCompany FRBOrderNo.2015–12(March23,2015) KSRS,LLC(“KSRS”),Osceola,Missouri,hasrequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tobecomeabankholdingcompanybyretaining32.11percentof thevotingsharesof BancorpII,Inc.(“Bancorp”),KansasCity,Missouri,andtherebyindirectlyretainingcontrolof itssubsidiarybank,Citizens CommunityBank,PilotGrove,Missouri. 26 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(a)(1).

LegalDevelopments:FirstQuarter,2015 127 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister32956(2014)).2Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. KSRSisanewlyorganizedlimitedliabilitycompanyformedforthepurposeof acquiring controlof Bancorp.Bancorp,withconsolidatedassetsof approximately$106.2million,is the4,455thlargestinsureddepositoryorganizationintheUnitedStates,controlling approximately$94.9millionindeposits.3BancorpoperatesonlyinMissouri.Citizens CommunityBankisthe186thlargestinsureddepositoryinstitutioninMissouri,controllingdepositsof approximately$94.9million,whichrepresentlessthan1percentof total depositsof insureddepositoryinstitutionsinthatstate.4 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.5 TheDepartmentof Justicehasconductedareviewof thepotentialcompetitiveeffectsof theproposalandadvisedtheBoardthatitdoesnotbelievethatconsummationof theproposalislikelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbanking market.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunity tocommentandhavenotobjectedtotheproposal. KSRSdidnotpreviouslycontroladepositoryinstitutionanddoesnotcurrentlycontrol anyotherdepositoryinstitution.Basedonallof thefactsof record,theBoardconcludes thatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly, theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolved, aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavariety of information,includingcapitaladequacy,assetquality,andearningsperformance.The Boardalsoevaluatestheeffectof thetransactiononthefinancialconditionof theapplicant,includingitscapitalposition,assetquality,liquidity,andearningsprospects,andthe impactof theproposedfundingof thetransaction.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefuture 2 12CFR262.3(b). 3 Assetandnationwidedeposit-rankingdataareasofDecember31,2014,unlessotherwisenoted. 4 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations. 5 12U.S.C.§1842(c)(1).

128 FederalReserveBulletin|May2015 prospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. TheBoardalsohasconsideredthemanagerialresourcesof theapplicantandthepublic commentreceivedontheproposal.TheBoardreceivedacommentobjectingtotheproposalprincipallyongroundsinvolvingthemannerinwhichKSRSacquiredtheBancorp shares.KSRSacquiredfromanotherfinancialinstitutionadefaultednote(the“Note”)on whichthecommenterwastheobligor,securedby32.11percentof Bancorpshares.The commenteralsoopposedtheproposalonseveralothergroundsrelatedtoallegedactionsof KSRSanditsprincipals.Inparticular,thecommenterallegedthat,priortoacquiringthe Note,theprincipalsof KSRSviolatedtheChangeinBankControlAct(“CIBCAct”)6 when,actinginconcertwithagroupof investorsin2011,theyacquiredsharesof Bancorp withoutregulatoryapproval.7Thecommenteralsoarguedthatoneof theprincipalsof KSRSbreachedhisfiduciarydutiestoBancorpbyusinginformationgainedinhiscapacity asaBancorpdirectortopurchasetheNote.8 Inconsideringthemanagerialresourcesof theapplicant,theBoardalsoconsideredinformationprovidedbytheapplicant.Asaninitialmatter,theBoardnotesthatanacquisition of aloanindefaultthatissecuredbyvotingsecuritiesof astatememberbankorbank holdingcompanyisconsideredanacquisitionof thosesecurities.9KSRSrepresentedthat itsprincipalswereunawarethatacquiringtheNoterequiredpriorapprovalof theFederal ReserveundertheBHCActortheCIBCAct.KSRSstatedthatitsprincipalsthought, basedonadvicereceivedfromabankregulatoryconsultant,thatregulatoryapproval wouldonlyberequiredpriortodirectlyacquiringBancorpshares. AfteracquiringtheNote,KSRSconductedapublicauctionfortheBancorpsharesin whichitwasthewinningbidder.Underthetermsof theauction,thewinningbiddercannotconsummatethetransactionuntilreceivingregulatoryapprovaltoacquiretheshares. Accordingly,KSRSfiledtheBHCActapplicationfollowingtheauction. KSRSrepresentsthatitsprincipalacquiredinformationabouttheNoteinhispersonal capacityandthathedidnotusehispositionasadirectorof BancorptobenefitKSRSin thetransaction.Further,KSRSrepresentsthat,priortoacquiringtheNote,itsprincipal informedBancorp’sshareholdersanddirectorsabouttheopportunitytopurchasethe Note,andtheydeclinedtheopportunity. 6 12U.S.C.§1817(j). 7 ApersonorpersonsactinginconcertmustseektheBoard’sapprovalpriortoacquiringcontrolofastate memberbankorbankholdingcompany.See12CFR225.41(c)(1).TheBoardconsidersanacquisitionof 25percentormoreofanyclassofvotingsecuritiestobeanacquisitionofcontrolrequiringpriorapproval, andalsopresumesthatthereisanacquisitionofcontrolwhenapersonorpersonsactinginconcert acquire10percentormoreofanyclassofvotingsecuritiesofaninstitutionandnootherpersonwillown,control,orholdthepowertovoteagreaterpercentageofanyclassofthatinstitution’svotingsecurities.See 12CFR225.41(c)(1)and(c)(2)(ii).Basedontheevidenceintherecord,evenassumingthevariouspartiesidentifiedbythecommenterwereagroupactinginconcertin2011,thisgroupintheaggregateownedlessthan 25percentofthevotingsecuritiesofBancorpandanothershareholderownedagreaterpercentageofBancorp’sshares.Thus,thecontroldefinitionandpresumptionswouldnotappeartohavebeentriggered.Inlight oftheevidenceintherecordandtheBoard’srulesandpresumptionsofcontrol,thereisinsufficientevidence toconcludethattheprincipalsofKSRSviolatedtheCIBCActin2011. 8 ThecommenteralsoallegedthattheauctionthatKSRSheldtoselltheBancorpsharessecuringtheNotewas notconductedinacommerciallyreasonablemanner.KSRSrepresentsthatitappropriatelyexerciseditsrights underthetermsoftheNoteandconductedtheauctioninaccordancewithstatelaw.Thecommenteralso claimedthatKSRSviolatedthetermsofashareholderagreementwhenconductingtheauctionandthat KSRS’spurchaseoftheNoteinjuredshareholdersbypreventingthesaleofBancorptoanotherpotentialpurchaser.Theseallegationsrelatetoprivatedisputesinvolvingstatecontractandcorporatelawandmaybeadjudicatedbyacourtwithcompetentjurisdiction.SeeWesternBancshares,Inc.v.BoardofGovernors,480F.2d 749(10thCir.1973). 9 12CFR225.41(e).

LegalDevelopments:FirstQuarter,2015 129 TheBoardhasalsoconsidereddocumentsconcerningthemannerinwhichKSRSacquired theNoteandconductedtheauction,disclosuresmadebyKSRStoBancorp’sboardof directorsandshareholdersregardingtheNoteandtheauction,andstatelawrequirements. TheBoardalsoconsideredtheregulatoryguidancereceivedbyKSRS’sprincipals,and commitmentsmadebyKSRStotheBoard.Further,theBoardhasconsideredconfidential supervisoryinformationregardingKSRSandBancorp,itssupervisoryexperienceswiththe principalsof KSRSandtheirrecordsof compliancewithapplicablebankingandantimoney-launderinglaws,aswellasKSRS’splanfortheacquisition.KSRShascommitted toseekadvicefromappropriateregulatoryagenciesandthird-partybankingorprofessionaladvisorspriortomakinganyfutureinvestmentsinanyotherbankorbankholding companystock. TheBoardhasreviewedtheexaminationrecordsof BancorpandCitizensCommunity Bank,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof other relevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliance withapplicablebankingandanti-money-launderinglaws. BancorpandCitizensCommunityBankarebothconsideredtobewellmanaged.Bancorp’sexistingrisk-managementprogramanditsdirectorateandseniormanagementare consideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Bancorphave substantialknowledgeof andexperienceinthebankingandfinancialservicessectors. KSRSrepresentsthatithasnoplanstoeffectsignificantchangesinmanagementateither BancorporCitizensCommunityBank. Basedonallthefactsandcircumstances,theBoardconcludesthatmanagerialresources areconsistentwithapproval.Inaddition,KSRS’smanagerialandoperationalresources,as wellasthesupervisoryrecordof BancorpandCitizensCommunityBank,provideareasonablebasisonwhichtoconcludethatfutureprospectsareconsistentwithapproval. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolved,as wellastherecordsof effectivenessof BancorpandCitizensCommunityBankincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).10TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,11and requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.12 10 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 11 12U.S.C.§2901(b). 12 12U.S.C.§2903.

130 FederalReserveBulletin|May2015 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof CitizensCommunityBank,otherinformationprovidedbyKSRS, andconfidentialsupervisoryinformation. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorof theCRAperformancerecordsof thatinstitution.13TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting thecreditneedsof itsentirecommunity,includingLMIneighborhoods.14Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CitizensCommunityBankwasassignedanoverallratingof “satisfactory”atitsmost recentCRAperformanceevaluationbytheFDICinMarch2014.15 CRAPerformanceof CitizensCommunityBank.Examinersdeterminedthatthebank’s averagequarterlynetloan-to-depositratiowasreasonablegiventhebank’sassetsize, financialcondition,andassessmentareacreditneeds.Inaddition,examinersfoundthata majorityof loanssampledweremadewithintheassessmentarea,illustratingareasonable commitmenttomeetingthecreditneedsof thelocalcommunity.Examinersalsonotedthat thebank’sgeographicdistributionof lendingreflectedareasonabledispersionthroughout theassessmentarea.Further,thebank’slendingdistributiontoborrowersreflectedexcellentpenetrationamongfarmoperationsof differentsizesandindividualsof different incomelevels,aswellasreasonablepenetrationamongcommercialbusinessesof different sizes. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. KSRSrepresentsthatthisproposalallowsBancorpandCitizensCommunityBanktocontinuetobelocallycontrolled,andthattheacquisitionof theNotestabilizedownershipof Bancorp.Further,KSRShasnoplanstoeffectsignificantchangesinmanagementateither organization.KSRSbelievesthatsuchcontinuityinownershipandmanagementisinthe bestinterestsof thecommunitiesservedbyCitizensCommunityBank.Further,KSRSrepresentsthatCitizensCommunityBankhashistoricallyreceivedsatisfactoryratingsduring itsCRAexaminationsandthatitdoesnotanticipateundertakinganynewprograms, activities,orproductsthatwouldundermineitsconsistentlysatisfactoryratings. 13 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 14 12U.S.C.§2906. 15 CitizensCommunityBank’sCRAevaluationwasconductedusingSmallInstitutionCRAExaminationProcedures,andexaminersreviewedthebank’slendingactivityfromDecember8,2008,throughMarch10,2014.

LegalDevelopments:FirstQuarter,2015 131 C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingthereportsof examinationof theCRArecordof theinstitutioninvolved,informationprovidedbyKSRS,andconfidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformance andconsumercomplianceprogramsof CitizensCommunityBank,reviewof examination reports,consultationswithotheragencies,andallthefactsof record,theBoardconcludes thattheconvenienceandneedsfactor,includingtheCRArecordof theinsureddepository institutioninvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”16 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.17These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.18 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Bancorpwouldhaveapproximately$106.2millioninconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthatamergeroracquisitionresultinginafirmwithlessthan$25billionin consolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnited Statesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalrisk factorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardconcludesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. 16 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 17 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 18 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

132 FederalReserveBulletin|May2015 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyKSRSwithalltheconditionsimposedinthisOrder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorderof theBoardof Governors,effectiveMarch23,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Simmons First National Corporation Pine Bluff, Arkansas OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2015–03(February12,2015) SimmonsFirstNationalCorporation(“Simmons”),PineBluff,Arkansas,hasrequested theBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to mergewithCommunityFirstBancshares,Inc.(“CommunityFirst”),andtherebyindirectly acquireitssubsidiarybank,FirstStateBank(“FirstBank”),bothof UnionCity,Tennessee.2Followingtheproposedacquisition,FirstBank,astatenonmemberbank,wouldbe mergedintoSimmons’subsidiarybank,SimmonsFirstNationalBank(“SimmonsBank”), PineBluff,Arkansas.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister43047(2014)).4Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. Simmons,withconsolidatedassetsof approximately$4.8billion,isthe185thlargest depositoryorganizationintheUnitedStates,controllingapproximately$4.0billioninconsolidateddeposits.5SimmonsoperatesinArkansas,Kansas,andMissouri. 1 12U.S.C.§1842. 2 SimmonshasalsorequestedtheBoard’sapprovaltomergewithLibertyBancshares,Inc.(“Liberty”),Springfield,Missouri.SeeLibertyBancshares,Inc.,FRBOrder2015-04(February12,2015). 3 TheconsolidationofFirstBankintoSimmonsBankissubjecttotheapprovaloftheOfficeoftheComptroller oftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c). 4 12CFR262.3(b). 5 Assetandnationwidedeposit-rankingdataareasofJune30,2014,andareupdatedtoreflectSimmons’acquisitiononSeptember1,2014,ofDeltaTrustandBankingCorporation,formerlyheadquarteredinLittleRock, Arkansas,unlessotherwisenoted.

LegalDevelopments:FirstQuarter,2015 133 CommunityFirst,withconsolidatedassetsof approximately$2.0billion,isthe367thlargestdepositoryorganizationintheUnitedStates,controllingapproximately$1.6billionin consolidateddeposits.CommunityFirstoperatesonlyinTennessee. Onconsummationof thecurrentproposals,6Simmonswouldbecomethe125thlargest depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $7.8billion,whichrepresentlessthan0.1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.Simmonswouldcontroltotaldepositsof approximately $6.4billion.InTennessee,7Simmonswouldbecomethe13thlargestdepositoryorganization,controllingdepositsof approximately$1.6billion,whichrepresent1.3percentof the totaldepositsof insureddepositoryinstitutionsinthatstate.8 InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto whetherthetransactionisprohibitedunderstatelaw.9Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.10Inaddition,theBoardmaynotapprove aninterstateacquisitionif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates,or 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.11 Forpurposesof theBHCAct,thehomestateof SimmonsisArkansasandCommunity First’shomestateisTennessee.12Simmonsiswellcapitalizedandwellmanagedunder applicablelawandhasasatisfactoryCommunityReinvestmentAct(“CRA”)rating.13Tennesseehasnominimumagerequirement,andCommunityFirsthasbeeninexistencefor morethanfiveyears.Onconsummationof theproposedtransactions,Simmonswould controllessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Inaddition,thecombinedorganizationwouldcontrolapproximately1percentof thetotalamountof depositsof insureddepositoryinstitutionsinCommunityFirst’shomestate,Tennessee,andtherearenostatesinwhich SimmonsandCommunityFirsthaveoverlappingbankingoperations.Accordingly,inlight 6 ProformadataincludethisrequesttomergewithCommunityFirstandSimmons’separaterequesttomerge withLiberty.SeeLibertyBancshares,Inc.,infranote2. 7 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andbanks. 8 Simmons’deposit-rankingsinArkansas,Kansas,andMissouriwouldremainunchanged.Simmons’separate requesttomergewithLibertydoesnotinvolveanyassetsordepositscontrolledinTennessee. 9 12U.S.C.§1842(d)(1)(A). 10 12U.S.C.§1842(d)(1)(B). 11 12U.S.C.§1842(d)(2)(A),(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See 12U.S.C.§1841(o)(4)–(7). 12 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 13 12U.S.C.§§2901–2908.

134 FederalReserveBulletin|May2015 of allthefactsof record,theBoardisnotprohibitedfromapprovingtheproposalunder section3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.14 SimmonsBankandFirstBankdonotcompetedirectlyinanybankingmarket.15Basedon allof thefactsof record,theBoardconcludesthatconsummationof theproposalwould nothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resources inanyrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,including capitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthe financialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of thefinancialandmanagerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.SimmonsandSimmons Bankarebothwellcapitalizedandwouldremainsoonconsummationof theproposed acquisition.Theproposedtransactionisabankholdingcompanymergerthatisstructured asanexchangeof shares.16Theassetquality,earnings,andliquidityof SimmonsBankand FirstBankareconsistentwithapproval,andSimmonsappearstohaveadequateresources toabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficient financialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Simmons,CommunityFirst,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbank 14 12U.S.C.§1842(c)(1). 15 ThesubsidiarydepositoryinstitutionsofCommunityFirstandLibertyalsodonotcompetedirectlyinany bankingmarket.SeeLibertyBancshares,Inc.,infranote2. 16 Aspartoftheproposedtransaction,eachshareofCommunityFirstcommonstockwouldbeexchangedfor 17.8975sharesofSimmonscommonstock.

LegalDevelopments:FirstQuarter,2015 135 supervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws. Simmons,CommunityFirst,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.Simmons’existingrisk-managementprogramanditsdirectorate andseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Simmonshavesubstantialknowledgeof andexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredSimmons’plansforimplementingtheproposal.Simmonsis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.17Simmonswouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,Simmons’andCommunityFirst’smanagementhastheexperienceandresourcestoensurethatthecombined organizationoperatesinasafeandsoundmanner,andSimmonsisproposingtointegrate FirstBank’sexistingmanagementandpersonnelinamannerthataugmentsSimmons’ management.18 Simmons’supervisoryrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof SimmonsandCommunityFirstin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCRA.19The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.21 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof SimmonsBankandFirstBank,datareportedbySimmonsBankand 17 SimmonsplanstooperateFirstBankasaseparateentityuntilSeptember2015,atwhichtimeSimmonswill integrateFirstBankintoSimmonsBank. 18 Onconsummation,Simmonswillincreasefrom9to11thenumberofseatsonitsboardofdirectors.Nine directorscurrentlyservingonSimmons’boardofdirectorsandtwodirectorsnominatedbyCommunityFirst’s boardofdirectorswillserveontheboardofthecombinedorganization.Onconsummationofitsseparate requesttomergewithLiberty,Simmonswillfurtherincreasethenumberofseatsonitsboardofdirectorsto 12,andtheadditionaldirectorwillbenominatedbyLiberty’sboardofdirectors.Thechairmanandchief executiveofficerofSimmonswillcontinuetoserveinhisrolefollowingthemerger.Thecurrentpresidentand chiefexecutiveofficerofbothCommunityFirstandFirstBankwillcontinuetoserveinhisroleatFirstBank followingthemergerandwillbecomearegionalchairmanofSimmons. 19 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 20 12U.S.C.§2901(b). 21 12U.S.C.§2903.

136 FederalReserveBulletin|May2015 FirstBankundertheHomeMortgageDisclosureAct(“HMDA”),22otherinformation providedbySimmons,confidentialsupervisoryinformation,andthepubliccomment receivedontheproposal.TheBoardreceivedonecommentthatobjectedtotheproposal onthebasisof SimmonsBank’sfairlendingrecordasreflectedin2012HMDAdataand SimmonsBank’sdispositionof branchesinconnectionwithpreviousacquisitions. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.23TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.24Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof SimmonsBank.SimmonsBankwasassignedanoverall“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheOCCinJanuary2013(“SimmonsBankEvaluation”).SimmonsBankreceived“lowsatisfactory”ratingsforboththe LendingTestandInvestmentTestanda“highsatisfactory”ratingfortheServiceTest.25 ExaminersnotedthatSimmonsBankhadagoodlevelof communitydevelopmentservices inthestatesinwhichthebankmaintainedanongoingpresence.26TheBoardhasconsulted withtheOCCregardingtheSimmonsBankEvaluation. Examinersfoundthatthebank’soveralllendingactivitywasadequateandreflected adequateresponsivenesstoitsassessmentareacreditneeds.SimmonsBank’sdistribution of homemortgageloansbygeographyandtoborrowersof differentincomelevelswas foundtobeadequate.Inaddition,thebank’sdistributionof smallbusinessloanstobusinessesof differentsizeswasconsideredadequate. Inevaluatingthebank’sperformanceundertheInvestmentTest,examinersfoundthat SimmonsBankhadanoveralladequatelevelof qualifiedcommunitydevelopmentinvestments.Examinersnotedthattherewasanadequatelevelof qualifiedinvestmentsbasedon theinvestmentopportunitiescomparedtothedollarvolumeof investmentsthebankmade initsassessmentareas. Withrespecttothebank’sperformanceundertheServiceTest,examinersnotedthat branchlocationswereaccessibletoLMIgeographiesandindividualsof differentincome levels.Examinersalsonotedthattheinstitutionprovidedagoodlevelof communitydevelopmentservicesintheassessmentareasinwhichthebankhasmaintainedanongoingpresence.Inaddition,examinersfoundthatSimmonsBank’sopeningandclosingof branches hadnotadverselyaffectedtheaccessibilityof itsdeliverysystemstoLMIgeographiesor LMIindividuals. 22 12U.S.C.§2801etseq. 23 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 24 12U.S.C.§2906. 25 TheSimmonsBankEvaluationwasconductedusingLargeBankCRAevaluationprocedures.Theevaluation periodfordatareportedundertheHomeMortgageDisclosureActwas2009through2011,andforcommunity developmentloans,investments,services,andretailserviceswasSeptember30,2008,throughJanuary2,2013. 26 TheSimmonsBankEvaluationincludedfull-scopereviewsofatleastoneassessmentareawithineachstatein whichSimmonsBankhadanoffice.ThestatesreviewedwereArkansas,Kansas,andMissouri.

LegalDevelopments:FirstQuarter,2015 137 CRAPerformanceof FirstBank.FirstBankwasassignedanoverall“satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation(“FDIC”)inMarch2013(“FirstBankEvaluation”).FirstBankreceiveda“highsatisfactory”ratingforeachof theLendingTest,InvestmentTest,andtheServiceTest.27 Inevaluatingthebank’sperformanceundertheLendingTest,examinersconcludedthat FirstBank’slendinglevelsreflectedgoodresponsivenesstoitsassessmentarea’scredit needs.Examinersfoundthatthemajorityof thebank’sloanswereoriginatedintheoverall assessmentarea,andthegeographicdistributionof itsloanswasgood.Examinersnoted thatFirstBank’sdistributionof loansbyincomereflectedgoodpenetrationamongretail customersof differentincomelevels.ExaminersalsofoundFirstBanktobealeaderin communitydevelopmentloansandthatthebankmadeextensiveuseof innovative andflexiblelendingpracticestoservethecreditneedsof itsassessmentarea. Inevaluatingthebank’sperformanceundertheInvestmentTest,examinersfoundthatthe bankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsin itsassessmentarea.FirstBank’scommunitydevelopmentactivitiesrepresentedverygood responsivenesstocommunityneeds.Inevaluatingthebank’sperformanceundertheServiceTest,examinersnotedthatFirstBank’sbranchandATMnetworkdidnotvaryina waythatinconveniencedportionsof theassessmentarea,particularlyLMIgeographies. TheFirstBankEvaluationnotedthatthebankprovidedarelativelyhighlevelof communitydevelopmentservicesthroughoutitsassessmentareasandthatthebankwasoneof onlyninebankstoparticipateintheFDIC’sSafeDepositAccountsPilotProgram. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof SimmonsBankandFirstBankincomplyingwith fairlendingandotherconsumerprotectionlaws.Aspartof thisconsideration,theBoard reviewedtheSimmonsBankandFirstBankEvaluations,assessedSimmonsBank’sand FirstBank’sHMDAdata,andconsideredthepubliccommentontheapplicationaswellas otheragencies’viewsonSimmonsBank’srecordof performanceunderfairlendinglaws. TheBoardalsoconsideredSimmonsBank’sfairlendingpoliciesandprocedures. Reviewof HMDADataandBranchClosings.TheBoardreviewedSimmonsBank’s2012 and2013HMDAdata,aswellasthebank’spreliminary2014HMDAdatathrough July31,2014,forthespecificmarketareasaddressedinthepubliccomment(LittleRock, Arkansas,andKansasCity,Missouri).Withinthosemarkets,theBoardfocuseditsreview ondatarelatedtohomepurchase,refinancing,andhomeimprovementloansmadeor deniedtoborrowersof theracesandethnicitieshighlightedbythepubliccomment,i.e., AfricanAmericansandHispanics.Inaddition,theBoardreviewedthebank’srecord of branchclosingsthatfollowedpreviousacquisitions. SimmonsBank’sHMDADataandBranchClosings.Thecommenterexpressedconcerns that,basedon2012HMDAdata,SimmonsBankisnotmeetingthecreditneedsof minorityindividualsinthecommunitiesservedbythebank.Thecommenterallegesthatthereare inaccuraciesinSimmonsBank’sdatareportingandthatthebankisdisguisingpotential violationsof provisionsof HMDAandtheEqualCreditOpportunityAct.Inparticular, thecommenterassertsthatSimmonsBankisprescreeningminorityborrowers,citing theHMDAdataintwomarketareasthatforsomeloantypesreflectasmallnumberof denials. 27 TheFirstBankEvaluationwasconductedusingLargeBankCRAevaluationproceduresinFirstBank’s assessmentareasofNashville,Jackson,Memphis,Knoxville,andnon-metropolitanareas,allinTennessee. ExaminersrevieweddatareportedbyFirstBankfromSeptember8,2009,toMarch25,2013.

138 FederalReserveBulletin|May2015 TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherthebank excludedordeniedcredittoanygrouponaprohibitedbasis.28Fullyevaluatingabank’s compliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof the bank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. TheBoard’sreviewof SimmonsBank’sHMDAdataconfirmedthatthebankreported relativelyhighoriginationratesintheLittleRockandKansasCitymarketareasforgovernment-securedmortgageloansforbothnonminorityandminorityapplicants.29The sameHMDAdata,however,showordinaryoriginationanddenialrateswhenincludingall HMDAproductcategories.Assuch,thedataarenotconsistentwithevidenceof prescreening. Simmonsprovidedinformationreflectingnondiscriminatoryreasonsforindividuallending decisions(i.e.,credithistory,inadequatecollateral,anddebt-to-incomeratio)onhomepurchaseandhomeimprovementloanscitedbythecommenter.Simmonsalsoprovidedthe BoardwithdetailedinformationonSimmonsBank’sproceduresandpoliciestopreventprescreening. TheBoardhasconsultedwith,andplacedgreatemphasisontheviewsof,theOCCregardingitsevaluationof SimmonsBank’scompliancewithfairlendinglawsandregulations. TheSimmonsBankEvaluationincludedreviewof 2012HMDAdata,and,inJanuary2013, theOCCtestedtheaccuracyof thebank’s2012HMDAdata.InFebruary2014,theOCC alsoconductedfairlendingandcomplianceexaminationsof SimmonsBank.Basedonits consultationswiththeOCCregardingthesereviews,theBoardconcludesthatthebank’s fairlendingmanagementprogramanditscompliancemanagementprogramareconsistent withapprovalof thisproposal. ThecommenteralsoallegesthatSimmonshasabusinessstrategyof closingbranchesand reducingfinancialservices,resultingininconveniencetolocalcommunities.TheBoardanalyzedthedistributionof SimmonsBank’sbranchesandthe2010censusdatawithinthe bank’sassessmentareas.TheBoardfoundthat,of thebank’s112branches,20.6percent arelocatedinLMIcensustracts.Of thepopulationwithinSimmonsBank’sassessment areas,29.3percentareinLMIgeographies.Asnotedabove,examinersonsitebelievedthat thebranchlocationsof SimmonsBankprovidedagoodlevelof servicesinthecommunity andwerereadilyaccessibletoindividualsof differentincomelevels. SimmonshasstatedthatSimmonsBankdoesnotintendtocloseanybranchesinconnectionwiththeproposedtransaction.Althoughthebankclosedseveralbranchesinrecent years,thebankhasrepresentedthatthedecisionswerebasedonprofitabilityanalysisand 28 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,thedatadonotaccountforthe possibilitythataninstitutionenteredtheassessmentareashortlybeforethecloseofthereportingperiod, therebycreatinganunrepresentativesample. 29 Government-securedloansarethoseunderprogramsoftheFederalHousingAdministration,FarmService Agency,RuralHousingService,orDepartmentofVeteransAffairs.

LegalDevelopments:FirstQuarter,2015 139 proximitytootherbranchesandthatcommunityimpactwasassessedpriortoallclosings. Further,theBoardhasconsideredthatfederalbankinglawprovidesaspecificmechanism foraddressingbranchclosings.Federallawrequiresaninsureddepositoryinstitutionto providenoticetothepublicandtotheappropriatefederalsupervisoryagencybeforeclosingabranch.30TheBoardnotesthattheOCCexaminersfoundthatSimmonsBank’s openingandclosingof brancheshadnotadverselyaffectedaccessibilityof itsservicesin LMIgeographiesortoLMIindividuals.TheOCCwillcontinuetoreviewSimmonsBank’s branchclosingrecordinthecourseof conductingCRAperformanceevaluations. Simmons’FairLendingProgram.Simmonshasinstitutedpoliciesandprocedurestohelp ensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Thecompany’slegalandcompliancerisk-managementprogramincludeswritten policiesoutliningthebank’sresponsibilityforcompliancewithfairlendinglawsandregulations,provisionforfairlendingofficerstoservewithineachof thebank’slendingdepartments,andrequiredannualfairlendingtrainingforapplicablestaff andtheboardof directors.Simmonsalsohasacentralizedunderwritingprocedure,anautomatedapplication process,asecondreviewprocess,adocumentedexceptionprocess,andastandardpricing sheet. C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Simmonsrepresentsthattheproposalwouldprovideopportunitiestoachievevarious operationalefficienciesandeconomiesof scale,whichwouldbenefitcurrentandfuture customersof thecombinedorganizationthroughmoreefficientandcost-effectivebanking services.Simmonsassertsthatthetransactionhasthepotentialtobenefitallaspectsof CommunityFirst’soperations,particularlyitsauditandloanreviewfunctions,online bankingplatform,andATMsystems.Simmonsalsostatesthatthecombinedorganization’slargerlendinglimitwouldallowSimmonstobettermeetthelendingneedsof itscorporatecustomersandmoreeffectivelycompeteforlargercommercialcustomers. Simmonsstatesthattheproposalwouldprovidecustomerswithanexpandednetworkof over112branchesinArkansas,Kansas,andMissouri.Simmonsnotesthatthecombined organizationwouldprovideFirstBank’scustomerswithanexpandedandmoresophisticatedrangeof productsandservicesthanFirstBankcurrentlyoffers,includingan enhancedrangeof consumerservicesanddepositaccounts. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbySimmons,confidential supervisoryinformation,andthepubliccommentontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof themortgagelendingoperationsandcomplianceprogramsof SimmonsBankandFirstBank,reviewof examinationreports,consultationswithotheragencies,andallthefactsof record,theBoardbelievesthattheconve- 30 Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicy StatementRegardingBranchClosings(64FederalRegister34844(1999)),requiresthatabankprovidethepublicwithatleast30days’notice,andtheappropriatefederalsupervisoryagencywithatleast90days’notice, beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

140 FederalReserveBulletin|May2015 nienceandneedsfactor,includingtheCRArecordof theinsureddepositoryinstitutions involvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”31 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.32These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.33 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Simmonswouldhaveapproximately$7.8billion inconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.34TheBoardgenerally presumesthatamergerresultinginafirmwithlessthan$25billioninconsolidatedassets willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidence thatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity, cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentin thistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.35Inreachingitsconclusion,theBoardhascon- 31 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 32 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 33 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 34 ProformadataincludethisrequesttomergewithCommunityFirstandSimmons’separaterequesttomerge withLiberty.SeeLibertyBancshares,Inc.,infranote2. 35 AcommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCActdoes notrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR

LegalDevelopments:FirstQuarter,2015 141 sideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebySimmonswithalltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof St.Louisactingunderdelegated authority. Byorderof theBoardof Governors,effectiveFebruary12,2015. Votingforthisaction:ChairYellen,GovernorsTarullo,Powell,andBrainard.Absentand notvoting:ViceChairmanFischer. MargaretMcCloskeyShanks DeputySecretaryof theBoard Simmons First National Corporation Pine Bluff, Arkansas OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2015–04(February12,2015) SimmonsFirstNationalCorporation(“Simmons”),PineBluff,Arkansas,hasrequested theBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1to mergewithLibertyBancshares,Inc.(“Liberty”),andtherebyindirectlyacquireitssubsidiarybank,LibertyBank,bothof Springfield,Missouri.2Followingtheproposedacquisition,LibertyBank,astatenonmemberbank,wouldbemergedintoSimmons’subsidiary bank,SimmonsFirstNationalBank(“SimmonsBank”),PineBluff,Arkansas.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister42793(2014)).4Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. 225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities. Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.IntheBoard’s view,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitteda writtencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons, andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied. 1 12U.S.C.§1842. 2 SimmonshasalsorequestedtheBoard’sapprovaltomergewithCommunityFirstBancshares,Inc.(“CommunityFirst”),UnionCity,Tennessee.SeeCommunityFirstBancshares,Inc.,FRBOrder2015-03(February12, 2015). 3 TheconsolidationofLibertyBankintoSimmonsBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C. §1828(c). 4 12CFR262.3(b).

142 FederalReserveBulletin|May2015 Simmons,withconsolidatedassetsof approximately$4.8billion,isthe185thlargest depositoryorganizationintheUnitedStates,controllingapproximately$4.0billioninconsolidateddeposits.5SimmonsoperatesinArkansas,Kansas,andMissouri.Simmonsisthe 106thlargestdepositoryorganizationinMissouri,controllingdepositsof approximately $207.0million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6 Liberty,withconsolidatedassetsof approximately$1.1billion,isthe630thlargestdepositoryorganizationintheUnitedStates,controllingapproximately$881.2millioninconsolidateddeposits.LibertyoperatesonlyinMissouri.Libertyisthe22ndlargestdepository organizationinMissouri,controllinglessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. Onconsummationof thecurrentproposals,7Simmonswouldbecomethe125thlargest depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $7.8billion,whichrepresentlessthan0.1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.Simmonswouldcontroltotaldepositsof approximately $6.4billion.InMissouri,Simmonswouldbecomethe20thlargestdepositoryorganization, controllingdepositsof approximately$1.1billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.8 InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto whetherthetransactionisprohibitedunderstatelaw.9Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.10Inaddition,theBoardmaynotapprove aninterstateacquisitionif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates,or 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.11 5 Assetandnationwidedeposit-rankingdataareasofJune30,2014,andareupdatedtoreflectSimmons’acquisitiononSeptember1,2014,ofDeltaTrustandBankingCorporation,formerlyheadquarteredinLittleRock, Arkansas,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andbanks. 7 ProformadataincludethisrequesttomergewithLibertyandSimmons’separaterequesttomergewithCommunityFirst.SeeCommunityFirstBancshares,Inc.,infranote2. 8 Simmons’deposit-rankingsinArkansasandKansaswouldremainunchanged.Simmons’separaterequestto mergewithCommunityFirstdoesnotinvolveanyassetsordepositscontrolledinMissouri. 9 12U.S.C.§1842(d)(1)(A). 10 12U.S.C.§1842(d)(1)(B). 11 12U.S.C.§1842(d)(2)(A),(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See 12U.S.C.§1841(o)(4)–(7).

LegalDevelopments:FirstQuarter,2015 143 Forpurposesof theBHCAct,thehomestateof SimmonsisArkansasandLiberty’shome stateisMissouri.12Simmonsiswellcapitalizedandwellmanagedunderapplicablelawand hasasatisfactoryCommunityReinvestmentAct(“CRA”)rating.13Missourihasnominimumagerequirement,andLibertyhasbeeninexistenceformorethanfiveyears.Onconsummationof theproposedtransactions,Simmonswouldcontrollessthan1percentof the totalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.Inaddition,thecombinedorganizationwouldcontrollessthan1percentof the totalamountof depositsof insureddepositoryinstitutionsinLiberty’shomestate,Missouri,theonlystateinwhichSimmonsandLibertyhaveoverlappingbankingoperations. Accordingly,inlightof allthefactsof record,theBoardisnotprohibitedfromapproving theproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.14 SimmonsBankandLibertyBankcompetedirectlyonlyintheSpringfield,Missouri,bankingmarket(the“Springfieldbankingmarket”).15TheBoardhasconsideredthecompetitiveeffectsof thisproposalontheSpringfieldbankingmarketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthebankingmarket;therelativesharesof totaldepositsininsureddepository institutionsinthemarket(“marketdeposits”)controlledbySimmonsandLiberty;16the concentrationlevelsof marketdepositsandtheincreaseinthoselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);17andothercharacteristicsof themarkets. 12 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 13 12U.S.C.§§2901–2908. 14 12U.S.C.§1842(c)(1). 15 TheSpringfieldbankingmarketisdefinedasthecountiesofChristian,Dade,Dallas,Greene,Polk,Webster, andthenorthernhalfofLawrence(includingthetownshipsofRedOak,Green,Lincoln,Ozark,Turnback, MountVernon,andVineyard,andthecityofMountVernon)inMissouri.ThesubsidiarydepositoryinstitutionsofLibertyandCommunityFirstdonotcompetedirectlyinanybankingmarket.SeeCommunityFirst Bancshares,Inc.,infranote2. 16 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,Midwest FinancialGroup,75FederalReserveBulletin386(1989);andNationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.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

144 FederalReserveBulletin|May2015 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheSpringfieldbankingmarket.Onconsummation,theSpringfieldbankingmarketwouldremainunconcentratedasmeasuredby theHHI,andnumerouscompetitorswouldremain.18 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesintheSpringfieldbankingmarketorinanyotherrelevantbankingmarket. Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations Inevaluatingfinancialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,including capitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthe financialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of thefinancialandmanagerialresourcesandtheproposedbusinessplan. TheBoardhasconsideredthefinancialfactorsof theproposal.SimmonsandSimmons Bankarebothwellcapitalizedandwouldremainsoonconsummationof theproposed acquisition.Theproposedtransactionisabankholdingcompanymergerthatisstructured asanexchangeof shares.19Theassetquality,earnings,andliquidityof SimmonsBankand LibertyBankareconsistentwithapproval,andSimmonsappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Basedonitsreviewof therecord,theBoardfindsthattheorganization hassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Simmons,Liberty,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof in2010(seePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10at-938.html),theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified. 18 SimmonsBankisthe39thlargestdepositoryinstitutionintheSpringfieldbankingmarket,controllingapproximately$8.1millionindeposits,whichrepresentlessthan1percentofmarketdeposits.LibertyBankisthe fourthlargestdepositoryinstitutioninthemarket,controllingapproximately$586.3millionindeposits,which represent6.88percentofmarketdeposits.Onconsummationoftheproposedtransaction,SimmonsBank wouldbecomethefourthlargestdepositoryinstitutioninthemarket,controllingapproximately$594.5million indeposits,whichrepresent6.98percentofmarketdeposits.TheHHIwouldincreasebyonepointto694,and 39competitorswouldremaininthemarket. 19 Aspartoftheproposedtransaction,eachshareofLibertycommonstockwouldbeexchangedforoneshareof Simmonscommonstock.

LegalDevelopments:FirstQuarter,2015 145 theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas considereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicablebankingand anti-money-launderinglaws. Simmons,Liberty,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobe wellmanaged.Simmons’existingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Simmonshavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredSimmons’plansforimplementingtheproposal.Simmonsis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.20Simmonswouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,Simmons’andLiberty’s managementhastheexperienceandresourcestoensurethatthecombinedorganization operatesinasafeandsoundmanner,andSimmonsisproposingtointegrateLiberty Bank’sexistingmanagementandpersonnelinamannerthataugmentsSimmons’management.21 Simmons’supervisoryrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummationprovideareasonablebasistoconclude thatmanagerialfactorsareconsistentwithapproval. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof SimmonsandLibertyincombatting money-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCRA.22The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,23andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.24 20 SimmonsplanstooperateLibertyBankasaseparateentityuntilApril2015,atwhichtimeSimmonswillintegrateLibertyBankintoSimmonsBank. 21 Onconsummation,Simmonswillincreasefrom9to10thenumberofseatsonitsboardofdirectors.Nine directorscurrentlyservingonSimmons’boardofdirectors,andonedirectornominatedbyLiberty’sboardof directorswillserveontheboardofthecombinedorganization.Onconsummationofitsseparaterequestto mergewithCommunityFirst,Simmonswillfurtherincreasethenumberofseatsonitsboardofdirectorsto 12,andthetwoadditionaldirectorswillbenominatedbyCommunityFirst’sboardofdirectors.Thechairman andchiefexecutiveofficerofSimmonswillcontinuetoserveinhisrolefollowingthemerger.Thecurrent chairmanandchiefexecutiveofficerofbothLibertyandLibertyBankwillcontinuetoserveinhisroleatLibertyBankfollowingthemergerandwillbecomearegionalchairmanofSimmons. 22 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 23 12U.S.C.§2901(b). 24 12U.S.C.§2903.

146 FederalReserveBulletin|May2015 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof SimmonsBankandLibertyBank,datareportedbySimmonsBank andLibertyBankundertheHomeMortgageDisclosureAct(“HMDA”),25otherinformationprovidedbySimmons,confidentialsupervisoryinformation,andthepubliccomment receivedontheproposal.TheBoardreceivedonecommentthatobjectedtotheproposal onthebasisof SimmonsBank’sfairlendingrecordasreflectedin2012HMDAdataand SimmonsBank’sdispositionof branchesinconnectionwithpreviousacquisitions. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.26TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.27Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof SimmonsBank.SimmonsBankwasassignedanoverall“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheOCCinJanuary2013(“SimmonsBankEvaluation”).SimmonsBankreceived“lowsatisfactory”ratingsforboththe LendingTestandInvestmentTestanda“highsatisfactory”ratingfortheServiceTest.28 ExaminersnotedthatSimmonsBankhadagoodlevelof communitydevelopmentservices inthestatesinwhichthebankmaintainedanongoingpresence.29TheBoardhasconsulted withtheOCCregardingtheSimmonsBankEvaluation. Examinersfoundthatthebank’soveralllendingactivitywasadequateandreflected adequateresponsivenesstoitsassessmentareacreditneeds.SimmonsBank’sdistribution of homemortgageloansbygeographyandtoborrowersof differentincomelevelswas foundtobeadequate.Inaddition,thebank’sdistributionof smallbusinessloanstobusinessesof differentsizeswasconsideredadequate. Inevaluatingthebank’sperformanceundertheInvestmentTest,examinersfoundthat SimmonsBankhadanoveralladequatelevelof qualifiedcommunitydevelopmentinvestments.Examinersnotedthattherewasanadequatelevelof qualifiedinvestmentsbasedon theinvestmentopportunitiescomparedtothedollarvolumeof investmentsthebankmade initsassessmentareas. Withrespecttothebank’sperformanceundertheServiceTest,examinersnotedthat branchlocationswereaccessibletoLMIgeographiesandindividualsof differentincome levels.Examinersalsonotedthattheinstitutionprovidedagoodlevelof communitydevelopmentservicesintheassessmentareasinwhichthebankhasmaintainedanongoingpresence.Inaddition,examinersfoundthatSimmonsBank’sopeningandclosingof branches 25 12U.S.C.§2801etseq. 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 27 12U.S.C.§2906. 28 TheSimmonsBankEvaluationwasconductedusingLargeBankCRAevaluationprocedures.Theevaluation periodfordatareportedundertheHomeMortgageDisclosureActwas2009through2011,andforcommunity developmentloans,investments,services,andretailserviceswasSeptember30,2008,throughJanuary2,2013. 29 TheSimmonsBankEvaluationincludedfull-scopereviewsofatleastoneassessmentareawithineachstatein whichSimmonsBankhadanoffice.ThestatesreviewedwereArkansas,Kansas,andMissouri.

LegalDevelopments:FirstQuarter,2015 147 hadnotadverselyaffectedtheaccessibilityof itsdeliverysystemstoLMIgeographiesor LMIindividuals. CRAPerformanceof LibertyBank.LibertyBankwasassignedanoverall“satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheFederalDepositInsurance CorporationinNovember2013(“LibertyBankEvaluation”).LibertyBankreceiveda“satisfactory”ratingfortheLendingTestandan“outstanding”ratingfortheCommunity DevelopmentTest.30 Withrespecttothebank’sperformanceundertheCommunityDevelopmentTest,examinersdeterminedthatLibertyBankdemonstratedexcellentresponsivenesstothecommunity developmentneedsintheassessmentareas.ExaminersnotedthatLibertyBankemployees orofficershaddevotedtimeandlenttechnicalexpertisetoanadequatenumberof communitydevelopmentservices. B.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof SimmonsBankandLibertyBankincomplying withfairlendingandotherconsumerprotectionlaws.Aspartof thisconsideration,the BoardreviewedtheSimmonsBankandLibertyBankEvaluations,assessedSimmons Bank’sHMDAdata,andconsideredthepubliccommentontheapplicationaswellas otheragencies’viewsonSimmonsBank’srecordof performanceunderfairlendinglaws. TheBoardalsoconsideredSimmonsBank’sfairlendingpoliciesandprocedures. Reviewof HMDADataandBranchClosings.TheBoardreviewedSimmonsBank’s2012 and2013HMDAdata,aswellasthebank’spreliminary2014HMDAdatathrough July31,2014,forthespecificmarketareasaddressedinthepubliccomment(LittleRock, Arkansas,andKansasCity,Missouri).Withinthosemarkets,theBoardfocuseditsreview ondatarelatedtohomepurchase,refinancing,andhomeimprovementloansmadeor deniedtoborrowersof theracesandethnicitieshighlightedbythepubliccomment,i.e., AfricanAmericansandHispanics.Inaddition,theBoardreviewedthebank’srecord of branchclosingsthatfollowedpreviousacquisitions. SimmonsBank’sHMDADataandBranchClosings.Thecommenterexpressedconcerns that,basedon2012HMDAdata,SimmonsBankisnotmeetingthecreditneedsof minorityindividualsinthecommunitiesservedbythebank.Thecommenterallegesthatthereare inaccuraciesinSimmonsBank’sdatareportingandthatthebankisdisguisingpotential violationsof provisionsof HMDAandtheEqualCreditOpportunityAct.Inparticular, thecommenterassertsthatSimmonsBankisprescreeningminorityborrowers,citing theHMDAdataintwomarketareasthatforsomeloantypesreflectasmallnumberof denials. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities andbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlendingpractices arebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoprovideequal accesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.Although theHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsincertainlocalareas, HMDAdataalonedonotprovideasufficientbasisonwhichtoconcludewhetherthebank 30 TheLibertyBankevaluationwasconductedusingtheIntermediateSmallBankevaluationprocedures,and examinersreviewedthebank’ssmallbusinessandresidentiallendingactivityfromSeptember13,2010,to November4,2013.Theseproductswereselectedforanalysisbecausetheyrepresented79percentofthebank’s loanportfolio.

148 FederalReserveBulletin|May2015 excludedordeniedcredittoanygrouponaprohibitedbasis.31Fullyevaluatingabank’s compliancewithfairlendinglawsandregulationswouldrequireathoroughreviewof the bank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccesstoinformationcontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. TheBoard’sreviewof SimmonsBank’sHMDAdataconfirmedthatthebankreported relativelyhighoriginationratesintheLittleRockandKansasCitymarketareasforgovernment-securedmortgageloansforbothnonminorityandminorityapplicants.32The sameHMDAdata,however,showordinaryoriginationanddenialrateswhenincludingall HMDAproductcategories.Assuch,thedataarenotconsistentwithevidenceof prescreening. Simmonsprovidedinformationreflectingnondiscriminatoryreasonsforindividuallending decisions(i.e.,credithistory,inadequatecollateral,anddebt-to-incomeratio)onhomepurchaseandhomeimprovementloanscitedbythecommenter.Simmonsalsoprovidedthe BoardwithdetailedinformationonSimmonsBank’sproceduresandpoliciestopreventprescreening. TheBoardhasconsultedwith,andplacedgreatemphasisontheviewsof,theOCCregardingitsevaluationof SimmonsBank’scompliancewithfairlendinglawsandregulations. TheSimmonsBankEvaluationincludedreviewof 2012HMDAdataand,inJanuary2013, theOCCtestedtheaccuracyof thebank’s2012HMDAdata.InFebruary2014,theOCC alsoconductedfairlendingandcomplianceexaminationsof SimmonsBank.Basedon consultationswiththeOCCregardingthesereviews,theBoardconcludesthatthebank’s fairlendingmanagementprogramandthecompliancemanagementprogramareconsistent withapprovalof thisproposal. ThecommenteralsoallegesthatSimmonshasabusinessstrategyof closingbranchesand reducingfinancialservices,resultingininconveniencetolocalcommunities.TheBoardanalyzedthedistributionof SimmonsBank’sbranchesandthe2010censusdatawithinthe bank’sassessmentareas.TheBoardfoundthat,of thebank’s112branches,20.6percent arelocatedinLMIcensustracts.Of thepopulationwithinSimmonsBank’sassessment areas,29.3percentareinLMIgeographies.Asnotedabove,examinersonsitebelievedthat thebranchlocationsof SimmonsBankprovidedagoodlevelof servicesinthecommunity andwerereadilyaccessibletoindividualsof differentincomelevels. SimmonshasstatedthatSimmonsBankdoesnotintendtocloseanybranchesinconnectionwiththeproposedtransaction.Althoughthebankclosedseveralbranchesinrecent years,thebankhasrepresentedthatthedecisionswerebasedonprofitabilityanalysisand proximitytootherbranchesandthatcommunityimpactwasassessedpriortoallclosings. Further,theBoardhasconsideredthatfederalbankinglawprovidesaspecificmechanism foraddressingbranchclosings.Federallawrequiresaninsureddepositoryinstitutionto providenoticetothepublicandtotheappropriatefederalsupervisoryagencybeforeclos- 31 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,thedatadonotaccountforthe possibilitythataninstitutionenteredtheassessmentareashortlybeforethecloseofthereportingperiod, therebycreatinganunrepresentativesample. 32 Government-securedloansarethoseunderprogramsoftheFederalHousingAdministration,FarmService Agency,RuralHousingService,orDepartmentofVeteransAffairs.

LegalDevelopments:FirstQuarter,2015 149 ingabranch.33TheBoardnotesthattheOCCexaminersfoundthattheSimmonsBank’s openingandclosingof brancheshadnotadverselyaffectedaccessibilityof itsservicesin LMIgeographiesortoLMIindividuals.TheOCCwillcontinuetoreviewSimmonsBank’s branchclosingrecordinthecourseof conductingCRAperformanceevaluations. Simmons’FairLendingProgram.Simmonshasinstitutedpoliciesandprocedurestohelp ensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.Thecompany’slegalandcompliancerisk-managementprogramincludeswritten policiesoutliningthebank’sresponsibilityforcompliancewithfairlendinglawsandregulations,provisionforfairlendingofficerstoservewithineachof thebank’slendingdepartments,andrequiredannualfairlendingtrainingforapplicablestaff andtheboardof directors.Simmonsalsohasacentralizedunderwritingprocedure,anautomatedapplication process,asecondreviewprocess,adocumentedexceptionprocess,andastandardpricing sheet. C.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Simmonsrepresentsthattheproposalwouldprovideopportunitiestoachievevarious operationalefficienciesandeconomiesof scale,whichwouldbenefitcurrentandfuture customersof thecombinedorganizationthroughmoreefficientandcost-effectivebanking services.Simmonsassertsthatthetransactionhasthepotentialtobenefitallaspectsof Liberty’soperations,particularlyitsauditandloanreviewfunctions,onlinebankingplatform,andATMsystems.Simmonsalsostatesthatthecombinedorganization’slargerlendinglimitwouldallowSimmonstobettermeetthelendingneedsof itscorporatecustomers andmoreeffectivelycompeteforlargercommercialcustomers. Simmonsstatesthattheproposalwouldprovidecustomerswithanexpandednetworkof over112branchesinArkansas,Kansas,andMissouri.Simmonsnotesthatthecombined organizationwouldprovideLibertyBank’scustomerswithanexpandedandmoresophisticatedrangeof productsandservicesthanLibertyBankcurrentlyoffers,includingan enhancedrangeof consumerservicesanddepositaccounts. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbySimmons,confidential supervisoryinformation,andthepubliccommentontheproposal.BasedontheBoard’s analysisof theHMDAdata,evaluationof themortgagelendingoperationsandcomplianceprogramsof SimmonsBankandLibertyBank,reviewof examinationreports,consultationswithotheragencies,andallthefactsof record,theBoardbelievesthattheconvenienceandneedsfactor,includingtheCRArecordof theinsureddepositoryinstitutions involvedinthistransaction,isconsistentwithapprovalof theapplication. 33 Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicy StatementRegardingBranchClosings(64FederalRegister34844(1999)),requiresthatabankprovidethepublicwithatleast30days’notice,andtheappropriatefederalsupervisoryagencywithatleast90days’notice, beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

150 FederalReserveBulletin|May2015 FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”34 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.35These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.36 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Simmonswouldhaveapproximately$7.8billion inconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.37TheBoardgenerally presumesthatamergerresultinginafirmwithlessthan$25billioninconsolidatedassets willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidence thatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity, cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentin thistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.38Inreachingitsconclusion,theBoardhascon- 34 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 35 ManyofthemetricsconsideredbyBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 36 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 37 ProformadataincludethisrequesttomergewithLibertyandSimmons’separaterequesttomergewithCommunityFirst.SeeCommunityFirstBancshares,Inc.,infranote2. 38 AcommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCActdoes notrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR 225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities. Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.IntheBoard’s

LegalDevelopments:FirstQuarter,2015 151 sideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebySimmonswithalltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof St.Louisactingunderdelegated authority. Byorderof theBoardof Governors,effectiveFebruary12,2015. Votingforthisaction:ChairYellen,GovernorsTarullo,Powell,andBrainard.Absentand notvoting:ViceChairmanFischer. MargaretMcCloskeyShanks DeputySecretaryof theBoard Sumitomo Mitsui Financial Group, Inc. Tokyo, Japan Sumitomo Mitsui Banking Corporation Tokyo, Japan OrderApprovingAcquisitionof Sharesof aBankHoldingCompany FRBOrderNo.2015–07(February20,2015) SumitomoMitsuiFinancialGroup,Inc.(“SMFG”),andSumitomoMitsuiBankingCorporation(“SMBC”),bothof Tokyo,Japan(collectively,“Applicants”),foreignbanking organizationsthatarefinancialholdingcompaniesundertheBankHoldingCompanyAct of 1956,asamended(“BHCAct”),1haverequestedtheBoard’sapprovalundersection3(a)of theBHCActtoincreasetheirownershipinterestfrom9.7percentto19.9percentof the votingsharesof TheBankof EastAsia,Limited(“BEA”),HongKongSAR,People’s Republicof China,aforeignbankingorganizationthatisabankholdingcompanyunder theBHCActbyvirtueof itsownershipinterestinIndustrialandCommercialBankof China(USA),NationalAssociation(“ICBC-USA”),NewYork,NewYork.2 view,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitteda writtencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons, andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied. 1 12U.S.C.§1842. 2 12CFR225.11(c)(1).BEAanditssubsidiary,EastAsiaHoldingCompany,Inc.,NewYork,NewYork,are bankholdingcompaniesbyvirtueoftheirownershipof20percentofthevotingsharesofICBC-USAand, thus,subjecttotheBHCAct.PriortoJuly2012,ICBC-USAwasawhollyownedsubsidiaryofBEAandwas namedTheBankofEastAsia(USA),NationalAssociation(“BEA-USA”).In2012,withtheBoard’sprior approval,BEAsoldan80percentinterestinthevotingsharesofBEA-USA(nowICBC-USA)totheIndustrialandCommercialBankofChinaLimited,Beijing,People’sRepublicofChina.SeeIndustrialandCommercialBankofChinaLimited,FRBOrderNo.2012-4(May9,2012).BEAalsoissubjecttotheBHCActbecause

152 FederalReserveBulletin|May2015 Noticeof theproposalaffordinginterestedpersonsanopportunitytosubmitcomments hasbeenpublished(79FederalRegister61308(October10,2014)).Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. SMFG,withtotalassetsof approximately$1.6trillion,isthethirdlargestbankingorganizationinJapan.3SMFG,throughitssubsidiaries,includingSMBC,engagesinabroad rangeof bankingandfinancialservicesthroughoutJapan,Asia,theUnitedKingdom,and NorthandSouthAmerica.OutsideJapan,SMFGownssubsidiarybanksintheUnited Kingdom,Brazil,Canada,thePeople’sRepublicof China,Indonesia,Russia,andMalaysia,andSMBCoperatesbranchesinmorethanadozenadditionalcountries. IntheUnitedStates,ApplicantsownManufacturersBank,LosAngeles,California,with consolidatedassetsof $2.4billionanddepositsof approximately$1.9billion.4ManufacturersBankengagesinretailandcommercialbankingintheUnitedStatesthrough10 branchesinCalifornia.SMBCoperatesuninsuredstatebranchesinNewYorkCity,Los Angeles,andSanFranciscoandrepresentativeofficesinHoustonandJerseyCity.ApplicantsalsomaintainnonbankingsubsidiariesintheUnitedStates.5SMFGandSMBCare eachqualifyingforeignbankingorganizationsand,uponconsummationof theproposal, wouldcontinuetomeettherequirementsforaqualifyingforeignbankingorganization underRegulationK.6 BEA,withtotalconsolidatedassetsof approximately$100.8billion,isthefifthlargest bankinHongKong.BEAengagesprimarilyinretailandcommercialbanking, wealthmanagement,andinsuranceservicesinthePeople’sRepublicof China,North America,theUnitedKingdom,andSoutheastAsia.IntheUnitedStates,BEAoperatesan FDIC-insuredfederalbranchinNewYorkCity(“BEA-NY”)anduninsuredfederal branchesinNewYorkCityandLosAngeles.Asnotedabove,BEAalsoowns20percentof thevotingsharesof ICBC-USA.ICBC-USA,withconsolidatedassetsof approximately $1.1billionanddepositsof approximately$910million,engagesinretailandcommercial bankingintheUnitedStatesandoperates13branchesinNewYorkandCalifornia. NoncontrollingInvestment Applicantscurrentlyownapproximately9.7percentof thevotingsharesof BEAandproposetoincreasetheirownershipinterestto19.9percentof votingshares.Applicantshave statedthattheydonotproposetocontrolorexerciseacontrollinginfluenceoverBEAasa resultof theproposal.7 itoperatesbranchesintheUnitedStates.12U.S.C.§3106(a).OnOctober31,2012,theBoardapprovedan applicationfromtheApplicantstoincreasetheirinterestinBEAfrom4.7percenttoupto9.9percent.See SumitomoMitsuiFinancialGroup,Inc.,FRBOrderNo.2012-11(Oct.31,2012)(“SumitomoOrder”). 3 AssetandrankingdataareasofSeptember30,2014,andarebasedontheexchangerateasofthatdate,unless otherwisenoted.Noshareholderowns5percentormoreoftheoutstandingsharesofSMFG. 4 AssetanddepositdataareasofSeptember30,2014. 5 ThesenonbankingsubsidiariesincludeSMBCCapitalMarkets,Inc.;SMBCLeasingandFinance,Inc.;SMBC NikkoSecuritiesAmerica,Inc.;andJRIAmerica,Inc.,allofNewYork,NewYork. 6 12CFR211.23(a). 7 TheBoardpreviouslyhasapprovedtheacquisitionbyabankholdingcompanyoflessthanacontrollinginterestinabankorbankholdingcompany.See,e.g.,SumitomoOrder;MitsubishiUFGFinancialGroup,Inc.,95 FederalReserveBulletinB34(2009)(acquisitionofupto24.9percentofthevotingsharesofabankholding company);BrooklineBancorp,MHC,86FederalReserveBulletin52(2000)(acquisitionofupto9.9percentof thevotingsharesofabankholdingcompany);MansuraBancshares,Inc.,79FederalReserveBulletin37(1993) (acquisitionof9.7percentofthevotingsharesofabankholdingcompany).

LegalDevelopments:FirstQuarter,2015 153 TheBoardreceivedacommentobjectingtotheproposalonthegroundsthatagroupof BEAshareholders,includingApplicants,maybeactinginconcertinrelationtotheir investmentsinBEAandmayhavecontroloverBEAforpurposesof section3of theBHC Act.TheBoardhasconsideredthecommenter’sallegationsinlightof allthefactsof recordandhasreviewedinformationprovidedbyboththecommenterandApplicants,as wellasconfidentialsupervisoryinformation,includinginformationprovidedbyApplicants’homecountrysupervisor,theJapaneseFinancialServicesAgency(“JFSA”). Inparticular,Applicantshaveagreedtoabidebycertaincommitmentssubstantiallysimilar tothoseonwhichtheBoardhaspreviouslyreliedindeterminingthataninvestingcompanywouldnotbeabletoexerciseacontrollinginfluenceoveranotherbankholdingcompanyorbankforpurposesof theBHCAct(“PassivityCommitments”).Forexample, Applicantshavecommittednottoexerciseorattempttoexerciseacontrollinginfluence overthemanagementorpoliciesof BEA,nottoseekoracceptmorethanonerepresentativeontheboardof directorsof BEA,andnottohaveanyotherdirectororexecutiveofficerinterlockswithBEAoritssubsidiaries. Inaddition,ApplicantshavecommittednottoenterintoanyagreementwithBEAorany of itssubsidiariesthatsubstantiallylimitsthediscretionof BEA’smanagementovermajor policiesanddecisions;nottosolicitorparticipateinsolicitingproxieswithrespecttoany matterthathasbeenpresentedtotheshareholdersof BEAoritssubsidiaries;andnotto disposeorthreatentodisposeof equityinterestsof BEAoranyof itssubsidiariesinany mannerasacondition,orinducement,of specificactionornon-actiononthepartof BEA oranyof itssubsidiaries.ThePassivityCommitmentsalsocontaincertainrestrictionson thepermissiblebusinessrelationshipsbetweenApplicantsandBEA. Uponconsummationof theproposal,SMBCwouldnotbeauthorizedtoown,control,or havethepowertovote25percentormoreof anyclassof votingsecuritiesof BEA,orto controlinanymannertheelectionof amajorityof thedirectorsof BEA.Applicantshave representedthattheyhaveprovidedallexistingorproposedagreementsregardingtheproposedinvestmenttotheBoardandhaveconfirmedthattheymadetheirdecisiontoinvest inBEAindependentof anyotherBEAshareholder.Thetermsof theinvestmentagreementbetweenSMBCandBEAareconsistentwiththerequirementsof theBoard’sPolicy StatementonEquityInvestmentsinBanksandBankHoldingCompaniesfornoncontrollinginvestments.Inaddition,Applicantshaverepresentedthattheyhavenoagreements withotherinvestorsinBEA. TheBoardhasalsoconsideredtherestrictionsimposedbythelawsof HongKongandthe People’sRepublicof Chinaontheauthorityof ApplicantstocontrolBEAandthestructureof ownershipof BEAbyothershareholders,includingthefoundingmembersof BEA. TheBoardhasconsultedwiththesupervisoryauthoritiesinHongKongandJapanon thesematters. Basedontheseconsiderationsandallthefactsof record,theBoardhasconcludedthatthe structureof theproposedtransactionwouldnotconstitutecontrolortheexerciseof acontrollinginfluenceoverBEAoranyof itssubsidiaries.TheBoardnotesthattheBHCAct requiresApplicantstoreceivetheBoard’sapprovalbeforedirectlyorindirectlyacquiringadditionalsharesof BEAorattemptingtoexerciseacontrollinginfluenceoverBEAor anyof itssubsidiaries.8 8 12U.S.C.§1842.See,e.g.,EmigrantBancorp,Inc.,82FederalReserveBulletin555(1996)(“EmigrantBancorp Order”).

154 FederalReserveBulletin|May2015 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.TheBHCActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbanking market,unlesstheanticompetitiveeffectsof theproposalclearlyareoutweighedinthe publicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneeds of thecommunitytobeserved.9 TheBoardpreviouslyhasstatedthatonecompanyneednotacquirecontrolof another companytolessencompetitionbetweenthemsubstantially.10Noncontrollinginterestsin directlycompetingdepositoryinstitutionsmayraisecompetitiveissuesundertheBHCAct, andthespecificfactsof eachcasewilldeterminewhetheraminorityinvestmentinacompanywouldbeanticompetitive.11 Becausethesubsidiarybanksof ApplicantsandBEAcompetedirectlyintheLosAngeles andSanFrancisco-Oakland-SanJosebankingmarkets,12theBoardhasreviewedthecompetitiveeffectsof theproposalinthesebankingmarketsinlightof allthefactsof record. Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremainin thebankingmarkets,therelativesharesof totaldepositsheldbyinsureddepositoryinstitutionsthatApplicantswouldcontrolinthemarkets(“marketdeposits”),13theconcentration levelsof marketdepositsandtheincreaseinthoselevelsasmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJGuidelines”),andothercharacteristicsof themarkets.14 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJGuidelinesintherelevantbankingmarkets.Onconsummation,the LosAngelesbankingmarketwouldremainunconcentratedandtheSanFrancisco-Oak- 9 12U.S.C.§1842(c)(1).See,e.g.,EmigrantBancorpOrder. 10 Seee.g.,SunTrustBanks,Inc.,76FederalReserveBulletin542(1990). 11 Seee.g.,BOKFinancialCorp.,81FederalReserveBulletin1052,1053-54(1995). 12 TheLosAngelesbankingmarketisdefinedastheLosAngelesRanallyMetropolitanArea(“RMA”)andthe citiesofActoninLosAngelesCountyandRosamondinKernCounty.TheSanFrancisco-Oakland-SanJose bankingmarketisdefinedastheSanFrancisco-Oakland-SanJoseRMAandthecitiesofByroninContra CostaCounty,HollisterandSanJuanBautistainSanBonitoCounty,PescaderoinSanMateoCounty,and PointReyesStationinMarshCounty.ApplicantsdonotcurrentlycompetewithBEAinanyotherrelevant bankingmarket.BEAoperatesaninsuredbranchinNewYork,andICBC-USAoperatesinNewYork. SMBC’sNewYorkbranchisnotinsuredbytheFederalDepositInsuranceCorporationandgenerallycannot acceptretaildeposits.Moreover,neitherbankingorganizationcontrolsasignificantshareoftheNewYork bankingmarket. 13 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2013,andhavebeenupdatedtoreflectindustrymergersandacquisitionsasof September18,2014.Thedataarealsobasedoncalculationsinwhichthedepositsofthriftinstitutionsare includedat50percent.TheBoardhaspreviouslyindicatedthatthriftinstitutionshavebecome,orhavethe potentialtobecome,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,Inc.,75 FederalReserveBulletin386(1989)andNationalCityCorporation,70FederalReserveBulletin743(1984). Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweighted basis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 14 UndertheDOJGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIisunder1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepostmergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthatabankmergeror acquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects) unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points. AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin2010, theDOJhasconfirmedthatitsguidelinesforbankmergersoracquisitions,whichwereissuedin1995,werenot changed.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/department-justice-and-federal-trade-commission-issue-revised-horizontal-merger-guidelines.

LegalDevelopments:FirstQuarter,2015 155 land-SanJosebankingmarketwouldremainhighlyconcentrated,asmeasuredbythe HHI.15Numerouscompetitorswouldremaininbothbankingmarkets. TheDOJconductedareviewof thepotentialcompetitiveeffectsof theproposalandhas advisedtheBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantly adverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriate bankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedto theapplication. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof bankingresourcesinanyrelevantbankingmarketandthatcompetitivefactorsareconsistentwithapprovalof theproposal. Financial,Managerial,andOtherSupervisoryConsiderations Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resources(includingconsiderationof thecompetence,experience,andintegrityof officers, directors,andprincipalshareholders)andfutureprospectsof thecompaniesanddepositoryinstitutionsinvolvedintheproposal,aswellastheeffectivenessof thesecompaniesin combattingmoney-launderingactivities.16Section3of theBHCActalsorequiresthe Boardtodeterminethatanapplicanthasprovidedadequateassurancesthatitwillmake availabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseof its affiliatesastheBoarddeemsappropriatetodetermineandenforcecompliancewiththe BHCAct.17 Thereviewwasconductedinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromthevariousU.S.bankingsupervisorsof theinstitutionsinvolved,publiclyreportedandotherfinancialinformation,consultationwiththe JFSA,andinformationprovidedbyApplicantsandbypubliccommenters. Inevaluatingfinancialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolved.Inthisevaluation,theBoardconsidersavarietyof information,including capitaladequacy,assetquality,andearningsperformance.TheBoardalsoevaluatesthe effectof thetransactiononthefinancialconditionof theapplicants,includingtheircapital position,assetquality,liquidity,andearningsprospects,andtheimpactof theproposed fundingof thetransaction.Inassessingfinancialfactors,theBoardconsiderscapital adequacytobeespeciallyimportant. Thecapitallevelsof Applicantsexceedtheminimumlevelsthatwouldberequiredunder theBaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthat wouldberequiredof aU.S.bankingorganizationseekingtoacquireupto19.9percentof BEA.18Applicants’reportedearningsperformance,liquidity,andassetqualityindicators, 15 AsofJune30,2014,theHHIwouldremainat973intheLosAngelesbankingmarket,whichhas132insured depositoryinstitutioncompetitors.TheHHIwouldremainat2030intheSanFrancisco-Oakland-SanJose bankingmarket,whichhas85insureddepositoryinstitutioncompetitors.ThecombineddepositsoftheinstitutionsinvolvedintheproposalineachoftheLosAngelesandSanFrancisco-Oakland-SanJosebankingmarketsrepresentlessthan1percentofmarketdeposits. 16 TheBoardhasanalyzedtheeffectivenessofApplicants’anti-money-launderingeffortsinconnectionwiththe Board’sassessmentofwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesintheirhomecountry. 17 12U.S.C.§1842(c)(3)(A). 18 TheBoardhasconsideredthetotal,andthetier1risk-basedcapitalratios,andtheratiosoftier1capitalto totalconsolidatedassetsofSMFGandSMBC.

156 FederalReserveBulletin|May2015 includingnonperformingloansandreservesforloanlosses,areconsistentwithapprovalof theproposal.Applicants’U.S.banksubsidiary,ManufacturersBank,andICBC-USAare eachwellcapitalizedandwouldremainsoonconsummationof theproposal. Theproposedtransactionisstructuredasacashpurchaseof shares.SMBCwouldacquire andholdthesharesdirectlyandwoulduseexistingresourcestofundtheproposedpurchase.Inlightof therelativesizeof Applicantstothesizeof theinvestmentinBEA,the transactionwouldhaveaminimalimpactonthefinancialconditionof Applicants.Based onitsreviewof therecord,theBoardconcludesthatApplicantshavesufficientfinancial resourcestoeffecttheproposal. TheBoardhasalsoconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof Applicants’andBEA’sU.S.operations, includingassessmentsof theirmanagement,risk-managementsystems,andoperations.TheBoardalsohasconsidereditssupervisoryexperiencesandthoseof theotherrelevantbanksupervisoryagencieswiththeorganizations,includingconsultationsinconnectionwiththisproposal,andtheorganizations’recordsof compliancewithapplicable bankingandanti-money-launderinglaws.Asnoted,theBoardalsohasconsultedwiththe JFSA.Inaddition,theBoardhasconsideredthefutureprospectsof Applicants,BEA, ManufacturersBank,andICBC-USAinlightof thefinancialandmanagerialresourcesof theorganizations. TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich Applicantsoperateandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.Inaddition,Applicantshavecommittedthat,totheextentnot prohibitedbyapplicablelaw,theywillmakeavailabletotheBoardsuchinformationon theiroperationsandtheoperationsof theiraffiliatesastheBoarddeemsnecessaryto determineandenforcecompliancewiththeBHCAct,theInternationalBankingAct,and otherapplicablefederallaws.ApplicantsalsohavecommittedtocooperatewiththeBoard toobtainanywaiversorexemptionsthatmaybenecessarytoenablethemortheiraffiliates tomakesuchinformationavailabletotheBoard. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellasaccesstoinformationbytheBoard,areconsistentwithapproval. SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplicationandasrequiredbysection3of theBHCAct,theBoardhas consideredwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationona consolidatedbasisbyappropriateauthoritiesintheirhomecountry.19 19 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderstandardssetforthinRegulationK.See12CFR225.13(a)(4). RegulationKprovidesthataforeignbankissubjecttoconsolidatedhomecountrysupervisioniftheforeign bankissupervisedorregulatedinsuchamannerthatitshomecountrysupervisorreceivessufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanyaffiliate) toassesstheforeignbank’soverallfinancialconditionandcompliancewithlawandregulation.12CFR 211.24(c)(1)(ii).Inassessingthisstandardundersection211.24ofRegulationK,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregulationexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationship betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancial

LegalDevelopments:FirstQuarter,2015 157 TheBoardpreviouslyhasdeterminedthatSMFGandSMBCaresubjecttocomprehensive supervisiononaconsolidatedbasisbytheirhomecountrysupervisor.20TheApplicants continuetobesupervisedbytheJFSAonsubstantiallythesametermsandconditions. Basedonthisfindingandallthefactsof record,theBoardhasconcludedthatSMBCand SMFGcontinuetobesubjecttocomprehensivesupervisiononaconsolidatedbasisby theirhomecountrysupervisor. TheBoardhasconsideredtheeffectivenessof Applicants’anti-money-launderingpolicies andproceduresaswellastheBoard’ssupervisoryexperiencesandthoseof otherrelevant bankingsupervisoryorganizationswithApplicants’compliancerecord.Onthebasisof all factsof record,theBoardhasdeterminedthatApplicants’anti-money-launderingmeasuresareconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).21TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,22andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentire community,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluating bankexpansionaryproposals.23 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof ManufacturersBank,BEA-NY,andICBC-USA;information providedbyApplicants;andconfidentialsupervisoryinformation. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.24TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.25Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,on-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor.26 CRAPerformanceof ManufacturersBank.ManufacturersBankwasassignedanoverall “satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederal conditiononaworldwideconsolidatedbasis;(v)evaluateprudentialstandards,suchascapitaladequacyand riskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 20 See,e.g.,SumitomoOrder;TheWakashioBank,Limited,89FederalReserveBulletin217(2003). 21 12U.S.C.§2901etseq.;12U.S.C.§1842(c)(2). 22 12U.S.C.§2901(b). 23 12U.S.C.§2903. 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010)(“InteragencyQuestionsandAnswers”). 25 12U.S.C.§2906. 26 SeeInteragencyQuestionsandAnswers.

158 FederalReserveBulletin|May2015 DepositInsuranceCorporation(“FDIC”)inFebruary2014(“ManufacturersBankEvaluation”).27ManufacturersBankreceiveda“lowsatisfactory”ratingfortheLendingTest and“highsatisfactory”ratingsforboththeInvestmentTestandtheServiceTest. InevaluatingtheLendingTest,examinersnotedthatthebankadequatelyrespondedtothe creditneedsof itsassessmentareas.Examinersfoundthatthebankwasaleaderinmaking communitydevelopmentloansandthatthegeographicdistributionof loansprovidedby thebankreflectedadequatepenetrationthroughouttheassessmentareas. InevaluatingtheInvestmentTest,examinersfoundthatthequalifiedinvestmentsheldby thebankexhibitedgoodresponsivenesstocreditandcommunityeconomicdevelopment needsinitsassessmentareas.Examinersnotedthatthetotalamountof qualifiedinvestmentsheldbythebankhadincreasedfromthepriorevaluationperiod.Themajorityof the bank’squalifiedinvestmentshadbeenutilizedtopurchasesecuritiesforaffordablehousing andeconomicdevelopment.Grantsanddonationsprovidedbythebankalsohadincreased fromthepriorevaluationperiodandhadbeenutilizedforvariouspurposes,suchasaffordablehousing,communitydevelopmentservices,andeconomicdevelopmentwithinthe bank’sassessmentareas. InevaluatingtheServiceTest,examinersfoundthatthebank’sdeliverysystems,banking productsandservices,andbusinesshourswereaccessibletoessentiallyallportionsof the bank’sassessmentareas.Thegeographicaldispersionof thebank’sbranchofficesby incomelevelwasconsideredfairlydiverse,withallincomelevelsrepresented.Examiners alsonotedthatthebankprovidedarelativelyhighlevelof communitydevelopmentservicesthatbenefitedLMIindividualsandgeographieswithinthebank’sassessmentareas. CRAPerformanceof BEA-NY.BEA-NYwasassignedanoverall“outstanding”ratingat itsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency(“OCC”)inJanuary2010(“BEA-NYEvaluation”),witharatingof “outstanding” fortheLendingTest.28InevaluatingtheLendingTest,examinersfoundthatthebank’s averageloan-to-depositratiometthestandardforoutstandingperformance,andthatthe geographicaldistributionof thebank’sloansreflectedexcellentdispersioninitsassessment areas.Asubstantialmajorityof theloansoriginatedbyBEA-NYduringtheperiodevaluatedwerewithinitsassessmentareas,andexaminersnotedthatthedistributionof loans reflectedreasonabledispersionamongbusinessesof differentsizesandexcellentdispersion throughoutgeographiesof differentincomelevels.Examinersalsofoundthatthepercentageof smallbusinessloansmadebythebanktobusinessesinLMIgeographiesexceeded thepercentageof businesseslocatedintheseareasduringtheevaluationperiod. CRAPerformanceof ICBC-USA.ICBC-USAwasassignedanoverall“outstanding”rating atitsmostrecentCRAperformanceevaluationbytheOCCinJanuary2010(“ICBC-USA 27 TheManufacturersBankEvaluationwasconductedusingLargeBankCRAexaminationprocedures.Examinersreviewedsmallbusinesslendingdatafor2012and2013andcommunitydevelopmentloans,investments, andservicesfromNovember29,2010,throughFebruary18,2014.Forcommunitydevelopmentinvestments, examinersalsoconsideredthecurrentbookvalueofanypriorperiodinvestmentsstilloutstandingasofthe subjectevaluation.TheManufacturersBankEvaluationincludedafull-scopereviewoftheLosAngelesassessmentarea,comprisingthefollowingregions:Los-Angeles-LongBeach-GlendaleMetropolitanDivision;Santa Ana-Anaheim-IrvineMetropolitanStatisticalArea(“MSA”);andRiverside-SanBernardino-OntarioMSA. 28 TheBEA-NYEvaluationwasconductedusingtheSmallBankCRAexaminationprocedures.Examiners reviewedcommercialrealestateloansfromJanuary1,2007,throughSeptember30,2009.TheBEA-NYEvaluationincludedafull-scopereviewofthreecountiesinNewYorkState:Kings,NewYork,andQueens,which arepartoftheNewYork-NorthernNewJersey-LongIslandMSA.SMBC’sandBEA’suninsuredbranchesare notsubjecttotheCRA.

LegalDevelopments:FirstQuarter,2015 159 Evaluation”).ICBC-USAreceived“outstanding”ratingsforboththeLendingTestandthe CommunityDevelopmentTest.29 InevaluatingtheLendingTest,examinersnotedthatthebank’saverageloan-to-deposit ratiowasmorethanreasonableandmetthestandardforoutstandingperformance.The geographicaldistributionof thebank’sloanswasconsideredtoreflectexcellentdispersion throughouttheassessmentareas.Thedistributionof thebank’sloanswasalsoconsidered toreflectexcellentpenetrationamongbusinessesof differentsizes.Examinersalsonoted thatthepercentageof smallbusinessloansmadebythebanktobusinessesinLMIgeographiesexceededthepercentageof businesseslocatedintheseareasduringtheevaluation period. InevaluatingtheCommunityDevelopmentTest,examinersnotedthatthebank’sperformancedemonstratedexcellentresponsivenesstotheneedsof theassessmentareasthrough communitydevelopmentloans,investments,andservices.Duringtheevaluationperiod,the bankmadecommunitydevelopmentloansandqualifiedinvestmentsforaffordablehousing topromoteeconomicdevelopment,torevitalizeandstabilizeLMIareas,andtoprovidean arrayof communityservices,includinghealthcareandyouthprograms.Bankstaff also supportedvariouscommunitydevelopmentservices,includingfinancialliteracyandhomeownershipseminarsandworkshopsforseniorcitizens. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServed Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Theproposalispartof BEA’seffortstoincreaseitscapitalbase.Applicantsrepresentthat theproposalisnotexpectedtoresultinanydiscontinuationormaterialchangestothe productsorservicesofferedbyApplicants’,BEA’s,orICBC-USA’sU.S.offices,including withrespecttoLMIneighborhoods.Applicantsalsorepresentthatafterthisproposal,they willcontinuetohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,andinmateriallythesamemanneras beforeconsummationof theproposal. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformancerecordsof theinstitutionsinvolved,informationprovidedbyApplicants,andconfidentialsupervisoryinformation.BasedontheBoard’sassessmentof the CRAperformanceof ManufacturersBank,BEA-NY,andICBC-USA;itsreviewof examinationreports;anditsconsultationwithotheragencies,theBoardconcludesthatthe convenienceandneedsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) 29 TheICBC-USAEvaluation,whichoccurredwhenICBC-USAwasawhollyownedsubsidiaryofBEA,was conductedusingIntermediateSmallBankCRAperformanceprocedures.Examinersreviewedcommercial loansfromJanuary1,2007,throughSeptember30,2009.Theevaluationperiodforcommunitydevelopment loans,investments,andserviceswasApril26,2006,throughJanuary4,2010.TheICBC-USAEvaluation includedafull-scopereviewofthreestatisticalareas:NewYork-NorthernNewJersey-LongIsland(Multi- State)MSA;SanFrancisco-SanMateo-RedwoodCityMSA;andLosAngeles-LongBeach-GlendaleMSA.

160 FederalReserveBulletin|May2015 amendedsection3of theBHCActtorequiretheBoardalsotoconsider“theextentto whichaproposedacquisition,merger,orconsolidationwouldresultingreaterormore concentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”30 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.31These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.32 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Inthiscase,theproposedacquisitionof anoncontrollinginterestin BEAisnotasignificantexpansionbySMFGandwouldhaveademinimisimpacton SMFG’ssystemicfootprint.Thevalueof theadditionalsharesthatApplicantsproposeto purchaseisapproximately$945million.33TheBoardgenerallypresumesthatanacquisitionof lessthan$2billioninassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors. Suchadditionalriskfactorsarenotpresentinthistransaction,astheproposalmerely increasesApplicants’ownershipinterestfromapproximately9.7percentto19.9percentof thevotingsharesof BEA.ApplicantswouldneitherconsiderBEAasubsidiarynorconsolidateitsfinancialperformanceontheirbalancesheets. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardapprovestheproposalby Applicantstoacquireadditionalsharesof BEAupto19.9percentof thevotingsharesof BEA.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicablestatutes. TheBoardconditionsitsdecisiononApplicantsprovidingtotheBoardadequateinformationontheiroperationsandactivitiesaswellasthoseof theiraffiliatestodetermineand enforcecompliancebyApplicantsortheiraffiliateswithapplicablefederalstatutes.Should 30 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.SC.§1842(c)(7). 31 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 32 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 33 ThisvalueisbasedonBEA’slistedpriceontheHongKongStockExchangeasofSeptember12,2014,andthe exchangerateasofthatdate.

LegalDevelopments:FirstQuarter,2015 161 anyrestrictionsonaccesstoinformationontheoperationsoractivitiesof Applicantsor anyof theiraffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformation todetermineandenforcecompliancebyApplicantsortheiraffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationordivestitureof anyof Applicants’or theiraffiliates’directorindirectactivitiesintheUnitedStates. TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswiththeconditionsimposedinthisorderandthecommitmentsmadetotheBoardinconnectionwith theproposal.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedto beconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision herein,and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unless suchperiodisextendedforgoodcausebytheBoardortheFederalReserveBankof New York,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary20,2015. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Orders Issued Under Federal Reserve Act Banco Popular de Puerto Rico Hato Rey, Puerto Rico OrderApprovingtheAcquisitionof Assets,Assumptionof Liabilities,andtheEstablishment of Branches FRBOrderNo.2015–10(February27,2015) BancoPopulardePuertoRico(“BancoPopular”)1,HatoRey,astatememberbank,has requestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct2 (“BankMergerAct”)toacquireassetsandassumeliabilitiesof DoralBank(“Doral”),San Juan,3astatenonmemberbank,bothof PuertoRico.Inaddition,BancoPopularhas appliedundersection9of theFederalReserveAct(“FRA”)4toestablishandoperate branchesatthelocationsof thebranchesacquiredfromDoral. TheFederalDepositInsuranceCorporation(“FDIC”)hasbeenappointedreceiverof Doralandhasscheduledthesaleof certainassetsandthetransferof certainliabilitiesof DoralforFebruary27,2015.TheFDIC,asreceiver,hasselectedaconsortiumbidleadby BancoPopularastheleast-costproposalinaccordancewiththeleast-cost-resolution 1 BancoPopularisasubsidiaryofPopular,Inc.(“Popular”),SanJuan,PuertoRico. 2 12U.S.C.§1828(c). 3 DoralisasubsidiaryofDoralFinancialCorporation,SanJuan,PuertoRico. 4 12U.S.C.§321.Theselocationsarelistedintheappendix.

162 FederalReserveBulletin|May2015 requirementsintheFederalDepositInsuranceAct(“FDIAct”)5andeliminatedmore costlyproposals.6TheFDIChasrecommendedimmediateactionbytheBoardonBanco Popular’sconsortiumproposaltopreventtheprobablefailureof Doral.Onthebasisof the informationbeforetheBoard,theBoardfindsthatitmustactimmediatelypursuanttothe BankMergerAct7tosafeguardthedepositorsof Doral.Accordingly,publicnoticeof the applicationandopportunityforcommentarenotrequiredbytheBankMergerAct. BancoPopular,withtotalassetsof approximately$26.2billion,operatesinPuertoRico, theU.S.VirginIslands,andNewYork.8BancoPopularisthelargestinsureddepository institutioninPuertoRico,controllingdepositsof approximately$20.1billion,whichrepresent46.7percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe Commonwealth(“totaldeposits”).9 Doral,withtotalassetsof approximately$6.4billion,operatesinPuertoRico,NewYork, andFlorida.10DoralisthesixthlargestinsureddepositoryinstitutioninPuertoRico,controllingdepositsof approximately$2.3billion,whichrepresentapproximately5.4percent of thetotaldepositsintheCommonwealth. Onconsummationof theproposal,andaccountingfortheproposeddivestitures,Banco PopularwouldremainthelargestinsureddepositoryinstitutioninPuertoRico,controlling depositsof approximately$21.0billion,whichrepresent49.4percentof totaldeposits. CompetitiveConsiderations TheBoardhasconsideredthecompetitiveeffectsof theproposalinlightof allthefactsof record.TheBankMergerActprohibitstheBoardfromapprovingaproposalthatwould resultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusiness of bankinginanyrelevantbankingmarket.11TheBankMergerActalsoprohibitsthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitionortendto createamonopolyinanyrelevantbankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposedtransactionareclearlyoutweighedinthepublicinterest bytheprobableeffectsof thetransactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.12 5 See12U.S.C.§§1821,1822,and1823(c)-(k).Theleast-costproceduresrequiretheFDICtochoosetheresolutionmethodinwhichthetotalamountoftheFDIC’sexpendituresandobligationsincurred(includingany immediateorlong-termobligationandanydirectorcontingentliability)istheleastcostlytotheDepositInsuranceFundofallpossiblemethods. 6 BancoPopularintendstosellDoral’sbranchesinNewYorkandFloridaandcertainofitsbranchesinPuerto Ricotoothermembersofitsbiddingconsortium.Itsaffiliate,BancoPopularNorthAmerica,NewYork,New York,hasrequestedtheBoard’sapprovaltoacquirecertainassetsandassumecertainliabilitiesofDoralin NewYork.SeeBancoPopularNorthAmerica,FRBOrder2015-11(Feb.27,2015)(“BPNAOrder”).CentennialBank,Conway,Arkansas,hasrequestedtheBoard’sapprovaltoacquirecertainassetsandassumecertain liabilitiesofDoralinFlorida.SeeCentennialBank,FRBOrder2015-09(Feb.27,2015). 7 12U.S.C.§1828(c). 8 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014.Statedepositandrankingdataareas ofJune30,2014.AsofDecember31,2014,BancoPopularhadtotalassetsofapproximately$27.1billion.For purposesofthisorder,insureddepositoryinstitutionsincludecommercialbanks.NosavingsassociationsoperateinPuertoRico. 9 PuertoRicanmarketsharesandrankingsexcludecorporatedepositsbookedinSanJuanbyCitigroupInc. 10 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014.Statedepositandrankingdataareas ofJune30,2014.AsofDecember31,2014,Doralhadtotalassetsofapproximately$5.9billion. 11 12U.S.C.§1828(c)(5)(A). 12 12U.S.C.§1828(c)(5)(B).

LegalDevelopments:FirstQuarter,2015 163 BancoPopularandDoralcompetedirectlyinthreebankingmarketsinPuertoRicoandin onebankingmarketinNewYork.13TheBoardhasreviewedthecompetitiveeffectsof the proposalineachof thesebankingmarketsinlightof allthefactsof record.Inparticular, theBoardhasconsideredthefinancialconditionof DoralandthefactthattheOfficeof theCommissionerof FinancialInstitutionsof PuertoRico(“PuertoRicoOCFI”)has placedthebankintoFDICreceivership.Inaddition,theFDIC,asreceiverforDoral,has selectedBancoPopular’sconsortiumbidforDoralinaccordancewiththeleast-cost-resolutionrequirementsintheFDIAct.TheBoardalsohasconsideredtheresultinglossof Doralasanindependentcompetitorinthebankingmarketsif thistransactionisnotconsummated,aswellasvariousmeasuresof competitionandmarketconcentration,and othercharacteristicsof themarkets. Undertheproposal,BancoPopularwouldpurchaseassetsandassumeliabilitiesof Doral andtherebymergeDoral’sbusinessesintoaviableongoingconcernwithdemonstrated capitalstrengthandmanagementcapability.BancoPopular’sproposalwouldcontinuethe availabilityof creditopportunitiesandbankingservicesforthecustomersandcommunities thatDoralservedandavoidseriouseconomicdisruptioninPuertoRico.TheFDIC activelysolicitedbidsforDoraland,afterconsideringBancoPopular’sproposalinlightof competingproposalssubmittedbyotherbidders,determinedthatBancoPopular’sbidrepresentedthelowestcosttotheDepositInsuranceFund.Onthisbasis,BancoPopular’s, proposalistheonlymeansbeforetheBoardof achievingthepublicbenefitsdiscussed above. Inaddition,theBoardhasconsideredthenumberof competitorsthatwouldremaininthe bankingmarkets;therelativesharesof totaldepositsininsureddepositoryinstitutionsin themarkets(“marketdeposits”)controlledbyBancoPopular;theconcentrationlevels of marketdepositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”);14othercharacteristicsof themarkets; and,asdiscussedbelow,commitmentsmadebyBancoPopulartodivestbranchesintwo bankingmarketsinPuertoRico. IntheSanJuan,PuertoRico,bankingmarket(the“SanJuanbankingmarket”),15Banco Popularisthelargestdepositoryinstitution,controllingapproximately$17.1billionin deposits,whichrepresentapproximately44.1percentof depositsinthatmarket.16Doralis 13 TheproposalwouldnotresultinsubstantiallyadversecompetitiveeffectsintheMetroNewYorkCitybanking market,thebankingmarketinNewYorkinwhichBancoPopularandDoralcompete.SeeBPNAOrder. 14 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. 15 TheSanJuanbankingmarketisdefinedtoincludethefollowingmunicipalitiesinPuertoRico:AguasBuenas, Aibonito,Arecibo,Barceloneta,Barranquitas,Bayamon,Caguas,Camuy,Canovanas,Carolina,Catano, Cayey,Ceiba,Ciales,Cidra,Comerio,Corozal,Dorado,Fajardo,Florida,Guaynabo,Gurabo,Hatillo,Humacao,Juncos,Lares,LasPiedras,Loiza,Luquillo,Manati,Maunabo,Morovis,Naguabo,Naranjito,Orocovis, Quebradillas,RioGrande,SanJuan,SanLorenzo,ToaAlta,ToaBaja,TrujilloAlto,Utuado,VegaAlta,Vega Baja,andYabucoa. 16 InadditiontotheexclusionofCitigroupInc.’scorporatedepositsbookedinSanJuan,calculationsforthe PuertoRicanbankingmarketsalsoexcludeapproximately$700millioninbrokereddepositsbookedinSan Juanthatwillnotbeacquiredbyanypartytothetransactionandincludedepositsofcooperativelendingsocieties(“cooperativas”)weightedat50percent.CooperativasareCommonwealth-insureddepositoryinstitutions uniquetoPuertoRico.Althoughcooperativasaremembershiporganizations,fewimposemembershiprestric-

164 FederalReserveBulletin|May2015 thesixthlargestdepositoryinstitution,controllingapproximately$1.4billionindeposits, whichrepresentapproximately3.7percentof depositsinthatmarket.IntheAguadilla- Mayaguez,PuertoRico,bankingmarket(the“Aguadilla-Mayaguezbankingmarket”),17 BancoPopularisthelargestdepositoryinstitution,controllingapproximately$1.8billion indeposits,whichrepresentapproximately50percentof thedepositsinthatmarket.Doral isthesixthlargestdepositoryinstitution,controllingapproximately$103millionindeposits,whichrepresentapproximately2.8percentof thedepositsinthatmarket.Tomitigate thepotentiallyadversecompetitiveeffectsof theproposalintheSanJuanandAguadilla- Mayaguezbankingmarkets,BancoPopularhascommittedtodivesteightbranchesinthe SanJuanbankingmarketandbothof theDoralbranchesintheAguadilla-Mayaguez bankingmarket,whichaccountforapproximately$736millionindepositsinthesetwo markets.18 Afterthedivestiture,theproposalwouldbeconsistentwithBoardprecedentintheSan JuanandAguadilla-Mayaguezbankingmarkets.BancoPopularwouldremainthelargest depositoryinstitutionintheAguadilla-Mayaguezmarket,anditsmarketsharewould remainunchanged. Afterthedivestiture,BancoPopularwouldremainthelargestdepositoryinstitutioninthe SanJuanbankingmarket,controllingapproximately$18.0billionindeposits,whichrepresentapproximately46.2percentof depositsinthatmarket.TheHHIwouldincrease232 points,from2548to2780.Fiveothercommercialbankingorganizationswouldremainin thatmarket. InthePonce,PuertoRico,bankingmarket(the“Poncebankingmarket”),19BancoPopularisthelargestdepositoryinstitution,controllingapproximately$944millionindeposits, whichrepresentapproximately39.4percentof thedepositsinthatmarket.Doralisthe sixthlargestdepositoryinstitution,controllingapproximately$67millionindeposits, whichrepresentapproximately2.8percentof thedepositsinthatmarket.Uponconsummationof thetransaction,BancoPopularwouldremainthelargestdepositoryinstitution inthePoncebankingmarket,controllingapproximately$1.0billionindeposits,whichrepresentapproximately42.2percentof depositsinthatmarket.TheHHIwouldincreaseby 221pointsto2431.Fourothercommercialbankingorganizationswouldremaininthat market. tions,andtheyareauthorizedtoprovideafullrangeofproductsandservicestononmembers,includingtransactionaccountsforpersonalandbusinesspurposes.Foradetaileddiscussionoftheactivitiesofcooperativas, seeBanPonceCorporation,77FederalReserveBulletin43,45(1991);StatementbytheBoardofGovernorsofthe FederalReserveSystemRegardingtheApplicationbyBancoSantander,S.A.,82FederalReserveBulletin833, 834-835(1996)(“Statement”).TheBoardpreviouslyhasrecognizedandcontinuestobelievethatcooperativas areatleastassignificantasthriftinstitutionsascompetitorsofcommercialbanksandshouldbeweightedat 50percent.SeeStatementat835n.13. 17 TheAguadilla-MayaguezbankingmarketisdefinedtoincludethefollowingmunicipalitiesinPuertoRico: Aguada,Aguadilla,Anasco,CaboRojo,Hormigueros,Isabela,Lajas,LasMarias,Maricao,Mayaguez,Moca, Rincon,SabanaGrande,SanGerman,andSanSebastian. 18 Asaconditiontoconsummationoftheproposedmerger,BancoPopularhascommittedthatitwillexecutean agreementtosellwithin180daysofconsummatingtheproposedmergertheDoralbranchesintheSanJuan andAguadilla-MayaguezbankingmarketstoapurchaserdeterminedbytheBoardtobecompetitivelysuitable.Iftheproposeddivestitureisnotcompletedwithinthe180-dayperiod,BancoPopularcommitstotransfertheunsoldbranchestoanindependenttrusteewhowillbeinstructedtosellthemtoanalternatepurchaser orpurchasersinaccordancewiththetermsofthisorderandwithoutregardtoprice.Boththetrusteeandany alternatepurchasermustbedeemedacceptabletotheBoard.SeeBankAmericaCorporation,78FederalReserve Bulletin338(1992);UnitedNewMexicoFinancialCorporation,77FederalReserveBulletin484(1991).Banco PopularhasprovidedasimilarcommitmenttotheDOJ. 19 ThePoncebankingmarketisdefinedtoincludethefollowingmunicipalitiesinPuertoRico:Adjuntas,Coamo, Guanica,Guayanilla,Jayuya,JuanaDiaz,Penuelas,Ponce,Salinas,SantaIsabel,Villalba,andYauco.

LegalDevelopments:FirstQuarter,2015 165 TheDOJalsohasconductedadetailedreviewof thepotentialcompetitiveeffectsof the proposalandhasadvisedtheBoardthatconsummationof theproposal,withtheproposed divestitureof branchesasdiscussedabove,wouldnotlikelyhaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket. Underthesecircumstances,andaftercarefulconsiderationof allthefactsof record,the Boardconcludesthattheanticompetitveeffectsof thisproposalintherelevantmarketsare clearlyoutweighedinthepublicinterestbytheprobableeffectof theBancoPopularproposalinmeetingtheconvenienceandneedsof thecommunitiestobeservedinPuerto Rico. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandfutureprospectsof theinstitutionsinvolvedandcertainother supervisoryfactors.TheBoardhasconsideredthesefactorsinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromthePuerto RicoOCFIandtheU.S.bankingsupervisorsof theinstitutionsinvolved,andpublicly reportedandotherfinancialinformation,includinginformationprovidedbyBanco Popular. Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandsignificantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof information,includingcapitaladequacy,assetquality,andearningsperformance. Inassessingfinancialresources,theBoardalsoevaluatesthefinancialconditionof the combinedorganizationatconsummation,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. BancoPopulariswellcapitalizedandwouldremainsoonconsummationof theproposal. Basedonitsreviewof therecordinthiscase,theBoardfindsthatBancoPopularhassufficientfinancialresourcestoeffecttheproposal.Asnoted,theproposedtransactionisstructuredasapurchaseof assetsandassumptionof liabilitiesfromtheFDICasreceiver,and thetransactionwillbefundedbycash. TheBoardalsohasconsideredthemanagerialresourcesof BancoPopularandhas reviewedtheexaminationrecordsof BancoPopular,includingassessmentsof itsmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsideredits supervisoryexperiencesandthoseof otherrelevantbankingsupervisoryagencies,includingtheFDIC,withtheorganizationsandtheirrecordsof compliancewithapplicable bankingandanti-money-launderinglaws.TheBoardalsohasconsideredBancoPopular’s plansforimplementingtheproposal,includingitsplansformanagingtheintegrationof theacquiredassetsandoperationsintothebank. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof BancoPopularareconsistent withapprovalundertheBankMergerAct,asaretheotherstatutoryfactors. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof the

166 FederalReserveBulletin|May2015 relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).20The CRArequiresthefederalfinancialsupervisoryagenciestoencouragefinancialinstitutions tohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistent withtheirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof its entirecommunity,includinglow-andmoderate-incomeneighborhoods,inevaluatingbank acquisitionproposals.BancoPopularreceivedanoverallratingof “outstanding”atits mostrecentCRAperformanceexaminationbytheFederalReserveBankof NewYork,as of January22,2013.21Afterconsummationof theproposal,BancoPopularplanstoimplementitsCRApoliciesatthebranchesandconsumerlendingoperationsacquiredfrom Doral. Asnoted,theBoardbelievesthattheproposalwillresultinsubstantialbenefitstotheconvenienceandneedsof thecommunitiestobeservedbymaintainingtheavailabilityof creditanddepositservicestocustomersof Doral.BancoPopularhasrepresentedthatconsummationof theproposalwouldallowittoprovideabroaderrangeof financialproducts andservicestothecustomersof Doral.Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtotheconvenienceandneedsof thecommunitiestobe servedandtheCRAperformancerecordsof therelevantdepositoryinstitutionsareconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”22 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.23These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.24 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Popularwouldhave approximately$36billionintotalconsolidatedassetsandwouldnotbelikelytoposesys- 20 12U.S.C.§2901etseq. 21 BancoPopular’sCRAevaluationwasconductedusingLargeBankCRAExaminationProcedures,andexaminersreviewedthebank’slendingactivityfromJanuary1,2010,throughDecember31,2012. 22 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 23 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 24 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:FirstQuarter,2015 167 temicrisks.Evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactorsisnotpresentinthis transaction.BancoPopularwouldcontinuetoengageintraditionalcommercialbanking activities.TheresultingorganizationwouldonlyexperienceverysmallincreasesinthemetricsthattheBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,withtheresultingfirmrankingoutsideof thetop100U.S.financialinstitutionsin termsof thosemetrics.Forexample,BancoPopular’sintrafinancialassetsandliabilities wouldcompriseanegligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction,andtheresultingfirmwouldcontrollessthan0.2percentof theassetsof allU.S. depositoryinstitutions.Theresultingorganizationwouldnotengageincomplexactivities, norwoulditprovidecriticalservicesinsuchvolumethatdisruptioninthoseserviceswould haveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtradeorresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches BancoPopularhasappliedundersection9of theFRAtoestablishandoperatebranches atthelocationsof thebranchesacquiredfromDoral,andtheBoardhasconsideredthe factorsitisrequiredtoconsiderwhenreviewinganapplicationunderthatsection.25Specifically,theBoardhasconsideredBancoPopular’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRA performance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,the Boardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyBancoPopularwithallof thecommitmentsmadeinconnectionwiththis proposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. BecausetheBoardhasfoundthatitmustactimmediatelytopreventtheprobablefailureof Doral,thetransactionmaybeconsummatedimmediately.Innoevent,however,shouldthe transactionbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBank of NewYorkactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary27,2015. 25 12U.S.C.§322;12CFR208.6.

168 FederalReserveBulletin|May2015 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard Appendix BranchestoBeEstablishedbyBancoPopulardePuertoRico 1. RexvilleTownCenter,CarrPr-167,EsquinaPr-199,BarrioPajaros,Bayamon, PuertoRico 2. 65thInfanteriaKm6.9SanAnton,Carolina,PuertoRico 3. PlazaDoradoRoad#693Km8.5Higuillar,Dorado,PuertoRico 4. Road#20Km3.4,Guaynabo,PuertoRico 5. 1451F.D.RooseveltAvenue,SanJuan,PuertoRico 6. PrRoadNumber2CornerLaFuenteAvenue,CandelariaWard,ToaBaja, PuertoRico 7. Carr#181BarrioLasCueveas,TrujilloAlto,PuertoRico Banco Popular North America New York, New York OrderApprovingtheAcquisitionof Assets,Assumptionof Liabilities,andtheEstablishment of Branches FRBOrderNo.2015–11(February27,2015) BancoPopularNorthAmerica(“BPNA”),1NewYork,NewYork,astatememberbank, hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsurance Act2(“BankMergerAct”)toacquirecertainassetsandassumecertainliabilitiesof Doral Bank(“Doral”),SanJuan,PuertoRico,3astatenonmemberbank,fromitsaffiliate,Banco Popular,SanJuan.Inaddition,BPNAhasappliedundersection9of theFederalReserve Act(“FRA”)4toestablishandoperatebranchesatthelocationsof thebranchesacquired fromDoral. TheFederalDepositInsuranceCorporation(“FDIC”)hasbeenappointedreceiverof Doralandhasscheduledthesaleof certainassetsandthetransferof certainliabilitiesof DoralforFebruary27,2015.TheFDIC,asreceiver,hasselectedaconsortiumbidled byBancoPopulardePuertoRico(“BancoPopular”),SanJuan,PuertoRico,astheleastcostproposalinaccordancewiththeleast-cost-resolutionrequirementsintheFederal DepositInsuranceAct(“FDIAct”)5andeliminatedmorecostlyproposals.TheFDIChas recommendedimmediateactionbytheBoardonBancoPopular’sconsortiumproposalto preventtheprobablefailureof Doral. 1 BPNAandBancoPopulardePuertoRico(“BancoPopular”)aresubsidiariesofPopular,Inc.(“Popular”), SanJuan,PuertoRico. 2 12U.S.C.§1828(c). 3 DoralisasubsidiaryofDoralFinancialCorporation,SanJuan. 4 12U.S.C.§321.Theselocationsarelistedintheappendix. 5 See12U.S.C.§§1821,1822,and1823(c)-(k).Theleast-costproceduresrequiretheFDICtochoosetheresolutionmethodbywhichthetotalamountoftheFDIC’sexpendituresandobligationsincurred(includingany immediateorlong-termobligationandanydirectorcontingentliability)istheleastcostlytotheDepositInsuranceFundofallpossiblemethods.

LegalDevelopments:FirstQuarter,2015 169 BPNAisamemberof theBancoPopularconsortium.BancoPopularwillacquireDoral’s assetsandassumeitsliabilitiesfromtheFDIC.6BPNAwillthenacquiretheNewYork branchesof DoraldirectlyfromBancoPopular. Onthebasisof theinformationbeforetheBoard,theBoardfindsthatitmustactimmediatelypursuanttotheBankMergerAct7tosafeguardthedepositorsof Doral.Accordingly, publicnoticeof theapplicationandopportunityforcommentarenotrequiredbytheBank MergerAct. BPNA,withtotalassetsof approximately$7.1billion,operatesinFlorida,NewJersey,and NewYork.8BPNAisthe42ndlargestinsureddepositoryinstitutioninNewYork,controllingdepositsof approximately$2.4billion,whichrepresent0.2percentof thetotalamount of depositsof insureddepositoryinstitutionsinthestate(“totaldeposits”). Doral,withtotalassetsof approximately$6.4billion,operatesinPuertoRico,NewYork, andFlorida.9Doralisthe53rdlargestinsureddepositoryinstitutioninNewYork,controllingdepositsof approximately$1.6billion,whichrepresent0.1percentof thetotaldeposits inthestate. Onconsummationof theproposal,BPNAwouldbecomethe31stlargestdepositoryinstitutioninNewYork,controllingdepositsof approximately$3.9billion,whichrepresent 0.3percentof totaldeposits. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovingaproposalthatwouldresultina monopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.10TheBankMergerActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitionortendtocreatea monopolyinanyrelevantbankingmarket,unlesstheBoardfindsthattheanticompetitive effectsof theproposedtransactionareclearlyoutweighedinthepublicinterestbythe probableeffectsof thetransactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.11 BPNAandDoralcompetedirectlyintheMetroNewYorkCity,NY-NJ-CT-PAbanking market(“MetroNewYorkmarket”).TheBoardhasreviewedthecompetitiveeffectsof the proposalinthisbankingmarketinlightof allthefactsof record.Inparticular,theBoard hasconsideredthefinancialconditionof DoralandthefactthattheOfficeof theCommissionerof FinancialInstitutionsof PuertoRicohasplacedthebankintoFDICreceivership.Inaddition,theFDIC,asreceiverforDoral,hasselectedBPNA’sconsortiumbid withBancoPopularinaccordancewiththeleast-cost-resolutionrequirementsintheFDI Act.TheBoardalsohasconsideredtheresultinglossof Doralasanindependentcompetitorinallthebankingmarketswhereitoperatesif thistransactionisnotconsummated,as 6 SeeBancoPopulardePuertoRico,FRBOrder2015-10(Feb.27,2015). 7 12U.S.C.§1828(c). 8 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014.Statedepositandrankingdataareas ofJune30,2014.AsofDecember31,2014,BPNAhadtotalassetsofapproximately$7.4billion.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 9 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014.Statedepositandrankingdataareas ofJune30,2014.AsofDecember31,2014,Doralhadtotalassetsofapproximately$6.4billion. 10 12U.S.C.§1828(c)(5)(A). 11 12U.S.C.§1828(c)(5)(B).

170 FederalReserveBulletin|May2015 wellasvariousmeasuresof competitionandmarketconcentration,andothercharacteristicsof themarket. Undertheproposal,BPNAwouldpurchasecertainassetsandassumecertainliabilitiesof DoralinNewYorkandtherebymergethebranchesintoaviableongoingconcernwith demonstratedcapitalstrengthandmanagementcapability.BPNA’sproposalwouldcontinuetheavailabilityof creditopportunitiesandbankingservicesforthecustomersand communitiesthatDoralservedandavoidseriouseconomicdisruptioninNewYork. Inaddition,theBoardhasconsideredthecompetitiveeffectsof theproposalintheMetro NewYorkmarketinlightof allthefactsof record.Inparticular,theBoardhasconsidered thenumberof competitorsthatwouldremaininthebankingmarket;therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)that BPNAwouldcontrol;12theconcentrationlevelsof marketdepositsandtheincreasein theselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);13andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheMetroNewYorkmarket.Onconsummationof theproposal,theMetroNewYorkmarketwouldremainunconcentratedas measuredbytheHHI.TheHHIchangewouldbeminimal,andnumerouscompetitors wouldremaininthemarket.14 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitionintheMetroNewYorkmarket. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesintheMetroNewYorkmarketorinanyotherrelevantbankingmarket. Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. 12 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 13 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. 14 BPNAoperatesthe38thlargestdepositoryinstitutionintheMetroNewYorkmarket,controllingapproximately$2.6billionindeposits,whichrepresentlessthan1percentofmarketdeposits.Doraloperatesthe52nd largestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$1.6billion,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,BPNAwould becomethe32ndlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$4.2billion,whichrepresentlessthan1percentofmarketdeposits.TheHHIfortheMetroNewYorkmarketwould remainunchangedat1308,and252competitorswouldremaininthemarket.

LegalDevelopments:FirstQuarter,2015 171 Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandfutureprospectsof theinstitutionsinvolvedandcertainother supervisoryfactors.TheBoardhasconsideredthesefactorsinlightof allthefactsof record,includingconfidentialsupervisoryandexaminationinformationfromtheU.S. bankingsupervisorsof theinstitutionsinvolved,andpubliclyreportedandotherfinancial information,includinginformationprovidedbyBPNA. Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance.Inassessingfinancialresources,theBoardalsoevaluatesthefinancialconditionof thecombinedorganizationatconsummation,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. BPNAiswellcapitalizedandwouldremainsoonconsummationof theproposal.Basedon itsreviewof therecordinthiscase,theBoardfindsthatBPNAhassufficientfinancial resourcestoeffecttheproposal.Asnoted,theproposedtransactionisstructuredasapurchaseof certainassetsandassumptionof certainliabilitiesfromBancoPopular,whichwill purchasetheassetsandassumetheliabilitiesfromtheFDICasreceiver,andthetransactionwillbefundedbycash. TheBoardalsohasconsideredthemanagerialresourcesof BPNAandhasreviewedthe examinationrecordsof BPNA,includingassessmentsof itsmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbankingsupervisoryagencies,includingtheFDIC,with theorganizationsandtheirrecordsof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredBPNA’splansforimplementingthe proposal,includingitsplansformanagingtheintegrationof theacquiredassetsand operationsintothebank. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof BPNAareconsistentwith approvalundertheBankMergerAct,asaretheotherstatutoryfactors. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).15The CRArequiresthefederalfinancialsupervisoryagenciestoencouragefinancialinstitutions tohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistent withtheirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof its entirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankacquisitionproposals. 15 12U.S.C.§2901etseq.

172 FederalReserveBulletin|May2015 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof BPNA,informationprovidedbyBPNA,andconfidentialsupervisoryinformation. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.16TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.17Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailedon-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof BPNA.BPNAreceivedanoverallratingof “satisfactory”atitsmost recentCRAperformanceexaminationbytheFederalReserveBankof NewYork,asof July15,2013.18BPNAreceiveda“lowsatisfactory”ratingfortheLendingTest,a“high satisfactory”ratingfortheInvestmentTest,andan“outstanding”ratingfortheService Test. InevaluatingtheServiceTest,examinersnotedthatBPNA’sdeliverysystemswerereadily accessibletothebank’sassessmentareasandtoindividualsof differentincomelevels andthatalternatedeliverysystemsprovidedimprovedaccessibilitytobankservices throughoutitsassessmentareas.TheexaminersconcludedthatBPNAcouldbeconsidered aleaderintheprovisionof communitydevelopmentservices. InevaluatingtheInvestmentTest,examinersfoundthatBPNAdemonstratedadequate responsivenesstocreditandcommunitydevelopmentneedsandrarelyusedcomplex investmentstosupportcommunitydevelopmentinitiatives.Theexaminersalsonotedthat BPNAhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsinits assessmentareas. InevaluatingtheLendingTest,examinersfoundthatBPNA’soveralllendingactivity reflectedadequateresponsivenesstothecreditneedsof itsassessmentareasandthat BPNAoriginatedahighpercentageof itsloansinitsassessmentareasduringtheperiod reviewed.Inaddition,examinersnotedthatthegeographicdistributionof loansdemonstratedexcellentpenetrationthroughoutLMIgeographiesandadequatepenetration amongcustomersof differentincomelevelsandamongbusinesscustomersof different sizes. Afterconsummationof theproposal,BPNAplanstoimplementitsCRApoliciesatthe acquiredbranchesof Doral. 16 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 17 12U.S.C.§2906. 18 BPNA’sCRAevaluationwasconductedusingLargeBankCRAExaminationProcedures,andexaminers reviewedthebank’slendingactivityfromJanuary1,2011,throughDecember31,2013.

LegalDevelopments:FirstQuarter,2015 173 B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.TheBoardbelievesthattheproposalwillresultinsubstantialbenefitstothe convenienceandneedsof thecommunitiestobeservedbymaintainingtheavailabilityof creditanddepositservicestocustomersof Doral.BPNAnotesthatwithoutitspurchase andassumptionof certainassetsandliabilitiesof Doral,Doral’soperationswould likelyceasetoexist.Inaddition,BPNArepresentsthatitwillbebetterpositionedtomeet thecreditneedsof thecommunitiescurrentlyservedbyDoral’sNewYorkbranches. BPNA’scustomerswillcontinuetoreceivethefullrangeof productsandservicestowhich theyareaccustomed.Inaddition,BPNArepresentsthattheproposalwillresultinanoverallenhancementinbankingproductsandfinancialservicesavailabletomembersof the communitiesinwhichDoral’sNewYorkbranchesarelocated.BPNAanticipatesthatit willbeabletoexpandandstrengthentheservicesalreadyprovidedtocurrentcustomersof bothDoral’sNewYorkbranchesandBPNA. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyBPNA,andconfidential supervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceand consumercomplianceprogramsof BPNA,itsreviewof examinationreports,anditsconsultationswithotheragencies,theBoardconcludesthattheconvenienceandneedsfactor, includingtheCRArecordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”19 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.20These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.21 19 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 20 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 21 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

174 FederalReserveBulletin|May2015 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Popularwouldhave approximately$36billionintotalconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.Evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactorsisnotpresentinthis transaction.BPNAwouldcontinuetoengageintraditionalcommercialbankingactivities. Theresultingorganizationwouldonlyexperienceverysmallincreasesinthemetricsthat theBoardconsiderstomeasureaninstitution’scomplexityandinterconnectedness,with theresultingfirmrankingoutsideof thetop100U.S.financialinstitutionsintermsof thosemetrics.Forexample,BPNA’sintrafinancialassetsandliabilitieswouldcomprisea negligibleshareof thesystemwidetotal,bothbeforeandafterthetransaction,andthe resultingfirmwouldcontrollessthan0.2percentof theassetsof allU.S.depositoryinstitutions.Theresultingorganizationwouldnotengageincomplexactivities,norwouldit providecriticalservicesinsuchvolumethatdisruptioninthoseserviceswouldhaveasignificantimpactonthemacroeconomicconditionof theUnitedStatesbydisruptingtrade orresultinginincreasedresolutiondifficulties. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches BPNAhasappliedundersection9of theFRAtoestablishandoperatebranchesatthe locationsof thebranchesacquiredfromDoral,andtheBoardhasconsideredthefactorsit isrequiredtoconsiderwhenreviewinganapplicationunderthatsection.22Specifically,the BoardhasconsideredBPNA’sfinancialcondition,management,capital,actionsinmeeting theconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyBPNAwithallof thecommitmentsmadeinconnectionwiththisproposal andtheconditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedto beconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedingsunderapplicablelaw. BecausetheBoardhasfoundthatitmustactimmediatelytopreventtheprobablefailureof Doral,thetransactionmaybeconsummatedimmediately.Innoevent,however,shouldthe transactionbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBank of NewYorkactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary27,2015. 22 12U.S.C.§322;12CFR208.6.

LegalDevelopments:FirstQuarter,2015 175 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard Appendix BranchestobeEstablishedbyBancoPopularNorthAmerica 1. 623FifthAvenue,NewYork,NewYork10022 2. 875ThirdAvenue,NewYork,NewYork10022 3. 345ParkAvenueSouth,NewYork,NewYork10010 Centennial Bank Conway, Arkansas OrderApprovingtheAcquisitionof Assets,Assumptionof Liabilities,andtheEstablishment of Branches FRBOrderNo.2015–09(February27,2015) CentennialBank(“Centennial”),1Conway,Arkansas,astatememberbank,hasrequested theBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct2(“Bank MergerAct”)toacquirecertainassetsandassumecertainliabilitiesof DoralBank (“Doral”),SanJuan,PuertoRico,astatenonmemberbank.Inaddition,Centennialhas appliedundersection9of theFederalReserveAct(“FRA”)3toestablishandoperate branchesatthelocationsof thebranchesacquiredfromDoral. TheFederalDepositInsuranceCorporation(“FDIC”)hasbeenappointedreceiverof Doralandhasscheduledthesaleof certainassetsandthetransferof certainliabilitiesof DoralforFebruary27,2015.TheFDIC,asreceiver,hasselectedaconsortiumbidleadby BancoPopulardePuertoRico(“BancoPopular”),SanJuan,PuertoRico,astheleast-cost proposalinaccordancewiththeleast-cost-resolutionrequirementsintheFederalDeposit InsuranceAct(“FDIAct”)4andeliminatedmorecostlyproposals.TheFDIChasrecommendedimmediateactionbytheBoardonBancoPopular’sconsortiumproposalto preventtheprobablefailureof Doral. Centennialisamemberof theBancoPopularconsortium.BancoPopularwillacquirecertainassetsandassumecertainliabilitiesfromtheFDIC.5Centennialwillthenacquirethe Floridabranchesof DoraldirectlyfromBancoPopular. Onthebasisof theinformationbeforetheBoard,theBoardfindsthatitmustactimmediatelypursuanttotheBankMergerAct6tosafeguardthedepositorsof Doral.Accordingly, publicnoticeof theapplicationandopportunityforcommentisnotrequiredbytheBank MergerAct. 1 CentennialisasubsidiaryofHomeBancshares,Inc.(“Home”),Conway,Arkansas. 2 12U.S.C.§1828(c). 3 12U.S.C.§321.Theselocationsarelistedintheappendix. 4 See12U.S.C.§§1821,1822,and1823(c)-(k).Theleast-costproceduresrequiretheFDICtochoosetheresolutionmethodinwhichthetotalamountoftheFDIC’sexpendituresandobligationsincurred(includingany immediateorlong-termobligationandanydirectorcontingentliability)istheleastcostlytotheDepositInsuranceFundofallpossiblemethods. 5 SeeBancoPopulardePuertoRico,FRBOrder2015-10(Feb.27,2015). 6 12U.S.C.§1828(c).

176 FederalReserveBulletin|May2015 Centennial,withtotalassetsof approximately$7.2billion,operatesinAlabama,Arkansas, andFlorida.7Centennialisthe35thlargestinsureddepositoryinstitutioninFlorida,controllingdepositsof approximately$1.5billion,whichrepresent0.3percentof thetotal depositsof insureddepositoryinstitutionsinthestate(“totaldeposits”). Doral,withtotalassetsof approximately$6.4billion,operatesinPuertoRico,NewYork, andFlorida.8Doralisthe50thlargestinsureddepositoryinstitutioninFlorida,controlling depositsof approximately$921million,whichrepresent0.2percentof thetotaldepositsin thatstate. Onconsummationof thisproposal,Centennialwouldbecomethe25thlargestinsured depositoryinstitutioninFlorida,controllingdepositsof approximately$2.4billion,which represent0.5percentof thetotaldepositsinthatstate. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovingaproposalthatwouldresultina monopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantbankingmarket.9TheBankMergerActalsoprohibitstheBoardfrom approvingaproposalthatwouldsubstantiallylessencompetitionortendtocreatea monopolyinanyrelevantbankingmarket,unlesstheBoardfindsthattheanticompetitive effectsof theproposedtransactionareclearlyoutweighedinthepublicinterestbythe probableeffectsof thetransactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.10 CentennialandDoralcompetedirectlyinthePensacolaandPanamaCitybankingmarkets,bothinFlorida.TheBoardhasreviewedthecompetitiveeffectsof theproposalin eachof thesebankingmarketsinlightof allthefactsof record.Inparticular,theBoard hasconsideredthefinancialconditionof DoralandthefactthattheOfficeof theCommissionerof FinancialInstitutionsof PuertoRico(“PuertoRicoOCFI”)hasplacedthebank intoFDICreceivership.Inaddition,theFDIC,asreceiverforDoral,hasselectedCentennial’sconsortiumbidwithBancoPopularinaccordancewiththeleast-cost-resolution requirementsintheFDIAct.TheBoardalsohasconsideredtheresultinglossof Doralas anindependentcompetitorinallthebankingmarketswhereitoperatesif thistransaction isnotconsummated,aswellasvariousmeasuresof competitionandmarketconcentration, andothercharacteristicsof themarkets. Undertheproposal,Centennialwouldpurchasecertainassetsandassumecertainliabilities of DoralinFloridaandtherebymergethebranchesacquiredfromDoralintoaviable ongoingconcernwithdemonstratedcapitalstrengthandmanagementcapability.Centennial’sproposalwouldcontinuetheavailabilityof creditopportunitiesandbankingservices forthecustomersandcommunitiesthatDoralservedandavoidseriouseconomicdisruptioninFlorida. Inaddition,theBoardhasconsideredthecompetitiveeffectsof theproposalinthePensacolaandPanamaCitybankingmarketsinlightof allthefactsof record.Inparticular,the 7 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014.Statedepositandrankingdataareas ofJune30,2014.AsofDecember31,2014,Centennialhadtotalassetsofapproximately$7.2billion.Inthis context,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 8 Assetandnationwidedeposit-rankingdataareasofSeptember30,2014.Statedepositandrankingdataareas ofJune30,2014.AsofDecember31,2014,Doralhadtotalassetsofapproximately$5.9billion. 9 12U.S.C.§1828(c)(5)(A). 10 12U.S.C.§1828(c)(5)(B).

LegalDevelopments:FirstQuarter,2015 177 Boardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarkets (“marketdeposits”)thatCentennialwouldcontrol;theconcentrationlevelsof market depositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”);11andothercharacteristicsof themarkets. InthePanamaCityArea,Florida,bankingmarket(the“PanamaCitybankingmarket”),12 Centennialisthefifthlargestdepositoryinstitution,controllingapproximately$256.4millionindeposits,whichrepresentapproximately8.8percentof depositsinthatmarket. Doralisthelargestdepositoryinstitution,controllingapproximately$763millionindeposits,whichrepresentapproximately23.7percentof depositsinthatmarket.InthePensacola Area,Florida,bankingmarket(the“Pensacolabankingmarket”),13Centennialisthe17th largestdepositoryinstitution,controllingapproximately$22.5millionindeposits,which representlessthan1percentof thedepositsinthatmarket.Doralisthe11thlargestdepositoryinstitution,controllingapproximately$158.2millionindeposits,whichrepresent approximately3.3percentof thedepositsinthatmarket. ThisproposalwouldbeconsistentwithBoardprecedentinthePanamaCityandPensacola bankingmarkets.Centennialwouldbecomethelargestdepositoryinstitutioninthe PanamaCitybankingmarket,controllingapproximately$1.0billionindeposits,which representapproximately31.7percentof depositsinthatmarket.TheHHIwouldincrease approximately379points,from1164to1542.Fifteenothercommercialbankingorganizationswouldremaininthatmarket.Centennialwouldbecomethetenthlargestdepository institutioninthePensacolabankingmarket,controllingapproximately$180.7millionin deposits,whichrepresentapproximately3.8percentof depositsinthatmarket.TheHHI wouldincreaseby3points,from1111to1114.Twentyothercommercialbankingorganizationswouldremaininthatmarket. TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesinthebankingmarketsinwhichCentennialandDoralcompeteorinany otherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandfutureprospectsof theinstitutionsinvolvedandcertainother supervisoryfactors.TheBoardhasconsideredthesefactorsinlightof allthefactsof 11 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. 12 ThePanamaCitybankingmarketincludesBayandGulfcounties,andthesouthernhalfofWashington County,includingthetownsofVernonandWausau,allinFlorida. 13 ThePensacolabankingmarketisdefinedtoincludeEscambiaandSantaRosaCounties,Florida.

178 FederalReserveBulletin|May2015 record,includingconfidentialsupervisoryandexaminationinformationfromtheU.S. bankingsupervisorsof theinstitutionsinvolved,andpubliclyreportedandotherfinancial information,includinginformationprovidedbyCentennial. Inevaluatingfinancialfactorsinexpansionaryproposalsbybankingorganizations,the Boardreviewsthefinancialconditionof theorganizationsinvolvedonbothaparent-only andconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandsignificantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof information,includingcapitaladequacy,assetquality,andearningsperformance. Inassessingfinancialresources,theBoardalsoevaluatesthefinancialconditionof the combinedorganizationatconsummation,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. Centennialiswellcapitalizedandwouldremainsoonconsummationof theproposal. Basedonitsreviewof therecordinthiscase,theBoardfindsthatCentennialhassufficient financialresourcestoeffecttheproposal.Asnoted,theproposedtransactionisstructured asapurchaseof certainassetsandassumptionof certainliabilitiesfromBancoPopular, whichhaspurchasedtheassetsandassumedtheliabilitiesfromtheFDICasreceiver,and thetransactionwillbefundedbycash. TheBoardalsohasconsideredthemanagerialresourcesof Centennialandhasreviewed theexaminationrecordsof Centennial,includingassessmentsof itsmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experiencesandthoseof otherrelevantbankingsupervisoryagencies,includingtheFDIC, withtheorganizationanditsrecordof compliancewithapplicablebankingandantimoney-launderinglaws.TheBoardalsohasconsideredCentennial’splansforimplementingtheproposal,includingitsplansformanagingtheintegrationof theacquiredassets andoperationsintothebank. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof Centennialareconsistentwith approvalundertheBankMergerAct,asaretheotherstatutoryfactors. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtakeintoaccounttherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).14The CRArequiresthefederalfinancialsupervisoryagenciestoencouragefinancialinstitutions tohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistent withtheirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof its entirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankacquisitionproposals. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof Centennial,informationprovidedbyCentennial,andconfidential supervisoryinformation. 14 12U.S.C.§2901etseq.

LegalDevelopments:FirstQuarter,2015 179 A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.15TheCRArequires thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.16Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailedon-siteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof Centennial.Centennialreceivedanoverallratingof “satisfactory”at itsmostrecentCRAperformanceexaminationbytheFederalReserveBankof St.Louis, asof July8,2013.17Centennialreceived“highsatisfactory”ratingsfortheLendingTest, theInvestmentTest,andtheServiceTest. InevaluatingtheServiceTest,examinersnotedthatCentennial’sdeliverysystemswere accessibletothebank’sassessmentareasandindividualsof differentincomelevels.Inaddition,examinersnotedthatCentennial’sservicesdidnotvaryinawaythatwouldinconvenienceindividualsinitsassessmentarea.TheexaminersalsonotedthatCentennialprovidedarelativelyhighlevelof communitydevelopmentserviceswithintheassessment areas. InevaluatingtheInvestmentTest,examinersfoundthatCentennialmadeasignificantlevel of qualifiedcommunitydevelopmentinvestmentsandgrantsandwasoccasionallyina leadershipposition.TheexaminersalsonotedthatCentennialmadeagoodlevelof qualifiedcommunitydevelopmentinvestmentsinitsassessmentareas. InevaluatingtheLendingTest,examinersfoundthatCentennial’soveralllendingactivity reflectedgoodresponsivenesstothecreditneedsof itsassessmentareasandthatCentennialoriginatedasubstantialpercentageof itsloansinitsassessmentareasduringthe periodreviewed.Inaddition,examinersnotedthatthegeographicdistributionof loans demonstratedgoodpenetrationthroughouttheassessmentareasandamongcustomersof differentincomelevelsandbusinesscustomersandfarmsof differentsizes. Afterconsummationof theproposal,CentennialplanstoimplementitsCRApoliciesat thebranchesacquiredfromDoral. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.TheBoardbelievesthattheproposalwillresultinsubstantialbenefitstothe convenienceandneedsof thecommunitiestobeservedbymaintainingtheavailabilityof creditanddepositservicestocustomersof Doral.CentennialrepresentsthatDoral’s customerswillcontinuetoreceivethefullrangeof productsandservicestowhichtheyare accustomed.AlthoughCentennialdoesnotanticipatethattherewillbeanyimmediatesig- 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 16 12U.S.C.§2906. 17 Centennial’sCRAevaluationwasconductedusingLargeBankCRAExaminationProcedures,andexaminers reviewedthebank’slendingactivityin2011and2012.

180 FederalReserveBulletin|May2015 nificantchangesinservicesorproductsasaresultof theproposal,Centennial’smanagementwillevaluatetheproducts,services,andfeeschedulesof Doralandmakecertain changesinordertoalignthemwithwhatiscurrentlyofferedbyCentennial. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyCentennial,andconfidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof Centennial,itsreviewof examination reports,anditsconsultationswithotheragencies,theBoardconcludesthattheconvenience andneedsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolved inthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”18 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.19These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.20 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Homewouldhave approximately$7.9billioninconsolidatedassetsandwouldnotbelikelytoposesystemic risks.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincrease ininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. 18 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 19 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 20 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:FirstQuarter,2015 181 Establishmentof Branches Centennialhasappliedundersection9of theFRAtoestablishandoperatebranchesatthe locationsof theacquiredbranchesof Doral,andtheBoardhasconsideredthefactorsitis requiredtoconsiderwhenreviewinganapplicationunderthatsection.21Specifically,the BoardhasconsideredCentennial’sfinancialcondition,management,capital,actionsin meetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfinds thosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyCentennialwithallthecommitmentsmadeinconnectionwiththisproposal andtheconditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedto beconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedingsunderapplicablelaw. BecausetheBoardhasfoundthatitmustactimmediatelytopreventtheprobablefailureof Doral,thetransactionmaybeconsummatedimmediately.Innoevent,however,shouldthe transactionbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisorder, unlesssuchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBank of St.Louisactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary27,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard Appendix 1. 1002West23rdStreet,PanamaCity,Florida32405 2. 701HarrisonAvenue,PanamaCity,Florida32401 3. 123NorthTyndallParkway,PanamaCity,Florida32404 4. 415NorthRichardJacksonBlvd.,PanamaCityBeach,Florida32404 5. 4920BayouBlvd.,Pensacola,Florida32503 Comerica Bank Dallas, Texas OrderApprovingEstablishmentof aBranch FRBOrderNo.2015–01(January15,2015) ComericaBank,astatememberbanksubsidiaryof ComericaIncorporated,bothof Dallas,Texas,hasrequestedtheBoard’sapprovalundersection9of theFederalReserveAct 21 12U.S.C.§322;12CFR208.6.

182 FederalReserveBulletin|May2015 (“FRA”)1andtheBoard’sRegulationH2toestablishabranchat3168thAvenue,Coopersville,Michigan(the“Coopersvillebranch”). Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredthenoticeandallcomments receivedinlightof thefactorsspecifiedintheFRA. ComericaBankisthesecondlargestdepositoryinstitutioninMichiganwith215branches, controllingapproximately$25.8billionindeposits,whichrepresentapproximately14.6percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.4ComericaBank’smainofficeisinDallas,anditoperates138branchesthroughoutTexas.ComericaBankoperatesatotalof 485branchesinArizona,California,Florida,Michigan,and Texas. UndertheBoard’sRegulationH,whichimplementssection9of theFRA,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 thesefactorsandthepubliccomment receivedontheproposal.Acommenterobjectedtotheproposal,allegingthatComerica BankdiscriminatesagainstAfricanAmericansandredlinesAfricanAmericanneighborhoods,particularlyintheHouston,TexasMetropolitanStatisticalArea(“HoustonMSA”), withrespecttoitsbranching,marketing,andlendingactivities.8 Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof ComericaBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,informationprovidedbyComericaBank,andthecommentreceived.ComericaBankiswellcapitalized andwouldremainsoonconsummationof theproposal.Afterconsideringallthefactsof record,theBoardhasconcludedthatthefinancialhistoryandcondition,capitaladequacy, andfutureearningsprospectsof ComericaBankareconsistentwithapprovalof thepro- 1 12U.S.C.§321etseq. 2 12CFRpart208. 3 12CFR262.3(b). 4 DataareasofJune30,2014,themostrecentavailable,andareupdatedtoreflectmergersthroughthedate.In thiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks. 5 12CFR208.6(b). 6 12U.S.C.§2901etseq. 7 Section9oftheFRA,12U.S.C.§321,whichappliestheinterstatebranchingprovisionsoftheNationalBank Act,12U.S.C.§36(c)(2),permitsastatememberbankwithabranchinastateotherthanthebank’shome statetoestablishadditionalbranchesinthatstatetothesameextentasabankcharteredinthatstate.Comerica BankcurrentlyoperatesbranchesinMichiganandispermittedunderbothMichiganstatelawandsection9of theFRAtoestablishadditionalbranchesinMichigan.See12U.S.C.§§36(c)(2),36(f)(1)(A);Mich.Comp. LawsAnn.§487.13711(7)(statingthatanout-of-statebanklocatedinastatewhoselawspermittheestablishmentofabranchinthatstate,mayestablishandoperatebranchesinMichigan). 8 Redliningisthepracticeofdenyingacreditworthyapplicantaloanorserviceinacertainneighborhoodeven thoughtheapplicantmayotherwisebeeligiblefortheloanorservice.

LegalDevelopments:FirstQuarter,2015 183 posal.TheBoardalsohasreviewedComericaBank’sproposedinvestmentintheCoopersvillebranchandconcludedthatitsinvestmentisconsistentwithregulatorylimitationson investmentinbankpremises.9 InconsideringComericaBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems,andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithComericaBankandthebank’srecordof compliancewithapplicablebankinglaws,including anti-moneylaunderinglaws.ComericaBankisconsideredtobewellmanaged.Basedon thisreviewandallthefactsof record,theBoardhasconcludedthatthecharacterof ComericaBank’smanagement,aswellastherecordsof effectivenessof ComericaBankincombattingmoneylaunderingactivities,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations TheBoardalsohasconsideredtheconvenienceandneedsof thecommunitytobeserved, takingintoaccountthecommentreceivedandthebank’sperformanceundertheCRA. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation.10Inaddition,theCRArequiresthe appropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepository institution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.11 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof ComericaBank,datareportedbyComericaBankundertheHome MortgageDisclosureAct(“HMDA”),12otherinformationprovidedbyComericaBank, confidentialsupervisoryinformation,thepubliccommentreceivedontheproposal,and otherinformation.Asnotedabove,acommenterobjectedtotheproposal,allegingthat ComericaBankhadengagedindiscriminatorylendingpractices,particularlyintheHoustonMSA. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof thatinstitution.13TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting thecreditneedsof itsentirecommunity,includingLMIneighborhoods.14Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. ComericaBankwasassignedanoverall“satisfactory”ratingatitsCRAperformance evaluationbytheFederalReserveBankof Dallas(“ReserveBank”)asof August16,2012 9 12CFR208.21(a). 10 12U.S.C.§2901(b). 11 12U.S.C.§2903. 12 12U.S.C.§2801etseq. 13 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 14 12U.S.C.§2906.

184 FederalReserveBulletin|May2015 (“ComericaBankEvaluation”).15ComericaBankreceived“highsatisfactory”ratingsfor theLendingTestandtheServiceTest,andan“outstanding”ratingfortheInvestment Test.16InTexas,ComericaBankreceivedanoverall“outstanding”rating,a“highsatisfactory”ratingfortheLendingTest,and“outstanding”ratingsfortheInvestmentTestand theServiceTest. AsdescribedintheComericaBankEvaluation,ReserveBankexaminersfoundthatthe bank’soveralllendingactivityintheassessmentareaswasgoodintheoriginationandpurchasingof HMDA-reportableloansandsmallbusinessloans.Examinersalsofoundthat ComericaBank’slendinglevelsreflectedagoodresponsivenesstotheassessmentareas’ creditneeds.Examinersnotedthatthebankhadagoodpenetrationof loansamongborrowersof differentincomelevels,andamongfarmsandbusinessesof differencesizes. Examinersalsofoundthatthebankhadanexcellentgeographicdistributionof loansinthe assessmentareas,includinginLMIgeographiesintheassessmentareas. ExaminersnotedthatComericaBankmadeanadequatelevelof communitydevelopment loans.ExaminersfoundthatComericamadeuseof innovativeandflexiblelendingpracticestoservethecreditneedsof itsassessmentareas.ExaminersalsonotedthatComerica Bank’scommunitydevelopmentloanswereusedforavarietyof purposes,includingthe financingof affordablehousingandhigh-impactcommunitydevelopmentprojects;the promotionof economicdevelopmentandjobcreation;andtherevitalizationof targeted communitiesinLMIgeographies. InevaluatingComericaBank’sperformanceundertheInvestmentTest,examinersfound thatComericaBankmadeanexcellentlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsduringtheevaluationperiod.Examinersnotedthatthebank’sinvestmentswereparticularlyresponsivetotheassessmentareas’needsforaffordablehousing andfinancialassistancetosmallbusinesses.ExaminershighlightedComericaBank’s investmentsinlow-incomehousingtaxcreditprojects,mortgage-backedsecurities,smallbusinessinvestmentcorporations,communitydevelopmentfinancialinstitutions,municipal bondstargetedtoLMIareas,zero-interestdeposits,andmutualfundsthatsupported affordablehousing.ExaminersalsonotedthatComericaBankmadecharitablecontributionstosupportaffordablehousinginitiatives;smallbusinessdevelopment;andeducational,healthcare,andsocialservicesorganizationsthatprimarilyservedLMIindividuals andgeographies. InevaluatingComericaBank’sperformanceundertheServiceTest,examinersfoundthat ComericaBank’sretailbankingservicesandproductsweregenerallyaccessibletobusinessesof differentsizesandindividualsof differentincomelevels.Further,examinershighlightedthatComericaBankhaddemonstratedleadershipinprovidingcommunitydevelopmentservicesinitsassessmentareas,andofferedfinancialliteracyprograms,affordable housingseminars,andothereconomicdevelopmentservices. 15 TheComericaBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The scopeoftheComericaBankEvaluationfortheLendingTestincludedanevaluationofdatafromJanuary1, 2010,throughDecember31,2011,aswellasdataregardingcertaincommunitydevelopmentloansfrom July28,2011,throughDecember31,2012.TheInvestmentTestandtheServiceTestincludedevaluationsof datafromJanuary1,2010,throughMarch31,2012. 16 TheComericaBankEvaluationincludedareviewofComericaBank’s38assessmentareas,includingafullscopereviewof18oftheseassessmentareas.TheComericaBankEvaluationincludedafull-scopereviewofat leastoneassessmentareawithineachstatewhereComericaBankhadanoffice.

LegalDevelopments:FirstQuarter,2015 185 B.FairLendingandOtherConsumerProtectionLaws FairLendingAnalysis.TheBoardreviewedComericaBank’sbranching,marketing,and lendingactivities,particularlyintheHoustonMSA,andperformedaredliningreviewof smallbusinesslendingandresidentialmortgagelendingfor2012and2013. Examinersfoundthatmorethan26percentof ComericaBank’sbranchesarelocatedin LMItractsintheHoustonMSA.Examinersconsideredthispercentagetobereasonable andadequateinprovidingbankingservicestotheLMIpopulationsinthatarea,basedon thepercentageof LMIcensustractsintheHoustonMSAandbasedonexamination guidelines.Examinersalsofoundthatmorethan45percentof ComericaBank’sbranches intheHoustonMSAareincensustractswhereminorityresidentsrepresentamajorityof thepopulation.ExaminersreviewedComericaBank’smarketingandoutreachactivitiesin theHoustonMSAandfoundthattheseactivitiesextendtoallgeographiesintheHouston MSAandthatthebankadvertisesinmediaoutletsthatreachminoritypopulationsand sponsorscommunityevents,civicorganizations,andmulti-culturalinitiativesdesignedto attractminorities.ExaminersalsofoundthatComericaBank’sbranchingintheHouston MSAshowsreasonablepenetrationof LMItractsandtractswhereminorityresidentsrepresentamajorityof thepopulation,andthatthebank’smarketingactivitiesandcommunityoutreachactivitiesreach,andinsomecasesspecificallytarget,LMIandminority populations,includingAfricanAmericans. ExaminersalsoreviewedComericaBank’slendingpoliciesandprocedures,includingits fairlendingpolicy.ComericaBankhasinstitutedadetailedandcomprehensiveconsumer complianceandfairlendingprogram.ComericaBankconductsongoingmonitoringand testing,includingperformingfairlendingriskassessmentsandaudits,toensurecompliance withallfairlendingandotherconsumerprotectionlawsandregulations.Thebankalso performsstatisticalanalysesof itslendingdataandcomparativefilereviewstodetect underwritingandpricingdisparities.Inaddition,ComericaBank’spoliciesrequirethatits mortgagelendingmeetwelldefinedguidelinesandunderwritingcriteria,andanyexceptionsmustbewelldocumentedandapprovedbyaseniorunderwriter.ComericaBank requiresmandatoryannualfairlendingtrainingforallof itsemployeesandofferstargeted fairlendingtrainingtoemployeesandseniormanagementonanongoingbasis. HMDAData.TheBoardanalyzedComericaBank’sHMDAdatafrom2012and2013in theHoustonMSArelatedtoallHMDA-reportableloanstodevelopaviewof thebank’s overalllendingpatterns,andexaminedthesubsetof thosedatarelatedspecificallytothe loanproductsthatwerethesubjectof thepubliccommentreceivedontheproposal, includingsmallbusinesslending.TheBoardanalyzedComericaBank’sassessmentareain theHoustonMSA,whichincludesthespecificmarketareasaddressedinthepublic comment. TheBoardisconcernedwhenHMDAdataforaninstitutionindicatelendingdisparities. TheBoardbelievesthatalllendinginstitutionsareobligatedtoensurethattheirlending practicesarebasedoncriteriathatareconsistentwithsafeandsoundlendingbutalsoto provideequalaccesstocreditbycreditworthyapplicants,regardlessof theirraceorethnicity.AlthoughHMDAdatamayreflectcertaindisparitiesintheratesof loanapplications, originations,anddenialsamongmembersof differentracialorethnicgroupsincertain localareas,HMDAdataalonedonotprovideasufficientbasisonwhichtoconclude whetherabankexcludesordeniescredittoanygrouponaprohibitedbasis.17Fullyevalu- 17 Thedata,forexample,donotaccountforthepossibilitythataninstitution’soutreacheffortsmayattracta largerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasis foranindependentassessmentofanyapplicant’screditworthiness.Inaddition,credithistoryproblems,exces-

186 FederalReserveBulletin|May2015 atingabank’scompliancewithfairlendinglawsandregulationsrequiresathorough reviewof thebank’sapplicationandunderwritingpoliciesandprocedures,aswellasaccess toinformationcontainedintheapplicationfiles,todeterminewhethertheobservedlendingdisparitiespersistaftertakingintoaccountlegitimateunderwritingfactors. Incomparingthepercentageof ComericaBank’sHMDAapplicationsandoriginationsin majority-minoritycensustractstoothersimilarlysituatedlenders,examinersdidnotfind statisticallysignificantdisparitiesintheHoustonMSAin2012or2013.Inaddition,examinersdidnotfindstatisticallysignificantdisparitiesinthepercentagesof lendingbythe bankinAfricanAmerican-onlycensustractscomparedtotheaggregateintheHouston MSA.InreviewingComericaBank’ssmallbusinesslendingintheHoustonMSAin2012 and2013,examinersfoundthatthebankoutperformedtheaggregateinmajority-minority censustractsasawellasinAfricanAmerican-onlycensustracts. C.ConclusiononConvenienceandNeedsConsiderations ComericaBankproposestoestablishtheCoopersvillebranchinconnectionwiththe plannedclosureof anotherComericaBankbranch,locatedat345MainStreet,Coopersville,Michigan,whichisapproximately1.4milesfromtheproposedlocationof theCoopersvillebranch.TheCoopersvillebranchwouldbewithinthesamecensustractasthe branchonMainStreet.ComericaBankrepresentsthattheCoopersvillebranchwouldprovidepublicbenefitsbyenablingcustomerstomaintainaccesstoitsbankingservicesafter theclosureof thebranchonMainStreet.ComericaBankalsorepresentsthattheCoopersvillebranchwouldprovidepublicbenefitsbyincreasingfunctionalityandconveniencefor itscustomers,andthebranch’svisibilitywouldattractnewopportunitiesforitscustomers inthearea.Basedonallthefactsof record,includingconsultationswithotheragencies, andforthereasonsdescribedinthisorder,theBoardconcludesthattheconvenienceand needsfactor,includingComericaBank’sCRArecord,isconsistentwithapprovalof the application. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.18TheBoard’sapprovalisspecificallyconditionedonComericaBank’scompliancewithallcommitmentsmadetotheBoardinconnectionwiththeproposalaswellasallconditionsimposedinthisorder.Thecommitments andconditionsreliedonbytheBoardaredeemedtobeconditionsimposedinwritingin connectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. sivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(the reasonsmostfrequentlycitedforacreditdenialorhighercreditcost)arenotalwaysavailablefromHMDA data. 18 TheBoardinterpretsthecommentreceivedontheproposaltoincludearequestthattheBoardholdpublic 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:FirstQuarter,2015 187 Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBank,actingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveJanuary15,2015. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard First Farmers Bank & Trust Converse, Indiana OrderApprovingtheMergerof BanksandtheEstablishmentof aBranch FRBOrderNo.2015–06(February17,2015) FirstFarmersBank&Trust(“FFBT”),Converse,Indiana,1astatememberbank,has requestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct2 (“BankMergerAct”)tomergewithFirstNationalBankof Chrisman(“Chrisman”), Chrisman,Illinois.3Inaddition,FFBThasappliedundersection9of theFederalReserve Act(“FRA”)4toestablishandoperateabranchatthelocationof Chrisman’ssoleoffice. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.5Thetimeforfilingcommentshasexpired.AsrequiredbytheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral.TheBoardhasconsideredtheapplicationsandallcommentsreceivedinlight of thefactorssetforthintheBankMergerActandtheFRA. FFBT,withtotalassetsof approximately$1.4billion,operatesinIndianaandIllinois.6 FFBTisthe23rdlargestinsureddepositoryinstitutioninIndiana,controllingdepositsof approximately$1.0billion,whichrepresentlessthan1percentof thetotaldepositsin insureddepositoryinstitutionsinthestate(“statedeposits”).7FFBTisthe173rdlargest insureddepositoryinstitutioninIllinois,controllingdepositsof approximately$221.0million,whichrepresentlessthan1percentof totalstatedeposits. Chrisman,withtotalassetsof approximately$38.5million,operatesonlyinIllinois.Chrismanisthe478thlargestinsureddepositoryinstitutioninIllinois,controllingdepositsof approximately$34.8million,whichrepresentlessthan1percentof totalstatedeposits.On consummationof theproposal,FFBTwouldbecomethe150thlargestinsureddepository 1 FFBTisasubsidiaryofFirstFarmersFinancialCorporation,afinancialholdingcompany,alsoofConverse, Indiana. 2 12U.S.C.§1828(c). 3 ChrismanisasubsidiaryofChrismanBancorp,Inc.,abankholdingcompany,Springfield,Illinois. 4 12U.S.C.§321. 5 12CFR262.3(b). 6 AssetdataareasofSeptember30,2014,updatedtoincludetheassetsacquiredbyFFBTthroughthepurchase ofninebranchesfromBMOHarrisBankNationalAssociation,Chicago,Illinois,onNovember14,2014. 7 DepositdataandstaterankingsareasofJune30,2014,updatedtoincludetheanticipatedmergerswithCommunityBank,Hoopeston,Illinois,andUnitedCommunityBank,Oakwood,Illinois,bothofwhichwere approvedbytheFederalReserveonFebruary3,2015.Inthiscontext,insureddepositoryinstitutionsinclude insuredcommercialbanks,savingsbanks,andsavingsassociations.

188 FederalReserveBulletin|May2015 institutioninIllinois,controllingdepositsof approximately$255.8million,representing lessthan1percentof totalstatedeposits. InterstateAnalysis Section102of theRiegle-NealInterstateBankingandBranchingEfficiencyActof 1994 (“Riegle-NealAct”)authorizesabanktomergewithabanklocatedinanotherstateunder certainconditionsunless,beforeJune1,1997,thehomestateof oneof thebanksinvolved inthetransactionadoptedalawexpresslyprohibitingmergertransactionsinvolvingoutof-statebanks.8Forpurposesof theRiegle-NealAct,thehomestateof FFBTisIndiana, andthehomestateof ChrismanisIllinois.9FFBThasprovidedacopyof itsBankMerger Actapplicationtotherelevantstateagencyandhascompliedwithstatelawfilingrequirements.10Theproposalalsocomplieswithallotherrequirementsof theRiegle-NealAct.11 Accordingly,theRiegle-NealActdoesnotprohibitthisinterstatebranchacquisition. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovingaproposalthatwouldresultina monopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof banking.12TheBankMergerActalsoprohibitstheBoardfromapprovingaproposalthat wouldsubstantiallylessencompetitionortendtocreateamonopolyinanyrelevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposedtransactionare clearlyoutweighedinthepublicinterestbytheprobableeffectsof thetransactionin meetingtheconvenienceandneedsof communitiestobeserved.13 FFBTandChrismancompetedirectlyintheEdgarCounty,Illinoismarket.14FFBToperatestwobranchesinParis,Illinois,locatedinthesouthernportionof themarket.Chrisman’smainofficeandonlylocationisinChrisman,Illinois,inthenorthernportionof the market.TheBoardhasreviewedthecompetitiveeffectsof theproposalinthisbanking marketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket,therelativeshareof thetotal depositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatFFBT wouldcontrol,15theconcentrationlevelsof marketdepositsandtheincreaseintheselevels asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Jus- 8 12U.S.C.§1831u. 9 See12U.S.C.§1831u(g)(4). 10 12U.S.C.§1831u(b)(1).TheIndianaDepartmentofFinancialInstitutionshasindicatedthatthistransaction wouldcomplywithapplicableIndianalaw,andtheIllinoisDepartmentofFinancial&ProfessionalRegulation hasindicatedthatthistransactionwouldcomplywithapplicableIllinoislaw.SeeInd.Code§28-2-17-20and 205Ill.Comp.Stat.5/21.1. 11 See12U.S.C.§1831u.AsrequiredbytheRiegle-NealAct,FFBTandChrismanarebothatleastadequately capitalized(asdefinedin12U.S.C.§1831o(b)(1)(B)),andtheresultingbankwouldbewellcapitalizedandwell managedonconsummationofthetransaction.Onconsummationoftheproposal,FFBTwouldcontrolless than10percentofthetotalamountofdepositsininsureddepositoryinstitutionsintheUnitedStatesandless than30percentofthetotalamountofdepositsininsureddepositoryinstitutionsinIllinois.See12U.S.C. §1831u(b)(2)(A)and(B)(ii).Allotherrequirementsofsection102oftheRiegle-NealActwouldalsobemeton consummationoftheproposal. 12 12U.S.C.§1828(c)(5)(A). 13 12U.S.C.§1828(c)(5)(B). 14 TheEdgarCountybankingmarketisdefinedasEdgarCounty,Illinois,minusKansasTownship. 15 DepositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsintheFederal DepositInsuranceCorporation’ssummaryofdepositsdataasofJune30,2014.

LegalDevelopments:FirstQuarter,2015 189 ticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”),16and othercharacteristicsof themarket. IntheEdgarCountybankingmarket,thechangeinconcentrationlevelsandtheconcentrationlevelsonconsummationwouldexceedthethresholdlevelsintheDOJBankMerger Guidelines.FFBTisthethirdlargestinsureddepositoryinstitutionintheEdgarCounty bankingmarket,controllingdepositsof approximately$78.9million,whichrepresent approximately17.4percentof marketdeposits.Chrismanisthefifthlargestinsureddepositoryinstitutioninthemarket,controllingdepositsof approximately$34.8million,which representapproximately7.7percentof marketdeposits.Onconsummationof theproposal, FFBTwouldremainthethirdlargestdepositoryinstitutionintheEdgarCountybanking market,controllingdepositsof approximately$113.6million.Themarketconcentration levelintheEdgarCountybankingmarketasmeasuredbytheHHIwouldincreaseby266 points,from2369to2635,andthemarketshareof thecombinedentitywouldrepresent approximately25.0percentof marketdeposits. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitioninthemarket.17Severalfactorsindicatethattheincreaseinconcentrationin theEdgarCountybankingmarket,asmeasuredbytheHHIandthemarketshareof the combinedorganization,overstatesthepotentialcompetitiveeffectsof theproposalinthe market.TheBoardhasconsideredthecompetitiveinfluenceof oneactivethrift,FirstBank &Trust,S.B.(“FirstBank”),Paris,Illinois.FirstBankhasaratioof commercialand industrialloanstoassetsthatiscomparabletotheratioforsomecommercialbanksinthe market;accordingly,theBoardhasconcludedthatdepositscontrolledbyFirstBank shouldbeweightedat100percentinthemarket-sharecalculations.18 Inaddition,afterconsummationof theproposal,threeothercompetitorswouldremainin themarket,eachcontrollingmorethan15percentof marketdeposits,includingtwowith greatermarketsharethanthecombinedorganization.Thelargestandsecondlargestcompetitorsinthemarketwouldcontrolapproximately32.8percentand25.8percentof marketdeposits,respectively,andthefourthlargestcompetitorinthemarketwouldcontrol approximately16.4percentof marketdeposits.TheBoardhasconcludedthatthisalso mitigates,inpart,thepotentialeffectsof theproposal. 16 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. 17 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreaseinandresultinglevelofconcentrationinabankingmarket.SeeNationsBankCorp.,84FederalReserveBulletin129(1998). 18 TheBoardhaspreviouslyindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorsofcommercialbanks(see,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386 (1989)andNationalCityCorporation,70FederalReserveBulletin743(1984))andhasgiventheirdeposits 50percentweightingtoreflecttheirlimitedlendingtosmallbusinessesrelativetobanks’lendinglevels.However,theBoardpreviouslyhasindicatedthatitmayconsiderthecompetitivenessofathriftinstitutionatalevel greaterthan50percentofitsdepositswhenappropriateifcompetitionfromtheinstitutioncloselyapproximatescompetitionfromacommercialbank.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703 (1989).FirstBankhasaratioofcommercialandindustrialloanstoassetsthatisgreaterthantheratiofor somethriftinstitutionsthattheBoardhaspreviouslyfoundtobefullcompetitorsofcommercialbanks.

190 FederalReserveBulletin|May2015 Thegeographiclocationsof theapplicantandtargetinthemarketalsosuggestthatHHI calculationslikelyoverstatethecompetitiveeffectsof theproposal.FFBT’sbranchesare locatedinParistownship,whichislocatedinthemorepopulated,southernportionof the countywhereasignificantmajorityof themarket’sbankingactivityiscentered.Incontrast,ChrismanonlyoperatesinRosstownship,whichisinthelesspopulated,northernpartof thecounty.19Althoughthenorthernandsouthernpartsof EdgarCountyare includedinthesamebankingmarket,onlyasmallnumberof EdgarCountyresidents regularlycommutebetweenthetwotownships.20Therefore,thereappeartobeveryfew residentsforwhomtheeffectivenumberof bankingoptionswouldbereduced.TheBoard hasconcludedthatthesefactorsalsomitigatethepotentialcompetitiveeffectsof the proposal. TheDOJconductedareviewof thepotentialcompetitiveeffectsof themergerandhas advisedtheBoardthatconsummationwouldnotbelikelytohaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtothe proposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheEdgarCountybankingmarket,orinanyotherrelevantbankingmarket. Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandfutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardconsiders thefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancial andmanagerialresourcesandtheproposedbusinessplan.TheBoardalsoconsidersthe abilityof theorganizationtoabsorbthecostsof theproposalandtheproposedintegration of theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiders capitaladequacytobeespeciallyimportant. FFBTiswellcapitalizedandwouldremainsoonconsummationof theproposal.ChrismanwouldbemergedintoFFBT.21Theassetquality,earnings,andliquidityof FFBTare consistentwithapproval,andFFBTappearstohaveadequateresourcestoabsorbthecosts of theproposalandtocompletetheintegrationof FFBT’sandChrisman’soperations. Futureprospectsareconsideredconsistentwithapproval.Basedonitsreviewof the record,theBoardconcludesthattheorganizationhassufficientfinancialresourcestoeffect theproposal. 19 Chrisman’sbranchinRosstownshipislocatedapproximately14milesnorthofFFBT’sbranchesinParis township. 20 AlthoughthepercentageofresidentsthatregularlycommutebetweenParistownshipandRosstownshipis highenoughthatthesetownshipsareconsideredtobeinthesamebankingmarket,theactualnumberofcommutersfromRosstownshipislow. 21 EachoutstandingshareofChrismanstockwouldbecanceledandconvertedintoaright-to-receivecashconsideration.Theanticipatedaggregatecashconsiderationtobepaidinconnectionwiththemergerisapproximately$4.3million,subjecttocertainadjustments.

LegalDevelopments:FirstQuarter,2015 191 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof FFBTandChrisman,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesand thoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecords of compliancewithapplicablebankingandanti-money-launderinglaws. FFBTandChrismanareconsideredtobewellmanaged.FFBT’sexistingrisk-managementprogram,anditsboardof directorsandseniormanagement,areconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof FFBThavesubstantialknowledge of andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredFFBT’splansforimplementingtheproposal.FFBTis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.FFBTwouldoperatetheacquiredbranchof Chrismanunderitsexistingrisk-managementpolicies,procedures,andcontrols,whichare consideredtobeacceptablefromasupervisoryperspective.Inaddition,FFBT’sandChrisman’smanagementhastheexperienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafeandsoundmanner,andFFBTisproposingtointegrateChrisman’sexistingmanagementandpersonnelinamannerthataugmentsFFBT’s management.22 Basedonallthefactsof record,includingFFBT’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof FFBT,aswellastherecordsof effectivenessof FFBT andChrismanincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardmustconsidertheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedandtakeinto accounttherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).23TheCRArequiresthefederalfinancialsupervisoryagenciesto encouragefinancialinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,andrequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountaninstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankmergerproposals. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof FFBTandChrisman,informationprovidedbyFFBT,andconfidentialsupervisoryinformation. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancebasedonthe CRAevaluationcompletedbythatinstitution’sprimaryregulator.24TheCRArequires 22 FFBT’sboardofdirectorsandseniormanagementteamwouldremainthesameafterconsummatingthe merger. 23 12U.S.C.§2901etseq. 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010).

192 FederalReserveBulletin|May2015 thattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.25Aninstitution’smostrecentCRAperformance evaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseit representsadetailed,onsiteevaluationof theinstitution’soverallrecordof performance undertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof FFBT.FFBTreceivedanoverallratingof “satisfactory”atitsmost recentCRAperformanceexaminationbytheFederalReserveBankof Chicago(“Reserve Bank”),inFebruary2012(“FFBTEvaluation”).FFBTreceived“satisfactory”ratingson theLendingTestandtheCommunityDevelopmentTest.26 InevaluatingtheLendingTest,examinersfoundthatasubstantialmajorityof FFBT’s HMDA-reportable,smallbusiness,andsmallfarmloanswerewithinthebank’sassessment areas.ExaminersnotedthatFFBT’sloansreflectedareasonabledispersionamonggeographiesof differentincomelevelsandthatthebank’sborrowerdistributionreflectedreasonablepenetrationamongindividualsof differentincomelevels.Examinerscommented favorablyonFFBT’sloan-to-depositratio,whichconsistentlyexceededthatof itspeers andclosestcompetitors. InevaluatingtheCommunityDevelopmentTest,examinersnotedthatFFBT’slevelof communitydevelopmentlendingdemonstratedadequateresponsivenesstotheneedsof its assessmentareas.ExaminersnotedthatFFBT’sstaff participatedinqualifiedcommunity developmentservicesofferingawidevarietyof financialassistancetoallportionsof the bank’sassessmentareas.ExaminersnotedthatFFBTmadequalifiedcommunitydevelopmentinvestmentsthatwereusedforavarietyof purposes,includingeconomicdevelopmentandaffordablehousing.FFBTmadequalifiedgrantsanddonationstovariouscharitableorganizationsthatservedtheneedsof theLMIpopulations. CRAPerformanceof Chrisman.Chrismanreceivedanoverallratingof “satisfactory”atits mostrecentCRAperformanceexaminationbytheOfficeof theComptrollerof theCurrency,inDecember2010(“ChrismanEvaluation”).27TheChrismanEvaluationfocusedon Chrisman’sprimaryloanproduct,agriculturalloans.ExaminersfoundthatChrisman’s loan-to-depositratiowasreasonablebasedonthebank’ssize,financialcondition,andthe creditneedsof theassessmentarea.Examinersalsonotedthatthebank’sdistributionof loansreflectedreasonablepenetrationamongfarmsof differentsizes. 25 12U.S.C.§2906. 26 TheFFBTEvaluationwasconductedusingIntermediate-SmallBankCRAExaminationProcedures.The evaluationperiodforthebank’sHMDA-reportable,smallbusiness,andsmallfarmloanswasfromJanuary1, 2009,throughDecember31,2010.Theevaluationperiodforthebank’scommunitydevelopmentactivitieswas fromFebruary22,2010,throughFebruary27,2012.Theevaluationincludedfull-scopereviewsofFFBT’s non-metropolitanassessmentarea(includingallofCass,Huntington,andMiamicounties,andportionsof Clinton,Fulton,Grant,Marshall,Pulaski,Starke,Wabash,andWhitecounties,allofIndiana)andthe Kokomo,IndianaMetropolitanStatisticalArea(“MSA”).Limited-scopereviewswereperformedintheportionofthebank’sassessmentareaslocatedwithintheAndersonMSA,Indianapolis-CarmelMSA,andLafayetteMSA,allinIndiana. 27 TheChrismanEvaluationwasconductedusingSmallBankCRAExaminationProcedures.Theevaluation periodwasfromAugust5,2005,throughDecember6,2010.Theevaluationexaminedthreecensustractsin EdgarCounty,Indiana,whichincludedthecitiesofParisandChrisman.

LegalDevelopments:FirstQuarter,2015 193 B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. FFBTrepresentsthattheproposedtransactionwouldprovideChrisman’scustomerswith accesstoabroadernetworkof branchesandATMs,enhancedproductsandservices,and expandedfinancialresourcesandlendingcapacity.FFBTplanstoexpandthesuiteof productsandservicescurrentlyavailabletoChrisman’scustomerstoinclude,amongother things,variousmobilebankingservicesandsecuritiesandinsurancebrokerageservices. FFBTalsoplanstoofferadditionalcreditservices,includingadditionalmortgageloans, farmlending,equipmentleasing,andvariousgovernment-sponsoredloanprograms. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationandthe CRArecordsof theinstitutionsinvolved,informationprovidedbyFFBT,andconfidential supervisoryinformation.BasedontheBoard’sassessmentof theCRAandconsumercompliancerecordsof FFBTandChrisman,itsreviewof examinationreports,anditsconsultationswithotheragencies,theBoardconcludesthattheconvenienceandneedsfactor, includingtheCRArecordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”28 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.29These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.30 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,FFBTwouldhave 28 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 29 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 30 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

194 FederalReserveBulletin|May2015 approximately$1.5billioninconsolidatedassetsandwouldnotbelikelytoposesystemic risks.TheBoardgenerallypresumesthatamergerthatinvolvesanacquisitionof lessthan $2billioninassets,orresultsinafirmwithlessthan$25billioninconsolidatedassets,will notposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethat thetransactionwouldresultinasignificantincreaseininterconnectedness,complexity, cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentin thistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branch FFBThasappliedundersection9of theFRAtoestablishabranchatthecurrentlocation of Chrisman,31andtheBoardhasconsideredthefactorsitisrequiredtoconsiderwhen reviewinganapplicationunderthatsection.32Specifically,theBoardhasconsidered FFBT’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceand needsof thecommunitiestobeserved,CRAperformance,andinvestmentsinbankpremises.33Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobeconsistent withapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyFFBTwithallthecommitmentsmadeinconnectionwiththisproposaland theconditionssetforthinthisorder.Thecommitmentsandconditionsaredeemedtobe conditionsimposedinwritingbytheBoardand,assuch,maybeenforcedinproceedings underapplicablelaw. FFBT’sacquisitionof Chrismanmaynotbeconsummatedbeforethe15thcalendarday aftertheeffectivedateof thisorderorlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheReserve Bankactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary17,2015. Votingforthisaction:ChairYellenandViceChairmanFischer,GovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 31 Chrisman’smainofficeandonlylocationis147WestMonroeAvenue,Chrisman,Illinois61924. 32 12U.S.C.§322;12CFR208.6. 33 Uponconsummationoftheproposedtransaction,FFBT’sinvestmentsinbankpremiseswouldremainwithin legalrequirementsunder12CFR208.21.

LegalDevelopments:FirstQuarter,2015 195 Orders Issued Under International Banking Act Taiwan Cooperative Bank, Ltd. Taipei, Taiwan OrderApprovingEstablishmentof aBranch FRBOrderNo.2015–08(February20,2015) TaiwanCooperativeBank,Ltd.,Taipei,Taiwan(“TaiwanCooperative”),aforeignbank withinthemeaningof theInternationalBankingActof 1978(“IBA”),hasappliedunder section7(d)of theIBA1toestablishastate-licensedbranchinNewYork,NewYork.The ForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,provides thataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchinthe UnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Post,August27,2014).Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. TaiwanCooperative,withconsolidatedassetsof approximately$92.0billion,isthesecond largestbankinTaiwan.2TaiwanCooperativeFinancialHoldingCo.,Ltd.,Taipei,ownsall of TaiwanCooperative’sshares.TaiwanCooperativeoffersarangeof commercial,wealth management,andretailbankingproducts.OutsideTaiwan,TaiwanCooperativeoperates branchesinManila,Sydney,HongKong,Suzhou,Tianjin,andPhnomPenh;arepresentativeofficeinBeijing;andasubsidiarybank,UnitedTaiwanBankS.A.,Brussels,Belgium. IntheUnitedStates,TaiwanCooperativeoperatesalimitedstate-licensedbranchinLos Angeles,California,andastate-licensedbranchinSeattle,Washington.3TaiwanCooperativeisaqualifyingforeignbankingorganizationunderRegulationK.4 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether(1)theforeignbankandanyforeignbank parentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,(2)theforeignbankhasfurnishedtotheBoardtheinformationitneedstoassesstheapplication adequately,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.5TheBoard alsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.6 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofDecember31,2014,andarebasedontheexchangerateasofthatdate. 3 Asalimitedbranch,theLosAngelesbranchisprohibitedfromacceptingdepositsfromsourcesotherthan thosepermittedbysection25AoftheFederalReserveAct.Pursuanttosection25AoftheFederalReserve Act,alimitedbranchmayreceivedepositsoutsidetheUnitedStatesandonlysuchdepositswithintheUnited Statesthatareincidentaltoorforthepurposeofcarryingouttransactionsinforeigncountries.12U.S.C. §615(a).RegulationKdefinestheextentofpermissibledeposit-takingactivitiesofentitiesundersection25A oftheFederalReserveAct.See12CFR211.6(a)(1). 4 12CFR211.23(a). 5 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

196 FederalReserveBulletin|May2015 Asnotedabove,TaiwanCooperativeengagesdirectlyinthebusinessof bankingoutside theUnitedStates.TaiwanCooperativealsohasprovidedtheBoardwithinformationnecessarytoassesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theFederalReservepreviously hasdeterminedthatTaiwanCooperativeissubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisor,theFinancialSupervisoryCommission (“FSC”).7TaiwanCooperativeremainssupervisedbytheFSConsubstantiallythesame termsandconditions.Basedonallthefactsof record,ithasbeendeterminedthatTaiwan Cooperativecontinuestobesubjecttocomprehensivesupervisiononaconsolidatedbasis byitshomecountrysupervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.TheFSChasnoobjectiontotheestablishmentof theproposed branch. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsinthecase.Taiwan’s risk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapital Accord(“BaselAccord”).TaiwanCooperative’scapitalisinexcessof theminimumlevels thatwouldberequiredbytheBaselAccordandisconsideredequivalenttocapitalthat wouldberequiredof aU.S.bankingorganization.Managerialandotherfinancial resourcesof TaiwanCooperativeareconsideredconsistentwithapproval,andTaiwan Cooperativeappearstohavetheexperienceandcapacitytosupporttheproposedbranch. Inaddition,TaiwanCooperativehasestablishedcontrolsandproceduresfortheproposed branchtoensurecompliancewithU.S.lawandforitsoperationsingeneral. Taiwanhasenactedlawsandregulationstodetermoneylaunderingthatareconsistent withtheFinancialActionTaskForce’srecommendations.Moneylaunderingisacriminal offenseinTaiwan,andfinancialinstitutionsarerequiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughout theirworldwideoperations.TaiwanCooperativehaspoliciesandprocedurestocomply withtheselawsandregulations,anditscomplianceismonitoredbygovernmentalentities responsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationonTaiwanCooperative’soperations,therestrictions ondisclosureinrelevantjurisdictionsinwhichTaiwanCooperativeoperateshavebeen reviewed.TaiwanCooperativehascommittedtomakeavailabletotheBoardsuchinformationonitsoperationsandonthoseof anyof itsaffiliatesthattheBoarddeemsnecessary worldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 6 12U.S.C.§3105(d)(3)-(4),12CFR211.24(c)(2)-(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:(i)whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;(ii)thefinancialandmanagerialresourcesofthebank;(iii)whetherthebank hasprocedurestocombatmoneylaundering,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,whetherthehomecountryofthebankhas adopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulation forthefinancialsystemofsuchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 7 TaiwanCooperativeBank,92FederalReserveBulletinC201(2006).

LegalDevelopments:FirstQuarter,2015 197 todetermineandenforcecompliancewiththeIBA,theBankHoldingCompanyActof 1956,andotherapplicablefederallaw.Totheextentthattheprovisionof suchinformation totheBoardmaybeprohibitedbylaworotherwise,TaiwanCooperativehascommittedto cooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthatmightbe requiredfromthirdpartiesfordisclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,ithasbeendeterminedthatTaiwanCooperativehasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmay request. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”)amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbank thatpresentsarisktothestabilityof theUnitedStatesfinancialsystem,whetherthehome countryof theforeignbankhasadopted,orismakingdemonstrableprogresstoward adopting,anappropriatesystemof financialregulationforthefinancialsystemof such homecountrytomitigatesuchrisk.8Informationrelevanttothestandardregardingriskto thestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular, considerationhasbeengiventotheabsoluteandrelativesizeof TaiwanCooperativeinits homejurisdiction;thescopeof TaiwanCooperative’sactivities,includingthetypeof activitiesitproposestoconductintheUnitedStatesandthepotentialforthoseactivitiesto increaseortransmitfinancialinstability;andtheframeworkinplaceforsupervisingTaiwanCooperativeinitshomejurisdiction.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistentwithapproval. TheIBAestablishescriteriathatmustbemetbeforetheBoardcanapprovetheestablishmentof abranchoutsideaforeignbank’shomestate.TaiwanCooperative’shomestateis Washington.Undersection5(a)(2)of theIBA,asamendedbysection104of theRiegle- NealInterstateBankingandBranchingEfficiencyActof 1994,9aforeignbank,withthe approvalof theBoardandtheappropriatestatesupervisoryagency,mayestablishand operateastate-licensedbranchinanystateoutsideitshomestatetotheextentthatastatecharteredbankwiththesamehomestateastheforeignbankcoulddosoundersection18(d)(4)of theFederalDepositInsuranceAct(“FDIAct”).Section18(d)(4),whichpreviouslyauthorizedstatesto“opt-in”tointerstatedenovobranching,wasamendedbysection613of the Dodd-FrankActtopermitinsuredstatebankstoestablishinterstatedenovobranches nationwide.10Ithasbeendeterminedthatalltheothercriteriareferredtoinsection5(a)(1)and 5(a)(3)of theIBA,includingthecriteriainsection7(d)of theIBA,havebeenmet.11In viewof allthefactsof record,theBoardispermittedtoapprovetheestablishmentof an interstatedenovostate-charteredbranchbyTaiwanCooperativeundersection5(a)of theIBA. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyTaiwan Cooperative,aswellasthetermsandconditionssetforthinthisorder,TaiwanCooperative’sapplicationtoestablishabranchinNewYorkisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneral 8 Pub.L.No.111-203,124Stat.1376,1440(2010),codifiedat12U.S.C.§3105(d)(3)(E). 9 12U.S.C.§3103(a)(2). 10 Pub.L.No.111-203,124Stat.1376,1614(2010),codifiedat12U.S.C.§1828(d)(4)(A)(i). 11 Section18(d)(4)oftheFDIActandsection5(a)oftheIBArequirethatcertainconditionsofsection44ofthe FDIActbemetinorderfortheBoardtoapproveadenovointerstatestate-charteredbranch.See12U.S.C. §1848(d)(4)(B)and12U.S.C.§1303(a)(3)(C)(referringtosections44(b)(1),44(b)(3),and44(b)(4)oftheFDI Act,12U.S.C.§1831u(b)(1),(b)(3),and(b)(4)).IthasbeendeterminedthatTaiwanCooperativeisincompliancewithstatefilingrequirements.TaiwanCooperativewaswellcapitalizedasofthedatetheapplicationwas filed,andonconsummationofthisproposal,TaiwanCooperativewouldcontinuetobewellcapitalizedand wellmanaged.

198 FederalReserveBulletin|May2015 Counsel,pursuanttoauthoritydelegatedbytheBoard.12Shouldanyrestrictionsonaccess toinformationontheoperationsoractivitiesof TaiwanCooperativeanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforce compliancebyTaiwanCooperativeoritsaffiliateswithapplicablefederalstatutes,the Boardmayrequireterminationof anyof TaiwanCooperative’sdirectorindirectactivities intheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyTaiwanCooperativewiththecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthisorder.13 Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveFebruary20, 2015. MargaretMcCloskeyShanks DeputySecretaryof theBoard 12 12CFR265.7(d)(12). 13 TheBoard’sauthoritytoapprovetheestablishmentofbranchesparallelsthecontinuingauthorityoftheState ofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplant theauthorityoftheStateofNewYorkanditsagent,theNewYorkStateDepartmentofFinancialServices,to licensetheproposedbranchofTaiwanCooperativeinaccordancewithanytermsandconditionsthattheNew YorkStateDepartmentofFinancialServicesmayimpose.

199 Federal Reserve BULLETIN August 2015 Vol. 101, No. 3 Legal Developments: Second Quarter, 2015 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Chemical Financial Corporation Midland, Michigan OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2015–13(April20,2015) ChemicalFinancialCorporation(“Chemical”),Midland,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyAct(“BHCAct”),hasrequestedthe Board’sapprovalundersection3of theBHCAct1tomergewithLakeMichiganFinancial Corporation(“LakeMichigan”),Holland,andtherebyindirectlyacquireitssubsidiary banks,TheBankof Holland(“Bankof Holland”),Holland,andTheBankof Northern Michigan(“Bankof NorthernMichigan”),Petoskey,allof Michigan. Inaddition,Chemical’ssubsidiarystatememberbank,ChemicalBank,Midland,Michigan,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewithBankof HollandandBankof Northern Michigan,withChemicalBankasthesurvivingentity.2ChemicalBankalsohasapplied undersection9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesat themainofficesandbranchesof Bankof HollandandBankof NorthernMichigan.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister7594(2015)).4Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct,theBankMergerAct,andtheFRA. AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwas requestedfromtheUnitedStatesAttorneyGeneralandacopyof therequesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). Chemical,withtotalconsolidatedassetsof approximately$7.3billion,isthe144thlargest depositoryorganizationintheUnitedStates.5ChemicalcontrolsChemicalBankandoperatesonlyinMichigan.ChemicalBankcontrolsapproximately$6.0billionindepositsand 1 12U.S.C.§1842. 2 12U.S.C.§1828(c). 3 12U.S.C.§321.TheselocationsarelistedinAppendixA.ChemicalwillconsolidatetwobranchesofBankofNorthernMichiganwithneighboringbranchesofChemicalBank. 4 12CFR262.3(b). 5 Nationwidedeposit,asset,andrankingdataareasofDecember31,2014.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,savingsassociations,andnon-deposittrustcompanies.

200 FederalReserveBulletin|August2015 istheeighthlargestinsureddepositoryinstitutioninthestate,withdepositsrepresenting 3.4percentof thetotaldepositsininsureddepositoryinstitutionsinMichigan.6 LakeMichigan,withconsolidatedassetsof approximately$1.2billion,isthe593rdlargest depositoryorganizationintheUnitedStates.LakeMichigancontrolstwobanks,Bankof HollandandBankof NorthernMichigan,whichoperateonlyinMichigan.LakeMichigan isthe22ndlargestinsureddepositoryorganizationinthestate,controllingapproximately $937millionindepositsrepresenting0.5percentof thetotaldepositsheldbyinsured depositoryinstitutionsinMichigan. Onconsummationof theproposal,Chemicalwouldbecomethe128thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$8.7billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Chemicalwouldcontroltotaldepositsof approximately$6.9billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.InMichigan,Chemicalwouldbecometheseventhlargest depositoryorganization,controllingdepositsrepresenting3.9percentof thetotaldeposits heldbyinsureddepositoryinstitutionsinthestate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.7Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitiestobeserved.8 ChemicalandLakeMichiganhavesubsidiarydepositoryinstitutionsthatcompetedirectly infivebankingmarketsinMichigan:Holland,GrandRapids,Muskegon-GrandHaven, Petoskey,andTraverseCity. A.CompetitiveEffectsintheBankingMarkets TheBoardhasconsideredthecompetitiveeffectsof theproposalineachof thebanking marketsinwhichChemicalandLakeMichigancompete.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets;therelative shareof totaldepositsininsureddepositoryinstitutionsinthemarkets(“marketdeposits”) thatChemicalBankwouldcontroluponconsummationof theproposal;9theconcentrationlevelsof marketdepositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive 6 Statedeposit,marketshare,andrankingdataareasofJune30,2014,asupdatedtoreflectchangesinownershipstructurefrommergersthroughMarch6,2015(includingChemical’smergerwithNorthwesternBancorp, Inc.,onOctober31,2014). 7 12U.S.C.§§1842(c)(1)and1828(c)(5). 8 12U.S.C.§1828(c)(5)(B). 9 LocaldepositandmarketsharedataareasofJune30,2014(includingdepositsfromChemical’smergerwith NorthwesternBankonOctober31,2014),andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,or havethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup, 75FederalReserveBulletin386(1989)andNationalCityCorporation,70FederalReserveBulletin743(1984). Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50-percentweighted basis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin53(1991).

LegalDevelopments:SecondQuarter,2015 201 Reviewguidelines(“DOJBankMergerGuidelines”),afterconsummationof theproposal;10andothercharacteristicsof themarkets. BankingMarketsWithinEstablishedGuidelines.Basedoninitialcompetitivescreening data,consummationof theproposalwouldbeconsistentwithBoardprecedentandwithin thethresholdsintheDOJBankMergerGuidelinesintheGrandRapids,Muskegon-Grand Haven,Petoskey,andTraverseCitybankingmarkets.11Onconsummationof theproposal, eachof thesefourbankingmarketswouldremainmoderatelyconcentrated,andthe changesinmarketconcentrationswouldbewithintheDOJBankMergerGuidelinesand Boardprecedent.Ineachof thesebankingmarkets,numerouscompetitorswouldremain. BankingMarketWarrantingSpecialScrutiny.Thestructuraleffectsthatconsummationof theproposalwouldhaveontheHollandbankingmarket12warrantadetailedreview because,usinginitialcompetitivescreeningdata,theconcentrationlevelonconsummation wouldexceedthethresholdlevelsintheDOJBankMergerGuidelines. Usingtheinitialscreeningdata,Chemicalisthesixthlargestdepositoryorganizationinthe Hollandbankingmarket,controllingapproximately$102.9millionindeposits,whichrepresent4.8percentof marketdeposits.LakeMichiganisthelargestdepositoryorganization inthemarket,controllingapproximately$482.9millionindeposits,whichrepresent 22.4percentof marketdeposits.Onconsummation,thecombinedentitywouldbethelargestdepositoryinstitutionintheHollandbankingmarket,controllingapproximately $585.8millionindeposits,whichwouldrepresentapproximately27.2percentof market deposits.TheHHIinthismarketwouldincreaseby214points,from1631to1845. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheHollandbankingmarket.13FactorsindicatethattheincreaseinconcentrationintheHollandbankingmarket,asmeasuredbytheaboveHHIandmarketshare, overstatesthepotentialcompetitiveeffectsof theproposalinthemarket.Inparticular,six communitycreditunionsexertacompetitiveinfluenceintheHollandbankingmarket. Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe relevantbankingmarket.14TheBoardfindsthatthesecircumstanceswarrantincludingthe 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),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 11 Thesefourbankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedin AppendixB. 12 TheHollandbankingmarketisdefinedasthePark,Holland,Zeeland,Olive,andPortSheldontownshipsin OttawaCountyandtheLaketown,Fillmore,andOveriseltownshipsinAlleganCounty,allofMichigan. 13 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 14 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);and WachoviaCorporation,92FederalReserveBulletinC183(2006).

202 FederalReserveBulletin|August2015 depositsof thesecreditunionsata50-percentweightinestimatingmarketinfluence.This weightingtakesintoaccountthelimitedlendingdonebythesecreditunionstosmallbusinessesrelativetocommercialbanks’lendinglevels. Thisadjustmentsuggeststhattheresultingmarketconcentrationof theproposedtransactionintheHollandbankingmarketislesssignificantthanwouldappearfromtheinitial competitivescreeningdata,whichfocusedoncommercialbankcompetitors.Inparticular, adjustingtoreflectcompetitionbyotherinsureddepositoryinstitutionsinthemarket,the marketconcentrationlevelintheHollandbankingmarketasmeasuredbytheHHIwould increaseby194,fromalevelof 1482to1676,andthemarketshareof Chemicalresulting fromthetransactionwouldincreaseinthemarketfrom4.5percentto25.9percent. Afterconsummationof theproposal,themergedentitywouldcontinuetofacecompetition fromcommercialbankcompetitorsinthemarket,threeof whichhaveamarketshare greaterthan15percent. B.Viewsof OtherAgenciesandConclusionRegardingCompetitiveFactors TheDOJconductedareviewof thepotentialcompetitiveeffectsof themergerandhas advisedtheBoardthatconsummationof theproposalwouldnotbelikelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheHollandbankingmarketorinanyotherrelevantbankingmarket.Accordingly,theBoardhasdeterminedthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryFactors InreviewingaproposalundertheBHCAct,theBankMergerAct,andtheFRA,the Boardconsidersthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellas thefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoard evaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecosts of theproposalandtheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant. TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalin lightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. ChemicalandChemicalBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisabankholdingcompanymergerthat isstructuredasacashandstockpurchase,withasubsequentmergerof thesubsidiary depositoryinstitutions.Chemicalexpectstofundthetransactionwithcashandotherliquid assetsonhand.Chemicalhastheresourcestofundthecashportionof theconsideration. Theassetquality,earnings,andliquidityof Chemicalareconsistentwithapproval,and Chemicalappearstohaveadequateresourcestoabsorbthecostsof theproposalandto completetheintegrationof ChemicalandLakeMichigan’soperations.Inaddition,future

LegalDevelopments:SecondQuarter,2015 203 prospectsareconsideredconsistentwithapproval.Basedonitsreviewof therecord,the BoardfindsthatChemicalhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Chemical,LakeMichigan,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyChemical,theBoard’ssupervisoryexperienceswithChemicalandLakeMichiganandthoseof otherrelevantbanksupervisory agencieswiththeorganizations,andtheirrecordsof compliancewithapplicablebanking andanti-money-launderinglaws. Chemicalanditssubsidiarydepositoryinstitutionareeachconsideredtobewellmanaged. Thedirectorsandseniorexecutiveofficersof Chemicalhavesubstantialknowledgeof and experienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredChemical’splansforimplementingtheproposal.Chemical isdevotingsufficientfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.Chemicalwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,ChemicalandLakeMichigan’s managementhavetheexperienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,includingChemical’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardhasconcludedthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof ChemicalandLakeMichiganincombattingmoney-laundering activities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardmustconsidertheconvenienceandneedsof thecommunitiestobeservedandtake intoaccounttherecordsof 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 ChemicalBank,Bankof Holland,andBankof NorthernMichigan, informationprovidedbyChemical,andconfidentialsupervisoryinformation. 15 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 16 12U.S.C.§2901(b). 17 12U.S.C.§2903.

204 FederalReserveBulletin|August2015 A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.18TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.19Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof ChemicalBank.ChemicalBankwasassignedanoverall“outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Chicago(“ReserveBank”)inAugust2013(“ChemicalBankEvaluation”).20Chemical Bankreceived“outstanding”ratingsfortheeachof theLendingTest,theInvestmentTest, andtheServiceTest.21 InevaluatingtheLendingTest,examinersnotedthatChemicalBankoriginatedasubstantialmajorityof loanswithinitsassessmentareasandshowedexcellentresponsivenessto creditneedsthroughoutitsassessmentareas.Examinersalsonotedthatthebankhadan excellentrecordof servingthecreditneedsof verysmallbusinesses.Further,Chemical Bank’sgeographicdistributionof loansreflectedexcellentpenetrationthroughoutthe assessmentareas.ExaminersalsonotedthatChemicalBankisaleaderinmakingcommunitydevelopmentloansinsideitsassessmentareasandusesflexibleandinnovativelending practicesinservingassessmentareaneeds.Examinersnotedthatthedollaramountof ChemicalBank’slendingincreasedbyapproximately11.0percentfromtheprior evaluation. InevaluatingtheInvestmentTest,examinersfoundthatChemicalBankhadprovidedan excellentlevelof qualifiedinvestments,donations,andgrants.Examinersnotedthatthe bankdemonstratedexcellentresponsivenesstocreditandcommunitydevelopmentneeds. Thebankalsomadeextensiveuseof innovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiatives.ExaminersnotedthatChemicalBank’sCRA-qualified investmentsincreasedbyapproximately32.9percentinnumberand50.5percentindollars fromthepriorevaluation. InevaluatingtheServiceTest,examinersnotedthatChemicalBank’sbranchlocation changeshadimprovedtheaccessibilityof itsdeliverysystems,particularlytoLMIgeographiesandLMIindividuals.Examinersalsofoundthatthebank’sdeliverysystemswere readilyaccessibletothebank’sgeographiesandindividualsof differentincomelevelsinthe assessmentareas.Further,examinershighlightedthatChemicalBankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutitsassessmentareas. 18 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 19 12U.S.C.§2906. 20 TheChemicalBankEvaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures.The ChemicalBankEvaluationreviewedhomemortgageandsmallbusinesslendingdatafromJanuary1,2011, throughDecember31,2012.Theevaluationperiodforcommunitydevelopmentloans,investments,andserviceswasJuly1,2011,throughAugust26,2013. 21 TheChemicalBankEvaluationincludedafull-scopereviewoffiveassessmentareas:theGrandRapids-WyomingMetropolitanStatisticalArea(“MSA”);theNiles-BentonHarborMSA;theBayCityMSA;theKalamazoo-PortageMSA;andtheNorthCentral-Non-MSA.Alimited-scopereviewwasperformedintheBattle CreekMSA;theFlintMSA;theHolland-GrandHavenMSA;theSaginaw-SaginawTownshipNorthMSA; theSouthBend-Mishawaka(Multi-State)MSA(CassCounty,Michigan,only);theEast-Non-MSA;the South-Non-MSA;andtheWest-Non-MSA.

LegalDevelopments:SecondQuarter,2015 205 CRAPerformanceof Bankof Holland.TheBankof Hollandwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDICinFebruary2012(“Bankof HollandEvaluation”),withratingsof “satisfactory”fortheLending TestandtheCommunityDevelopmentTest.22 InevaluatingtheLendingTest,examinersnotedthatthebankoriginatedamajorityof homemortgageloansandsmallbusinessloanswithinitsassessmentareas.23Examiners alsofoundthatthebank’sgeographicdistributionof homemortgageloansandsmallbusinessloansreflectedreasonabledispersionthroughoutitsassessmentareas.Theyfurther notedthatthebank’sdistributionof loanstoborrowersreflectedreasonablepenetration amongindividualsof differentincomelevels,withroomforimprovementnotedinpenetratingbusinessesof differentsizes.Further,examinersconcludedthatBankof Holland’s loan-to-depositratiowasreasonablegivenitssize,financialcondition,andassessment areas’creditneeds. InevaluatingtheCommunityDevelopmentTest,examinersnotedthatBankof Holland’s levelof communitydevelopmentperformancedemonstratedadequateresponsivenessto thecommunitydevelopmentneedsof itsassessmentareasthroughcommunitydevelopmentloans,qualifiedinvestments,andcommunitydevelopmentservices,asappropriate, consideringthebank’scapacityandtheneedandavailabilityof opportunitiesforcommunitydevelopmentinthebank’sassessmentareas. CRAPerformanceof Bankof NorthernMichigan.TheBankof NorthernMichiganwas assignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationby theFDICinNovember2013(“Bankof NorthernMichiganEvaluation”),withratingsof “satisfactory”fortheLendingTestandtheCommunityDevelopmentTest.24 InevaluatingtheLendingTest,examinersnotedthatthebankoriginatedamajorityof homemortgageloansandsmallbusinessloanswithinitsassessmentarea.25Examinersalso foundthatthebank’sgeographicdistributionof homemortgageloansandsmallbusiness loansreflectedreasonabledispersionthroughoutitsassessmentarea,andthebank’sdistributionof loanstoborrowersreflectedreasonablepenetrationamongindividualsof differentincomelevelsandbusinessesof differentsizes.Further,examinersconcludedthatBank of NorthernMichigan’sloan-to-depositratiowasreasonablegivenitssize,financialcondition,andassessmentareacreditneeds.ExaminersalsonotedthatBankof Northern Michigandidnotreceiveanycomplaintsaboutitsperformanceinmeetingassessmentarea creditneeds. InevaluatingtheCommunityDevelopmentTest,examinersnotedthatBankof Northern Michigan’slevelof communitydevelopmentperformancedemonstratedadequaterespon- 22 TheBankofHollandEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures.TheLendingTestincludedareviewofhomemortgageloansandsmallbusinessloansfortheperiodof January1,2010,throughDecember31,2011.TheCommunityDevelopmentTestreviewedallcommunity developmentactivities,includingdonationsandinvestments,services,andanycommunitydevelopmentloans originatedbyBankofHollandsinceitspreviousCRAevaluation,inMarch2008. 23 TheBankofHollandhastwodesignatedassessmentareas.Thefirstassessmentarea,the“HollandAssessment Area,”consistsofthewholeofOttawaCounty,Michigan,intheHolland-HavenMSA.Thesecondassessment area,the“GrandRapidsAssessmentArea,”consistsofsouthernportionsofKentCounty,Michigan,inthe GrandRapids-WyomingMSA. 24 TheBankofNorthernMichiganEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures.TheLendingTestincludedareviewofhomemortgageloansandsmallbusinessloansfor theperiodofJanuary1,2012,throughSeptember30,2013.TheCommunityDevelopmentTestreviewedall communitydevelopmentactivities,includingdonationsandinvestments,services,andanycommunitydevelopmentloansoriginatedbyBankofNorthernMichigansinceitspreviousCRAevaluation,inAugust2010. 25 TheBankofNorthernMichiganhasonedesignatedassessmentarea,whichcomprisesCharlevoix,Emmet, GrandTraverse,andLeelanaucounties,allofwhicharenonmetropolitanareasinMichigan.

206 FederalReserveBulletin|August2015 sivenesstothecommunitydevelopmentneedsof itsassessmentareathroughcommunity developmentloans,qualifiedinvestments,andcommunitydevelopmentservices,asappropriate,consideringthebank’scapacityandtheneedandavailabilityof opportunitiesfor communitydevelopmentinthebank’sassessmentarea. AdditionalCRAActivitiesof ChemicalBank.ChemicalBankrepresentsthatitprovidesa comprehensiverangeof bankingandrelatedfinancialservicestomeettheneedsof individuals,families,andbusinessesinthecommunitiesitserves.ChemicalBankstatesthatit usesinnovativeandflexiblelendingpracticesdesignedtoexpandhomeownershipopportunitiesforLMIborrowers,suchasFHAMortgages,RuralDevelopmentMortgages,and VeteranAdministrationLoans.Inaddition,ChemicalBankisinvolvedinboththeMichiganStateHousingDevelopmentAuthority’sPropertyImprovementProgramloansandthe federalNeighborhoodImpactProgramrehabgrants.ChemicalBankmakesavailableto borrowersportfoliohomelendingproducts,whichprovideitgreaterflexibilityinmeeting theneedsof LMIborrowers.Chemicalalsorepresentsthatitisaleaderincommunity developmentlendingandthatitmakesloansthataddressallfourcategoriesof community development,includingaffordablehousing,economicdevelopment,stabilizationandrevitalization,andcommunityservices.Inadditiontoitslendingactivities,ChemicalBankrepresents,itoffersanumberof retailproductstargetedathelpingLMIcustomers. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. Chemicalrepresentsthattheproposedtransactionwouldstrengthentheabilityof thecurrentofficesof Bankof HollandandBankof NorthernMichigantomeettheconvenience andneedsof thecommunitiestheyservebyleveragingtheproductsandthemanagerial andfinancialresourcesof ChemicalBank.ChemicalBankcurrentlyhasaratingof “outstanding”fromitsmostrecentCRAexamination,andChemicalrepresentsthatitwould bringitscommitmenttoCRAanditsresourcestomeettheconvenienceandneedsof the communitiescurrentlyservedbyBankof HollandandBankof Michigan,whichboth maintain“satisfactory”CRAratings. Chemicalfurtherrepresentsthatfollowingthemerger,thebankingproductsandservicesof Bankof HollandandBankof NorthernMichiganwouldbeshiftedtoChemicalBank, whichwouldcontinuetoprovidehigh-qualityfinancialproductstothecustomersandcommunitiescurrentlyservedbyBankof HollandandBankof NorthernMichigan.Bankof HollandandBankof NorthernMichiganhavefocusedprimarilyoncommerciallending forsmallandmid-sizedbusinessesandonprovidingpersonalbankingservicestotheir ownersandexecutives.Followingthemerger,consumersinthecommunitiesservedby Bankof HollandandBankof NorthernMichiganwouldbeabletotakeadvantageof a broaderarrayof personalbankingproductsandservicesofferedbyChemicalBank, includingportfoliomortgageloans,consumerloans,anddepositaccounts.Chemicalalso statesthatcommerciallenderswouldbeabletobenefitfromtreasurymanagementproductsandthehigherlendinglimitof ChemicalBankfollowingthemerger.Inaddition,the customersof Bankof HollandandBankof NorthernMichiganwouldgainaccesstoa broadrangeof trustandwealth-managementproductsandservices,whicharenotcurrentlyofferedbyeitherbank. ChemicalrepresentsthatitdoesnotexpectthatChemicalBankwoulddiscontinueanyservicesorproductscurrentlyofferedbyBankof HollandorBankof NorthernMichigan.In

LegalDevelopments:SecondQuarter,2015 207 instanceswhereaproductorserviceof Bankof HollandorBankof NorthernMichigan duplicatesoneofferedbyChemicalBank,thoseaccountswouldbemigratedtotheChemicalBankproduct. AlthoughChemicalplanstoconsolidatetwoof Bankof NorthernMichigan’sbranches withnearbyChemicalBankbranchesfollowingthemerger,Bankof HollandandBankof NorthernMichigancustomersneverthelesswouldbenefitfromhavingalargernetworkof bankingofficesthroughoutMichigan.Customersof Bankof HollandandBankof NorthernMichiganwouldbeabletobankatanyof ChemicalBank’sbranchofficesinthat extensivenetwork,whichwouldextendfromMichigan’ssouthernmosttierof countiesto thetipof Michigan’sLowerPeninsula. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyChemical,andconfidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof ChemicalBank,Bankof Holland,and Bankof NorthernMichigan,itsreviewof examinationreports,anditsconsultationswith otheragencies,theBoardconcludesthattheconvenienceandneedsfactor,includingthe CRArecordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankActWallStreetReformandConsumerProtectionAct(“Dodd-Frank Act”)amendedtheBHCActandtheBankMergerActtorequiretheBoardtoconsidera proposal’s“risktothestabilityof 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 theUnitedStates bankingorfinancialsystem.Afterconsummationof theproposedtransaction,Chemical wouldhaveapproximately$8.7billioninconsolidatedassetsandwouldnotbelikelyto 26 Sections604(d)and(f)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §§1842(c)(7)and1828(c)(5). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

208 FederalReserveBulletin|August2015 posesystemicrisks.TheBoardgenerallypresumesthatamergerthatinvolvesanacquisitionof lessthan$2billioninassets,orresultsinafirmwithlessthan$25billionintotal consolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnited Statesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalrisk factorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardhasdetermined thatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches ChemicalBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof Bankof HollandandBankof NorthernMichigan.TheBoardhasassessed thefactorsitisrequiredtoconsiderwhenreviewinganapplicationunderthatsection.29 Specifically,theBoardhasconsideredChemicalBank’sfinancialcondition,management, capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved, CRAperformance,andinvestmentinbankpremises.30Forthereasonsdiscussedinthis order,theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyChemicalandChemicalBankwith alltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplications.For purposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,as such,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanOctober31,2015,unlesssuchperiodisextendedforgoodcause bytheBoardortheReserveBankactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveApril20,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 29 12U.S.C.§322;12CFR208.6. 30 Inaddition,uponconsummationoftheproposedtransaction,ChemicalBank’sinvestmentsinbankpremises wouldremainwithinlegalrequirementsunder12CFR208.21.

LegalDevelopments:SecondQuarter,2015 209 AppendixA BranchestoBeAcquiredbyChemicalBank TheBankof Holland 1. 150CentralAvenue,Holland,Michigan49423 2. 16930RobbinsRoad,Suite120,GrandHaven,Michigan49417 3. 51IoniaSW,GrandRapids,Michigan49503 TheBankof NorthernMichigan 4. 406BayStreet,Petoskey,Michigan49770 5. 130SouthUnion,TraverseCity,Michigan49036 AppendixB ChemicalBank/BankofHolland/BankofNorthernMichiganBankingMarketsinMichiganConsistent withBoardPrecedentandDOJBankMergerGuidelines MarketDeposit Remaining Amountof Bank Rank Shares ResultingHHI ChangeinHHI Numberof Deposits (percent) Competitors GrandRapids,Michigan–includesKentCounty(excludingOakfieldandSpencertownships);Thornapple,Irving,Carlton,YankeeSprings, RutlandandHastingstownshipsinBarryCounty;CasanoviatownshipinMuskegonCounty;Salem,DorrandLeightontownshipsinAllegan County;Jamestown,Georgetown,Blendon,Allendale,Tallmadge,Polkton,WrightandChestertownshipsinOttawaCounty,allofMichigan. ChemicalBankPre-Consummation 6 820.4mil. 5.8 LakeMichigan(BankofHolland) 17 146.8mil. 1 ChemicalBankPost-Consummation 5 967.2mil. 6.8 1104 12 25 Muskegon-GrandHaven,Michigan–includesMuskegonCounty(excludingCasanoviatownship);GrandHaven,SpringLake,Crockeryand RobinsontownshipsinOttawaCounty,allofMichigan. ChemicalBankPre-Consummation 11 30.4mil. 1.4 LakeMichigan(BankofHolland) 14 14.0mil. 0.7 ChemicalBankPost-Consummation 11 44.4mil. 2.1 1527 2 13 Petoskey,Michigan–includesCharlevoixCounty,EmmetCounty(excludingBliss,CarpLakeandWawatamtownships);Burt,Toscorara,Mentor andWilmottownshipsinCheboyganCounty;BankstownshipinAntrimCounty,allofMichigan. ChemicalBankPre-Consummation 10 56.3mil. 4.7 LakeMichigan(BankofNorthernMichigan) 2 196.6mil. 16.5 ChemicalBankPost-Consummation 1 252.9mil. 21.2 1346 157 9 TraverseCity,Michigan–includesAntrimCounty(excludingBankstownship);BenzieCounty;GrandTraverseCounty;KalkaskaCounty; LeelanauCounty,evelopmentsallofMichigan. ChemicalBankPre-Consummation 2 449.0mil. 15.5 LakeMichigan(BankofNorthernMichigan) 9 96.9mil. 3.3 ChemicalBankPost-Consummation 2 555.9mil. 18.8 1308 104 14 DepositdataareasofJune30,2014.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent. BB&T Corporation Winston-Salem, North Carolina OrderApprovingtheAcquisitionof aBankHoldingCompany FBROrderNo.2015–15(June3,2015) BB&TCorporation(“BB&T”),Winston-Salem,NorthCarolina,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyAct(“BHCAct”)1tomergewith TheBankof KentuckyFinancialCorporation(“KentuckyFinancial”)andtherebyacquire 1 12U.S.C.§1842.

210 FederalReserveBulletin|August2015 TheBankof Kentucky,Inc.(“KentuckyBank”),bothof CrestviewHills,Kentucky.Followingtheproposedacquisition,KentuckyBank,anonmemberbank,wouldbemerged intoBB&T’ssubsidiarynonmemberbank,BranchBankingandTrustCompany(“Branch Bank”),alsoof Winston-Salem.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister62141(2014)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. BB&T,withconsolidatedassetsof approximately$186.8billion,isthe18thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$129.0billionin consolidateddeposits,whichrepresentapproximately1.1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.BB&TcontrolsBranch Bank,whichoperatesinAlabama,Florida,Georgia,Indiana,Kentucky,Maryland,North Carolina,SouthCarolina,Tennessee,Texas,Virginia,WestVirginia,andtheDistrictof Columbia.BranchBankisthethirdlargestinsureddepositoryinstitutioninNorthCarolina,controllingapproximately$54.6billionindeposits,andthefourthlargestinsured depositoryinstitutioninKentucky,controllingapproximately$4.1billionindeposits, whichrepresent16.1and5.8percent,respectively,of thetotaldepositsof insureddepositoryinstitutionsinthosestates.4 KentuckyFinancial,withconsolidatedassetsof approximately$1.9billion,isthe395th largestdepositoryorganizationintheUnitedStates,controllingapproximately$1.6billion indeposits,whichrepresentlessthan1percentof nationwidedeposits.KentuckyFinancial controlsKentuckyBank,whichoperatesinKentuckyandOhio.KentuckyBankisthe10th largestinsureddepositoryinstitutioninKentucky,controllingapproximately$1.5billionin deposits,whichrepresent2.2percentof thetotaldepositsof insureddepositoryinstitutions inthatstate.InOhio,KentuckyBankisthe227thlargestinsureddepositoryinstitution, controllingapproximately$30.5millionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof theproposal,BB&Twouldremainthe18thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$188.7billion, whichrepresent0.9percentof thetotalamountof assetsof insureddepositoryinstitutions intheUnitedStates.BB&Twouldcontroltotaldepositsof approximately$130.7billion, whichrepresent1.1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InKentucky,BB&Twouldbecomethesecondlargestdepository organization,controllingdepositsof approximately$5.7billion,whichrepresent8percent of thetotaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto 2 ThemergerofKentuckyBankintoBranchBankissubjecttotheapprovaloftheFederalDepositInsurance Corporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct(the“BankMerger Act”).12U.S.C.§1828(c).TheFDICapprovedthebankmergeronFebruary6,2015. 3 12CFR262.3(b). 4 NationalassetanddepositdataareasofDecember31,2014.StatedepositdataareasofJune30,2014.Inthis context,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsandloan associations.

LegalDevelopments:SecondQuarter,2015 211 whetherthetransactionisprohibitedunderstatelaw.5Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.6Inaddition,theBoardmaynotapprove aninterstateacquisitionif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates,or 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.7 Forpurposesof theBHCAct,thehomestateof BB&TisNorthCarolina,andKentucky Financial’shomestateisKentucky.8KentuckyBankisalsolocatedinOhio.BB&Tiswell capitalizedandwellmanagedunderapplicablelawandhasasatisfactoryCommunityReinvestmentAct(“CRA”)rating.9Kentuckyhasafive-yearagerequirement,10Ohiohasno minimumagerequirement,11andKentuckyBankhasbeeninexistenceformorethanfive years. Onconsummationof theproposedtransactions,BB&Twouldcontrol1.1percentof the totalamountof depositsininsureddepositoryinstitutionsintheUnitedStates.Inaddition,thecombinedorganizationwouldcontrolapproximately8percentof thetotal amountof depositsof insureddepositoryinstitutionsinKentuckyFinancial’shomestate, Kentucky.12TherearenootherstatesinwhichBB&TandKentuckyFinancialhaveoverlappingbankingoperations.Accordingly,inlightof allthefactsof record,theBoardisnot prohibitedfromapprovingtheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.13 BranchBankandKentuckyBankdonotcompetedirectlyinanybankingmarket.Based onallof thefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof 5 12U.S.C.§1842(d)(1)(A). 6 12U.S.C.§1842(d)(1)(B). 7 12U.S.C.§1842(d)(2)(A),(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See 12U.S.C.§1841(o)(4)-(7). 8 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 9 12U.S.C.§§2901-2908.Therearenostatecommunityreinvestmentlawsapplicabletothiscase. 10 Ky.Rev.Stat.Ann.§286.3-920. 11 OhioRev.CodeAnn.§1115.05. 12 Kentuckyimposesa15-percentlimitonthetotalamountofin-statedepositsthatasinglebankingorganization maycontrol.Ky.Rev.Stat.Ann.§286.3-900. 13 12U.S.C.§1842(c)(1).

212 FederalReserveBulletin|August2015 resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedon bothaparent-onlyandconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialandmanagerial resourcesandtheproposedbusinessplan. BB&TandBranchBankarebothwellcapitalizedandwouldremainsoonconsummation of theproposedacquisition.Theproposedtransactionisabankholdingcompanymerger thatisstructuredasacashandshareexchange.14Theassetquality,earnings,andliquidity of BranchBankandKentuckyBankareconsistentwithapproval,andBB&Tappearsto haveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BB&T,KentuckyFinancial,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyBB&T,theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andthe organizations’recordsof compliancewithapplicablebankingandanti-money-laundering laws. BB&T,KentuckyFinancial,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.BB&T’sexistingrisk-managementprogramanditsdirectorate andseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof BB&Thavesubstantialknowledgeof andexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredBB&T’splansforimplementingtheproposal.BB&Thasa demonstratedrecordof successfullyintegratingorganizationsintoitsoperationsand risk-managementsystemsfollowingacquisitions.BB&Thasconductedcomprehensivedue diligenceandisdevotingsignificantfinancialandotherresourcestodevelopadetailed integrationplanandtimelineforthisproposal.BB&Twouldimplementitsexistingcomplianceandrisk-managementsystemsandprogramsatthecombinedorganization,andthese 14 Aspartoftheproposedtransaction,eachshareofKentuckyFinancialcommonstockwouldbeconvertedinto arighttoreceivecashandBB&Tcommonstock,basedonanexchangeratio.BB&Thasthefinancialresources tofundthetransaction.

LegalDevelopments:SecondQuarter,2015 213 areconsideredacceptablefromasupervisoryperspective.Inaddition,BB&T’sandKentuckyFinancial’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andBB&Tplanstointegrate KentuckyFinancial’sexistingmanagementandpersonnelinamannerthataugments BB&T’smanagement.15 Basedonallthefactsof record,includingBB&T’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof BB&TandKentuckyFinancialincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inits evaluationof theeffectof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhetherthereisareasonablebasistoconcludethatthe relevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserveand whethertheproposalwouldresultinpublicbenefits.Inthisevaluation,theBoardplaces particularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.16TheBoardalsoconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations,thesupervisoryviewsof examiners,othersupervisoryinformation, andcommentsreceivedontheproposal.OtherinformationtheBoardmayconsider includestheinstitution’sbusinessmodel,theinstitution’smarketingandoutreachplans, thedevelopmentandmonitoringof businessgoalsandinitiatives,andtheorganization’s plansfollowingconsummation. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,17andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-andmoderateincome(“LMI”)neighborhoods.18Inadditiontocomplyingwiththerequirementsof the CRA,fairlendingandotherconsumerprotectionlawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orother prohibitedbases. TheBoardalsoconsideredinformationprovidedbythepublicduringthecommentperiod. TheBoardreceivedonecommentfromacommenterwhoobjectedtotheproposalonthe basisof BranchBank’sandKentuckyBank’slendingrecordstoLMIandminorityborrowers,basedon2013datareportedbythebanksundertheHomeMortgageDisclosureAct(“HMDA”),forBranchBankintheLouisville,KY-IN(“Louisville”)Multi-State MetropolitanStatisticalArea(“MSA”),Dallas-Plano-Irving(“Dallas”)MSA,andHouston-Sugarland-BayTown(“Houston”)MSAassessmentareas;andforKentuckyBankin 15 Forinstance,inordertoprovideBB&T’sexistingmanagementwithfurtherinsightintoservingtheneedsof thecommunitiescurrentlyservedbyKentuckyFinancial,BB&TwouldinvitecertainrepresentativesfromKentuckyFinancialtoserveontwonewadvisorybodies:aregionaladvisoryboardandaNorthernKentucky CommunityDevelopmentCommittee. 16 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 17 12U.S.C.§2901(b). 18 12U.S.C.§2903.

214 FederalReserveBulletin|August2015 theCincinnati-Middletown(“Cincinnati”)Multi-StateMSAassessmentarea.ThecommenteralsocriticizedBranchBank’sbranchdistributioninLMIareasintheDallasMSA andHoustonMSAassessmentareas. HMDAdatareflectingcertaindisparitiesintheratesof loanapplications,originations, anddenialsamongmembersof differentracialorethnicgroupsinlocalareascanraise concernabouttheadequacyof policiesandprogramsataninstitutionformeetingitsobligationstoextendcreditfairlyandequitably.However,otherinformationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.19Consequently,HMDAdisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecord of aninstitution. TheBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.20TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepository institutionprepareawrittenevaluationof theinstitution’srecordof meetingthecredit needsof itsentirecommunity,includingLMIneighborhoods.21Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof BranchBank.BranchBankwasassignedanoverall“Outstanding” ratingbytheFDICatitsmostrecentCRAperformanceevaluation,asof May19,2014 (“BranchBankEvaluation”).22BranchBankreceived“Outstanding”ratingsfortheInvestmentTestandtheServiceTestanda“HighSatisfactory”ratingfortheLendingTest. ExaminersfoundthatBranchBankmadeanexcellentlevelof qualifiedinvestmentsand extensiveuseof innovativeinvestmentstosupportcommunitydevelopmentinitiatives.The BoardhasconsultedwiththeFDICregardingtheBranchBankEvaluation. InevaluatingtheLendingTest,examinersfoundthatBranchBank’soveralllendinglevels reflectedgoodresponsivenesstoassessmentareacreditneedsandthatBranchBankmade ahighpercentageof itsloanswithinitsassessmentareas,reflectingadequatepenetration. Examinersalsofoundthatthebank’sdistributionof borrowersreflectedgoodpenetration amongretailcustomersof differentincomelevelsandbusinesscustomersof differentsizes. ExaminersnotedthatBranchBankexhibitedagoodrecordof servingthecreditneedsof themosteconomicallydisadvantagedareasof itsassessmentareas,LMIindividuals,and 19 Otherdatarelevanttoafairlendinganalysiscouldinclude,forexample,informationoncredithistoryproblems,debt-to-incomeratios,andloan-to-valueratios.Moreover,HMDAdatadonotaccountforthepossibility thataninstitution’soutreacheffortsmayattractalargerproportionofmarginallyqualifiedapplicantsthan otherinstitutionsattractanddonotprovideabasisforanindependentassessmentofanyapplicant’s creditworthiness. 20 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 21 12U.S.C.§2906. 22 TheBranchBankEvaluationwasreleasedtothepubliconJune1,2015,andwasconductedusingLargeBank CRAExaminationProcedures.Examinersreviewedloansreported,pursuanttoHMDAandCRAdatacollectionrequirements(geographicdistributionandborrowerdistribution),in2011,2012,and2013.Theevaluation periodforcommunitydevelopmentlending,innovativeandflexiblepractices,qualifiedinvestments,andcommunitydevelopmentserviceswasJanuary1,2011,throughDecember31,2013.Thebranchofficedistribution wasasofDecember31,2013.TheBranchBankEvaluationcoveredBranchBank’s108assessmentareas locatedin11statesandfivemulti-stateMSAs:NorthCarolina,Alabama,Georgia,Florida,Kentucky,Maryland,SouthCarolina,Tennessee,Texas,Virginia,WestVirginia,theCharlotte,NC-SC(“Charlotte”)Multi- StateMSA,theColumbus,GA-AL(“Columbus”)Multi-StateMSA,theKingsport-Bristol,TN-VA(“Kingsport”)Multi-StateMSA,theLouisvilleMulti-StateMSA,andtheWashington,DC-MD-VA-WV (“WashingtonDC”)Multi-StateMSA.TheBranchBankEvaluationincludedafull-scopereviewof48of theseassessmentareas,includingallfivemulti-stateMSAs,whichcapturedapproximately70percentormore ofthetotallendinganddepositactivityforeachstate.

LegalDevelopments:SecondQuarter,2015 215 verysmallbusinesses.Examinersalsonotedthatthebankwasaleaderinmakingcommunitydevelopmentloansduringthereviewperiod.BranchBank’scommunitydevelopment loansweremadeforavarietyof purposes,includingfinancingaffordablehousingforLMI individuals,promotingeconomicdevelopmentbypartneringwithcommunitydevelopment organizations,andsupportingvariousstatewidelendingconsortiums.Inaddition,examinersnotedthatBranchBankofferedaffordablehousingloansthroughseveralfederaland stategovernmentprograms. IntheLouisvilleMulti-StateMSAassessmentarea,anareaonwhichthecommenter focused,examinersratedBranchBank’sLendingTestperformanceas“Outstanding,”notingthatitslendinglevelsreflectedexcellentresponsivenesstoassessmentareacreditneeds. Thegeographicdistributionof thebank’shomemortgageandsmallbusinesslendingwas good.BranchBank’sborrowerdistributionamongretailcustomersof differentincomelevelswasexcellentandamongbusinessesof differentsizeswasgood.Examinersnotedthat thebankmadeextensiveuseof innovativeandflexiblelendingpractices,andthatBranch Bankwasaleaderinmakingcommunitydevelopmentloansintheassessmentarea. InTexas,anotherareaonwhichthecommenterfocused,BranchBankwasassignedan overall“Satisfactory”ratingbytheFDIC.IntheDallasMSAassessmentarea,examiners notedthatBranchBank’slendingreflectedgoodresponsivenesstoassessmentareacredit needs.Thegeographicdistributionof thebank’shomemortgagelendingwasgood,andits smallbusinessloansreflectedexcellentpenetrationthroughouttheassessmentarea.Branch Bank’sdistributionof HMDAloansamongindividualsof differentincomelevelsand amongbusinessesof differentsizeswasadequate.Examinersnotedthatthebankmade extensiveuseof innovativeandflexiblelendingpracticesandthatBranchBankoriginated arelativelyhighlevelof communitydevelopmentloansintheassessmentarea.Branch Bankalsofundedasmall-businessretailfacilityinalow-incomecensustract,providingfor economicdevelopmentandjobcreation.IntheHoustonMSAassessmentarea,examiners notedthatBranchBank’slendingreflectedadequateresponsivenesstoassessmentarea creditneeds.Thegeographicdistributionof thebank’shomemortgageandsmallbusiness lendingwasadequate.Examinersnotedthatthebankmadeextensiveuseof innovativeand flexiblelendingpracticesandthatBranchBankoriginatedarelativelyhighlevelof communitydevelopmentloansintheassessmentarea. InevaluatingtheInvestmentTest,examinersfoundthatBranchBankhadanexcellentlevel of qualifiedcommunitydevelopmentloaninvestmentsandgrants,anditsvolumeof qualifiedinvestmentswassignificant.Thebankextendedqualifiedinvestments,ofteninaleadershippositionandnotroutinelyprovidedbyprivateinvestors,atahighlevelthroughout itsassessmentareas.ExaminersnotedthatBranchBank’sinvestmenttestperformancewas “Outstanding”throughoutasignificantnumberof statesandmulti-stateMSAs,andits performancewasrated“HighSatisfactory”inseveralothers.23Examinersalsofoundthe banktobealeaderinaffordablehousingtaxcreditinvestmentsandthatthebankprovided innovativeinvestmentsthatexhibitedexcellentresponsivenesstoassessmentareaneeds. ExaminersalsonotedthatBranchBank’slevelof qualifiedinvestmentsrelativetoits operationsintheHoustonMSAandLouisvilleMulti-StateMSAassessmentareaswas excellentandgood,respectively. 23 Examinersfoundthatthebank’sperformanceundertheInvestmentTestwas“Outstanding”inNorthCarolina,Virginia,Florida,SouthCarolina,Georgia,Texas,WestVirginia,andAlabama,aswellasinthemultistateMSAsofKingsportandColumbus.ExaminersalsonotedBranchBank’sinvestmenttestperformance was“HighSatisfactory”inMaryland,Tennessee,andKentucky,aswellasinthemulti-stateMSAsofWashingtonDC,Charlotte,andLouisville.

216 FederalReserveBulletin|August2015 InevaluatingtheServiceTest,examinersnotedthatBranchBank’soverallbranchdistributioninFlorida,Georgia,NorthCarolina,Tennessee,andVirginiaprovidedagoodlevelof accessibilitytoLMIindividualsandareasandthatitsbranchdistributioninWestVirginia providedexcellentaccessibilitytoLMIareas.24Examinersfurthernotedthatinthesubstantialmajorityof theremainingassessmentareas,thebranchdistribution,bygeography, wasatleastadequate.Examinersalsofoundthatthebankofferedseveralservicesdesigned tomeettheconvenienceandneedsof theassessmentareas,particularlyforLMIgeographiesandindividuals.Examinersindicatedthatthebankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutitsassessmentareas.Examinersnotedthatbank managementandemployeesprovidedfinancialadviceandassistancetomanycommunity developmentorganizations. IntheDallasMSAassessmentarea,anareaonwhichthecommenterfocused,Branch Bankoperatesfiveof its25branchesinLMItracts,andanadditional12branchesare adjacenttoorwithinonemileof anLMItract.Sevenof thosebranchesarelocatedin tractsinwhichamajorityof thepopulationareminorityindividuals(“majorityminority tracts”).Of the13branchesBranchBankoperatesintheHoustonMSAassessmentarea, threearelocatedinanLMItract,andanadditionalfivebranchesarelocatedadjacentto orwithinonemileof anLMItract.Sixof thosebranchesarelocatedinmajorityminority tracts.IntheLouisvilleMulti-StateMSAassessmentarea,eightof the27BranchBank branchesarelocatedinanLMItract,andanadditionalninebranchesareadjacenttoor withinonemileof anLMItract.Fiveof thosebranchesarelocatedinmajorityminority tracts. Inaddition,BranchBankassertedthatithasastrongrecordof communitydevelopment lendingandinvestmenttomeetcommunityreinvestmentneeds.BranchBankstatedthatit continuedtomakeahighlevelof communitydevelopmentloansandqualifiedcommunity developmentinvestmentstothecommunitiesitserves.Inaddition,BranchBankindicated thatitsassociateshaveprovidedmorethan1,850qualifiedcommunitydevelopmentservice activitieswithintheirlocalcommunitiesandthatithasemployedcommunitydevelopment specialiststoserveasliaisonsbetweenthecommunityandthebanktofacilitycommunity developmentloans,services,andinvestmentopportunitiesthroughoutitsfootprint. CRAPerformanceof KentuckyBank.KentuckyBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDICinNovember2013(“KentuckyBankEvaluation”).KentuckyBankreceiveda“HighSatisfactory” ratingfortheLendingTestand“LowSatisfactory”ratingsforboththeInvestmentTest andtheServiceTest.25 InevaluatingKentuckyBank’sperformanceundertheLendingTest,examinersconcluded thatKentuckyBank’slendinglevelsreflectedgoodresponsivenesstoitsassessmentarea’s creditneeds.Examinersfoundthatahighpercentageof KentuckyBank’sloanswereoriginatedinitsassessmentarea,andthegeographicdistributionof itsloansreflectedgood 24 ExaminersnotedthatBranchBankdemonstratedan“Outstanding”recordregardingtheServiceTestinthe LouisvilleMulti-StateMSA,amongotherstateandmulti-stateMSAs.AsofDecember31,2013,thebank operated870branchesinNorthCarolina,Virginia,andFlorida,togetheraccountingforapproximately48percentofthebank’sbranches.Consequently,examinersplacedmoreweightontheinstitution’sperformancein NorthCarolina,Virginia,andFlorida. 25 TheKentuckyBankEvaluationwaspreparedusingtheinteragencyevaluationproceduresforlargeinstitutions. TheLendingTestincludedareviewofallhomemortgageloansandsmallbusinessloansreportedunderregulatoryrequirementsfor2011and2012andareviewofallcommunitydevelopmentloansfromMay23,2011, throughNovember18,2013.TheInvestmentTestandtheServiceTestcoveredtheperiodfromMay23,2011, throughNovember18,2013.TheKentuckyBankEvaluationincludedafull-scopereviewoftheCincinnati Multi-StateMSA,includingBoone,Campbell,Kenton,Grant,Gallatin,andPendletoncounties,allofKentucky,andHamiltonCounty,Ohio.

LegalDevelopments:SecondQuarter,2015 217 penetrationthroughoutitsassessmentarea.ExaminersnotedthatKentuckyBank’sdistributionof borrowersreflectedgoodpenetrationamongretailcustomersof differentincome levelsandbusinesscustomersof differentsizes.ExaminersalsofoundthatKentuckyBank madearelativelyhighlevelof communitydevelopmentloansandthatitmadeuseof innovativeandflexiblelendingpracticesinordertoservethecreditneedsof itsassessmentarea. InevaluatingKentuckyBank’sperformanceundertheInvestmentTest,examinersfound thatKentuckyBankhadanadequatelevelof qualifiedcommunitydevelopmentinvestmentsandgrants.ExaminersnotedthatKentuckyBankexhibitedadequateresponsiveness tocreditandcommunityeconomicdevelopmentneeds. InevaluatingKentuckyBank’sperformanceundertheServiceTest,examinersnotedthat KentuckyBank’sdeliverysystemswerereasonablyaccessibletoessentiallyallportionsof itsassessmentareaandwerenotadverselyaffectedbytheopeningandclosingof branches. ExaminersalsonotedthatKentuckyBankprovidedanadequatelevelof community developmentservicesthroughoutitsassessmentarea,andthatservicesdonotvaryinaway thatinconveniencesportionsof itsassessmentarea,particularlyLMIgeographiesand individuals. BB&T’sFairLendingProgram.TheBoardhasconsultedwiththeFDIC,whichisthe appropriatefederalbankingagencyforBranchBank,regardingitsevaluationof compliancewithfairlendinglawsandregulationsbyBranchBank.InJanuary2015,theFDIC approvedanapplicationbyBankBranchtoacquire42CitibankbranchesinTexasunder theBankMergerAct.Thecommenterinthiscaseraisedsimilarallegationsinthatapplication,criticizingBB&T’slendingrecordandbranchdistributionintheDallasandHouston MSAs.Asaresultof thatcomment,theFDICinvestigatedBB&T’slendingactivityand branchdistributionintheDallasandHoustonMSAsaspartof itsreviewof BB&T.Duringtheirinvestigationof thoseMSAs,FDICexaminersreviewedBB&T’spoliciesandprocedures,conductedananalysisof theHMDAandcommerciallendingdata,andconducted acomparativefilereview.Followingitsreview,theFDICapprovedtheacquisitionof the 42CitibankbranchesonJanuary30,2015.Inconnectionwiththeapproval,theFDIC directedBranchBanktodevelopandsubmitastrategicplan.BranchBanksubmitteda strategicplantotheFDIC,whichprovidedforasemi-annualreviewof BranchBank’s enterprise-widebranchingstrategy,lendingdistributions,andmarketingefforts.26The FDICdeemedtheplanacceptableonFebruary3,2015,and,subsequently,approvedthe mergerof KentuckyBankintoBranchBank. BB&Thasestablishedpoliciesandprocedurestohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.BB&T’sFairLendingCompliance GroupisresponsibleforengaginginanongoingriskevaluationforBB&T’slendingand operationallinesof business.TheFairLendingComplianceGroup’songoingriskevaluationincludesalistof riskindicators,suchastheconsiderationof consumerandregulatory complaints.BB&Tprovidesonlinefairlendingtrainingforstaff,including,butnotlimited to,underwriters,loanofficers,andcustomerserviceandcollectionpersonnel,withinformationrelatedtothevariousaspectsandnuancesof currentfairlendinglegislation. BB&Treviewsitsmarketingprogramsandcampaignsforappropriatecoverageandinclusionforminorityaswellasnon-minorityorientedmediaandgeographies.Priortoissuance,BB&Trequiresafairlendingreviewandsignoff of alladvertisingandmarketingprogramsandmaterialtoconfirmcompliancewithapplicablefederalandstatefairlending 26 AsrequiredbytheFDIC,theplanwasdevelopedinthecontextofavailableaggregateandpeerdataand demographicsandsafeandsoundlendingconsiderationsandevaluatedperformanceinmajorityminoritycensustracts,aswellasperformanceamongindividualracialandethnicgroups.

218 FederalReserveBulletin|August2015 laws.BB&T’sFairLendingComplianceRiskManagersconductannualmonitoringfor eachlendinglineof business.BB&Tperformsadditionalreviewsforproducts,promotions, andotherbankoperationstoconfirmfairlendingcompliance.BB&Tperformsregularfair lendinganalyses,includingtransactionalandpricingregression,minoritypenetration,and populationdata. BranchBankarguesthat,intheLouisvilleMulti-StateMSAassessmentarea,thepercentageof mortgageloanapplicationsreceivedfromandoriginatedtominorityborrowerssignificantlyexceedsthoseof aggregatelendersin2013.27BranchBankstatedthatitisa recententranttoboththeDallasandHoustonbankingmarketsandreceivedrelativelyfew applicationsformortgageloans.BranchBankrepresentsthatithasdevelopedplansto increaseoutreacheffortstostrengthenmortgageloanactivitytoLMIandminorityborrowersandcommunitiesintheDallasMSAandHoustonMSAassessmentareasand wouldalsodosointheCincinnatiMulti-StateMSA,thebankingmarketservedbyKentuckyBank.BranchBankstatedthattoassistabroaderscopeof borrowerstogainaccess tomortgagecredit,itoffersmortgageloanswithflexiblefeatures.BranchBankalsostates thatitisanactivesmallbusinesslenderthroughouttheLouisvilleMulti-StateMSA,Dallas MSA,andHoustonMSAassessmentareas. AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbytheCombinedOrganization.Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiestobeserved,theBoardalsoconsiderstheextenttowhichtheproposal wouldresultinpublicbenefits.BB&Trepresentsthattheproposalwouldbenefitcustomers of allprofilesinthecommunitiesitservesbyofferinganincreasednumberof productsand services.BranchBankoffersvariousproductsthatareunavailablethroughKentuckyBank, suchasdepositproductsdesignedforyouthandseniorcitizens,prepaidaccountswith debitcards,communitycheckingforcivicandnonprofitorganizations,andonlineloan applicationsandloanfulfilment,amongotherproducts.Additionally,KentuckyBankcustomerswouldhaveaccesstotheseadditionalfinancialproductsthroughasignificantly largernetworkof financialcentersandATMs. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRArecordsof theinstitutions involved,theapprovalbytheFDICof theunderlyingBankMergerActapplicationand theFDIC’sfairlendingreviewof BranchBank,informationprovidedbyBB&T,confidentialsupervisoryinformation,andthepubliccommentontheproposal.Basedonitsconsiderationof thatinformation,theBoardbelievesthatthereisareasonablebasisonwhichto concludethatBB&Tishelpingtomeetthecreditneedsof thecommunitiesitservesand thattheproposalwouldresultinpublicbenefits,andconcludesthattheconvenienceand needsfactorisconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”28 27 Thelendingdataoftheaggregatelendersrepresentthecumulativelendingforallfinancialinstitutionsthat havereportedHMDAdatainaparticularMSAormetropolitandivision.Inthiscontext,aggregatelendingis consideredanindicatorofthelendingopportunitiesinthegeographicareainwhichthebankislocated. 28 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7).

LegalDevelopments:SecondQuarter,2015 219 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.29These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.30 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Theproposalinvolvestheacquisitionof approximately$1.9billionin totalassets.Uponconsummation,BB&Twouldhave$188.7billionintotalassetsand wouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthataproposal thatinvolvesanacquisitionof lessthan$2billioninassets,orthatresultsinafirmwith lessthan$25billioninconsolidatedassets,willnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.31Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyBB&Twithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection 29 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 30 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 31 ThecommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately representtheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.In theBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact, submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’s requestdoesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbe clarifiedbyapublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnot presentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.For thesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnot requiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

220 FederalReserveBulletin|August2015 withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Richmond,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveJune3,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Sterling Bancorp Montebello, New York OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2015–16(June15,2015) SterlingBancorp(“Sterling”),Montebello,NewYork,afinancialholdingcompanywithin themeaningof theBankHoldingCompanyAct(“BHCAct”),hasrequestedtheBoard’s approvalundersection3of theBHCAct1toacquireHudsonValleyHoldingCorporation (“HudsonValley”),andtherebyindirectlyacquireitssubsidiarybank,HudsonValley Bank,NationalAssociation(“HudsonValleyBank”),bothof Yonkers,NewYork.Followingtheproposedacquisition,HudsonValleyBankwouldbemergedintoSterling’ssubsidiarybank,SterlingNationalBank(“SterlingBank”),Montebello,NewYork.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(79FederalRegister74091(2014)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. Sterling,withconsolidatedassetsof approximately$7.4billion,isthe140thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$5.2billionin deposits.4SterlingcontrolsSterlingBank,whichoperatesinNewYorkandNewJersey. SterlingBankisthe25thlargestinsureddepositoryinstitutioninNewYork,controlling depositsof approximately$5.0billion,whichrepresentlessthan1percentof thetotal depositsininsureddepositoryinstitutionsinthatstate.5 HudsonValley,withconsolidatedassetsof approximately$3.1billion,isthe263rdlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$2.8billion indeposits.HudsonValleycontrolsHudsonValleyBank,whichoperatesonlyinNew 1 12U.S.C.§1842. 2 ThemergerofHudsonValleyBankintoSterlingBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”),pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C. §1828(c). 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2014,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks,andsavingsassociations.

LegalDevelopments:SecondQuarter,2015 221 York.HudsonValleyBankisthe38thlargestinsureddepositoryinstitutioninNewYork, controllinglessthan1percentof thetotaldepositsininsureddepositoryinstitutionsinthat state. Onconsummationof theproposal,Sterlingwouldbecomethe108thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$10.6billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Sterlingwouldcontroltotaldepositsof approximately$8.0billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.InNewYork,Sterlingwouldbecomethe21stlargest depositoryorganization,controllingdepositsof approximately$7.8billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.6ThestatutealsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitiestobeserved.7 SterlingandHudsonValleyhavesubsidiarydepositoryinstitutionsthatcompetedirectlyin theMetropolitanNewYorkCitybankingmarket(“NewYorkCitymarket”).8TheBoard hasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlightof all thefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthebankingmarket;therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatSterlingwouldcontroluponconsummationof theproposal;9theconcentrationlevelsof marketdepositsandtheincreasein theselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”),afterconsummationof theproposal;10andothercharacteristicsof themarket. 6 12U.S.C.§1842(c)(1). 7 Id. 8 TheNewYorkCitymarketisdefinedasBronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam,Queens, Richmond,Rockland,Suffolk,Sullivan,Ulster,andWestchestercounties,allinNewYork;Bergen,Essex, Hudson,Hunterdon,Middlesex,Mercer,Monmouth,Morris,Ocean,Passaic,Somerset,Sussex,Union,and Warrencounties,allinNewJersey;MonroeandPikecounties,bothinPennsylvania;FairfieldCounty,Connecticut;Bridgewater,Canaan,Cornwall,Kent,NewMilford,NorthCanaan,Roxbury,Salisbury,Sharon, Warren,andWashingtontownships,includingthecitiesofCornwallBridge,FallsVillage,Lakeville,Marble Dale,NewPreston,Salisbury,andWashingtonDepot,allinLitchfieldCounty,Connecticut;andAnsonia,BeaconFalls,Derby,Milford,andSeymourtownshipsinNewHavenCounty,Connecticut. 9 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percent weightedbasis.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

222 FederalReserveBulletin|August2015 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheNewYorkCitymarket.Onconsummationof theproposal,theNewYorkCitymarketwouldremainmoderatelyconcentrated, asmeasuredbytheHHI.TherewouldbeonlyaminimalchangeintheHHI,and251competitorswouldremaininthemarket.11 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotbelikelyto haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesintheNewYorkCitybankingmarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedon bothaparent-onlyandconsolidatedbasis,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,earnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof thefinancialandmanagerial resourcesandtheproposedbusinessplan. SterlingandSterlingBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisabankholdingcompanymergerthatis structuredasashareexchange,withasubsequentmergerof thesubsidiarydepository institutions.12Theassetquality,earnings,andliquidityof SterlingBankandHudsonValleyBankareconsistentwithapproval,andSterlingappearstohaveadequateresourcesto absorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations. Inaddition,futureprospectsareconsideredconsistentwithapproval.Basedonitsreview in2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html. 11 Sterlingoperatesthe27thlargestdepositoryinstitutionintheNewYorkCitymarket,whichincludesportions ofNewJersey.Sterlingcontrolsapproximately$5.1billionindepositsinthismarket,whichrepresentlessthan 1percentofmarketdeposits.HudsonValleyoperatesthe37thlargestdepositoryinstitutioninthesamemarket,controllingapproximately$2.8billionindeposits,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,Sterlingwouldbecomethe22ndlargestdepositoryinstitutioninthemarket,controllingapproximately$8.0billionindeposits,whichrepresentlessthan1percentof marketdeposits.TheHHIfortheNewYorkCitymarketwouldincreasebyonepointto1371. 12 Aspartoftheproposedtransaction,eachshareofHudsonValleycommonstockwouldbeconvertedintoa righttoreceiveSterlingcommonstock,basedonafixedexchangeratio.Sterlinghasthefinancialresourcesto fundtheexchange.

LegalDevelopments:SecondQuarter,2015 223 of therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcesto effecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Sterling,HudsonValley,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbySterling,theBoard’ssupervisoryexperienceswithSterlingandHudsonValleyandthoseof otherrelevantbanksupervisory agencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicablebankingandanti-money-launderinglaws. Sterling,HudsonValley,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.Sterling’sexistingrisk-managementprogram,anditsdirectorateand seniormanagement,areconsideredtobesatisfactory.Thedirectorsandseniorexecutive officersof Sterlinghavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredSterling’splansforimplementingtheproposal.Sterlingis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.Sterlingwouldimplementitsrisk-management policies,procedures,andcontrolsatthecombinedorganization,andtheseareconsidered acceptablefromasupervisoryperspective.Inaddition,Sterling’sandHudsonValley’s managementhavetheexperienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafeandsoundmanner,andSterlingplanstointegrateHudsonValley’s existingmanagementandpersonnelinamannerthataugmentsSterling’smanagement.13 Basedonallthefactsof record,includingSterling’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof SterlingandHudsonValleyincombattingmoney-laundering activities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobeserved,theBoardconsiders whethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunities theyserveandwhethertheproposalwouldresultinpublicbenefits.Inthisevaluation,the Boardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutions undertheCommunityReinvestmentAct(“CRA”).14TheBoardalsoconsidersthebanks’ overallcompliancerecord,recentfairlendingexaminationsandothersupervisoryassessments;thesupervisoryviewsof examiners;othersupervisoryinformation;andcomments receivedontheproposal.OtherinformationtheBoardmayconsiderincludestheinstitu- 13 Onconsummation,Sterlingwillincreasefrom13to15thenumberofseatsonitsboardofdirectors.Eleven directorscurrentlyservingonSterling’sboardofdirectorsandfourdirectorsnominatedbyHudsonValley’s boardofdirectorswillserveontheboardofthecombinedorganization.TheChiefExecutiveOfficerandthe ChiefFinancialOfficerofSterlingwillcontinuetoserveintheirrolesfollowingthemerger.Inaddition,SterlingBankwillestablishapaidadvisoryboard,comprisedofothermembersofHudsonValley’sboardof directorswhowishtoserveandotherindividualsappointedbySterling.TheadvisoryboardwillmonitorSterlingBank’sbusinessincertainmarketstosupporttheboardofdirectorsofSterlingandSterlingBank. 14 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq.

224 FederalReserveBulletin|August2015 tion’sbusinessmodel,theinstitution’smarketingandoutreachplans,itsdevelopmentand monitoringof businessgoalsandinitiatives,andtheorganization’splansfollowing consummation. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,15andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods.16Inadditiontocomplyingwiththerequirementsof theCRA,fairlending andotherconsumerprotectionlawsrequirealllendinginstitutionstoprovideapplicants withequalaccesstocredit,regardlessof theapplicant’srace,ethnicity,orcertainother characteristics. TheBoardreceivedtwocommentsfromasinglecommenterwhoobjectedtotheproposal principallyonthebasisof SterlingBank’srecordof extendinghomemortgagecreditto minorityindividualsintheNewYork-Wayne-WhitePlains,NewYork-NewJerseyMetropolitanDivision(“NewYorkCityMSA”)andtheNassau-SuffolkMetropolitanDivision (“Nassau-SuffolkMD”),asreflectedindatareportedundertheHomeMortgageDisclosureAct(“HMDA”)17for2013.Thecommenterexpressedconcernsthat,basedon2013 HMDAdata,SterlingBankwasnotmeetingthecreditneedsof minorityindividualsinthe communitiesservedbythebank.18ThecommenteralsocontendedthatSterlingBank’s HMDAdataare“irregular.”ThecommenternotedthatthebankreportedthreewithdrawnandthreeincompleteapplicationsforrefinanceloanstoAfricanAmericansinthe NewYorkCityMSAandnodenials,suggestingthatthebankisprescreeningminorityborrowers.19 TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairlyandequitably. However,otherinformationcriticaltoaninstitution’screditdecisionsisnotavailablefrom HMDAdata.20Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof SterlingBankandHudsonValleyBank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theOCC,confidentialsupervisory 15 12U.S.C.§2901(b). 16 12U.S.C.§2903. 17 12U.S.C.§2801etseq. 18 ThecommenteralsoallegedthatHudsonValleyBankwasnotmeetingthecreditneedsofminoritiesinits communities,basedon2013HMDAdata.SterlingrepresentedthatHudsonValleyBankisprimarilyacommerciallenderanddoesnothaveamaterialmortgageprogram.Mortgageloansrepresentedapproximately 14percentofthebank’soveralllendingportfolioasofDecember31,2014.SterlingrepresentedthatHudson ValleyBankmakesonlyamodestnumberofin-housemortgageoriginations. 19 Sterlingassertedthatthreeloanapplicationswerewithdrawnattheprospectiveborrowers’requestbecausethey didnotwishtocontinuethetransactionandthatthethreeotherapplicationsweredeemedincompletebecause theprospectiveborrowersdidnotprovidetherequestedproperty,asset,orincomedocumentationneededby thebanktomakealendingdecision. 20 Otherdatarelevanttoafairlendinganalysiscouldinclude,forexample,informationoncredithistoryproblems,excessivedebtlevelsrelativetoincome,andhighloanamountsrelativetothevalueoftherealestatecollateral(thereasonsmostfrequentlycitedforacreditdenialorhighercreditcost).Moreover,HMDAdatado notaccountforthepossibilitythataninstitution’soutreacheffortsmayattractalargerproportionofmarginallyqualifiedapplicantsthanotherinstitutionsattractanddonotprovideabasisforanindependentassessmentofanyapplicant’screditworthiness.

LegalDevelopments:SecondQuarter,2015 225 information,informationprovidedbySterling,andthepubliccommentsreceivedonthe proposal. A.SterlingBank’sBusinessandResponsetoComments SterlingBankisprimarilyacommerciallenderanddoesnothavealargeresidentialmortgageloanoperation.Residentialmortgageloansrepresentedapproximately11percentof thebank’soveralllendingportfolioin2014.21Sterlingacknowledgedthatthe bank’spercentageof HMDA-reportablemortgageloanstoAfricanAmericanandHispanicborrowerswaslowerthantheaggregate’spercentageintheNewYorkCityMSAin 2013.22However,Sterlingarguedthatthislowerpercentagewasduetothebank’sfocuson commerciallendingandthehighlycompetitivenatureof theNewYorkCitymarket.Sterlingindicatedthat,asacommerciallender,SterlingBankprovideshomemortgageloans primarilyasanaccommodationtoitscommerciallendingcustomers,originatingmostof itsmortgagesinresponsetocustomerinquiriesinconnectionwithcommerciallendingrelationships.SterlingBankdidnotengageinsignificantmarketingeffortsforresidentialmortgagelendingin2013. B.Recordsof PerformanceundertheCRA TheBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.23TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepository institutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthe creditneedsof itsentirecommunity,includingLMIneighborhoods.24Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdatainadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulationstoassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;thegeographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberand amountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamount 21 Sterling’scommerciallending,includingcommercialmortgageandcommercialandindustrialloans,representedintheaggregateapproximately84percentofSterlingBank’soveralllendingportfolioin2014. 22 Thelendingdataoftheaggregatelendersrepresentthecumulativelendingforallfinancialinstitutionsthat havereportedHMDAdatainagivenmarket.Inthiscontext,aggregatelendingisconsideredapotentialindicatorofthelendingopportunitiesinthegeographicareainwhichthebankislocated. 23 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 24 12U.S.C.§2906.

226 FederalReserveBulletin|August2015 of homemortgageloanstolow-,moderate-,middle-,andupperincomeindividuals;25the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies.Consequently,theBoardconsiderstheoverallCRAratingand theratingonthelendingtesttobeimportantindicators,whentakenintoconsideration withotherfactors,indeterminingwhetheradepositoryinstitutionishelpingtomeetthe creditneedsof itscommunities. CRAPerformanceof SterlingBank.SterlingBankwasassignedanoverallratingof “Satisfactory”bytheOCCatitsmostrecentCRAperformanceevaluationasof January2014 (“SterlingBankEvaluation”).26SterlingBankreceived“LowSatisfactory”ratingsforboth theLendingTestandInvestmentTestanda“HighSatisfactory”ratingfortheServiceTest. ExaminersfoundthatSterlingBank’slendinglevelsreflectedadequateresponsivenessto thecreditneedsof itsassessmentarea,thatitengagedinarelativelyhighlevelof communitydevelopmentlendinginvolvingloansthathadanaffordablehousingorothercommunitydevelopmentpurpose,andthatitmadeasubstantialmajorityof itshomemortgage loansandsmallloanstobusinessesandfarmswithinitsassessmentarea.TheBoardhas consultedwiththeOCCregardingtheSterlingBankEvaluation. InevaluatingtheLendingTest,examinersfoundthatSterlingBank’sgeographicdistributionof loans,includinghomemortgageloansandsmallbusinessloans,reflectedadequate penetrationthroughouttheassessmentarea.Thebank’spenetrationof loansamongborrowersof differentincomelevelsandbusinessesof differentsizeswasadequate,although examinersnotedsomeweaknesseswithrespecttocertaintypesof lending.Examiners foundthatSterlingBankmadearelativelyhighlevelof communitydevelopmentloansfor avarietyof purposes,includingtheconstructionanddevelopmentof affordablehousing unitsforLMIindividualsandseniorcitizens,thepromotionof economicdevelopmentand jobcreationthroughSmallBusinessAdministration(“SBA”)programs,andthestabilizationof LMIareasbyfinancinglocalbusinesses.ExaminersnotedthatSterlingBankhada goodrecordof servingthecreditneedsof themosteconomicallydisadvantagedareasinits assessmentarea,LMIindividuals,andsmallbusinesses. InevaluatingtheInvestmentTest,examinersfoundSterlingBanktohaveanadequatelevel of qualifiedcommunitydevelopmentinvestmentsandgrants,althoughexaminersnoted thatperformancecouldbeimprovedincertainareas.Thebankexhibitedadequateresponsivenesstocreditandcommunityeconomicdevelopmentneedsintheformof affordable housing,andoccasionallyusedinnovativeand/orcomplexinvestmentstosupportcommu- 25 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupperincomeindividuals.See, e.g.,12CFR228.22(b)(3). 26 TheSterlingBankEvaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures.ExaminersreviewedHMDA-reportableandsmallbusinessloansfortheperiodJanuary1,2011,throughSeptember30,2013.Theevaluationperiodforcommunitydevelopmentloans,services,andinvestmentswasNovember1,2010,throughJanuary20,2014.TheSterlingBankEvaluationincludedafull-scopereviewofthebank’s assessmentarea,theentiretyofwhichiswithintheNewYork-Newark-JerseyCity,NY-NJ-PAMultistateMetropolitanStatisticalAreaandiscomposedofNassau-SuffolkMD;NewYorkCityMSA;Poughkeepsie- Newburgh-MiddletownMSA;KingstonMSA;andNewYorkStateNon-MSA,definedasthetownsof Mamakating,Forestburgh,ThompsonandFallsburg,allinSullivanCounty,NewYork.Examinersplaced moreweightontheirreviewoftheNewYorkCityMSAduetothesignificantnumberoflendingandcommunitydevelopmentactivitiesconductedinthatmetropolitandivisionduringtheevaluationperiod,andbecausea significantmajorityofcensustractsintheassessmentareaarelocatedintheNewYorkCityMSA. SterlingNationalBankandProvidentBankmergedonOctober31,2013.Forallbutcommunitydevelopment investments,theOCCevaluatedProvidentBank’sCRAactivities.TheOCCconsideredoutstandingcommunitydevelopmentinvestmentsmadebylegacySterlingNationalBankafterJanuary1,2012.

LegalDevelopments:SecondQuarter,2015 227 nitydevelopmentinitiatives.ExaminersnotedthatthebanksupportedanonprofitorganizationpromotingeconomicdevelopmentinunderservedurbanandruralareasinNew Yorkstate,whichprincipallybenefittedwomen,minorities,andLMIindividualstryingto startorexpandtheirbusinesses,aswellasseveralothercommunitydevelopmentorganizations.SterlingBankalsomadeinvestmentsandgrantstoorganizationstoprovideandsupportaffordablehousingandcommunityservicestoLMIindividualsinitsassessmentarea. InevaluatingtheServiceTest,examinersfoundthatSterlingBankparticipatedinanumber of communitydevelopmentservices.Thebankactivelypartneredwithhomeownership counselingagenciesandprovidedfinancialliteracyseminarstoLMIindividualsregarding first-timehomebuyingexperiences.ExaminersnotedthatSterlingBankparticipatedin FederalHomeLoanBankof NewYork(“FHLBNY”)programsaimedatproviding down-paymentassistancetofirst-timehomebuyersandfacilitatingaffordablehousingconstruction,rehabilitation,anddevelopment.Examinersfoundthebank’sretaildeliverysystemswerereasonablyaccessibleinessentiallyallportionsof itsassessmentarea. CRAPerformanceof HudsonValleyBank.HudsonValleyBankwasassignedanoverallratingof “Satisfactory”bytheOCCatitsmostrecentCRAperformanceevaluationasof May2013(“HudsonValleyBankEvaluation”).27Thebankreceiveda“LowSatisfactory” ratingfortheLendingTestand“HighSatisfactory”ratingsforboththeInvestmentTest andServiceTest. InevaluatingtheLendingTest,examinersfoundthatHudsonValleyBank’slendinglevels reflectedadequateresponsivenesstothecreditneedsof itsNewYorkassessmentarea, althoughexaminersnotedareasforimprovementwithrespecttocertainmortgageand smallbusinesslending.Thebank’slevelof communitydevelopmentloanswasconsidered excellent.InNewYork,examinersfoundthatHudsonValleyBank’sgeographicdistributionof homepurchaseloansandhomerefinanceloanswasgood,andthegeographicdistributionof multi-familyloanswasexcellent.Thebank’smarketshareof multi-family loansoriginatedinLMIgeographieswashigherthanthebank’soverallmarketshare. Examinersnotedthat,duringtheevaluationperiod,thebankoriginatedcommunitydevelopmentloanstoconstruct,renovate,andfundoperationsof learningfacilities,nursing homes,hospitals,andaffordablehousingforLMIindividuals. InevaluatingtheInvestmentTest,examinersfoundthatHudsonValleyBankdemonstrated goodresponsivenesstothecreditandcommunityeconomicdevelopmentneedswithinits NewYorkassessmentareabymakinginvestmentstargetingaffordablehousing.Duringthe evaluationperiod,thebank(1)madeinvestmentsinseveralschooldistrictstoeducateand supportchildrenwithinthebank’sassessmentarea,themajorityof whomlivedinLMI households,and(2)retainedinvestmentsthatprovidedcredittobusinessesthatwouldnot otherwisemeettherequirementsfortraditionalbankfinancing. InevaluatingtheServiceTest,examinersfoundthatHudsonValleyBankprovidedahigh levelof communitydevelopmentservicesthroughitsofferingsof financialandtechnical 27 TheHudsonValleyBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. ExaminersreviewedloansreportableunderHMDAandsmallbusinessloansfortheperiodJanuary1,2010, throughDecember31,2012.Theevaluationperiodforcommunitydevelopmentloans,investments,andservice activitieswasJune7,2010,throughMay6,2013.TheHudsonValleyBankEvaluationincludedafull-scope evaluationofthebank’sassessmentareainthestateofNewYork,whichconsistsofWestchester,Bronx,Rockland,Manhattan,andaportionofBrooklyncounties;andalimited-scopeevaluationofHudsonValleyBank’s assessmentareasinConnecticut,whichconsistofallofFairfieldCountyandaportionofNewHavenCounty. Examinersplacedgreaterweightonthebank’sperformanceinNewYorkbecauseamajorityofitsactivities areconcentratedthere.

228 FederalReserveBulletin|August2015 expertisetoLMIindividualsandsmallbusinesses.ThebankalsoworkedwithvariousnonprofitorganizationsthatprovideaffordablehousingforLMIfamilies,promotesmallbusinessventures,andeducateyoungLMIindividualsontheimportanceof financialplanning andstability. Sterling’sEffortssincetheSterlingBankEvaluation.FollowingtheJanuary2014Sterling BankEvaluation,SterlingBankadoptedamorerobust,firm-wideCRAprogram(“CRA Plan”)toincreasemarketpenetrationandoutreachinthebank’sassessmentareatomore effectivelymeetthecreditneedsof thecommunitiesitserves.TheCRAPlanestablishes revisedmeasurementcriteriaforthebank’sCRAperformance,refocusesthebank’sinvestmentstrategytoincludetargetedassessmentareainvestmentsandcommunitydevelopment investments,setsforthgoalsforidentifyingnewinitiativesonCRA-relatedactivities,and institutesanenterprise-widedatagatheringinitiativetotrackallCRA-relatedactivity acrosstheorganization.Theplanoutlinesspecificactivitieswithinitsassessmentareaon whichthebankplanstofocus,includingincreasedmarketingandcommunityoutreach; financialseminars;andincreasedmortgageandsmallbusinesslendinginLMItracts, includingtowomen-ownedsmallbusinesses. TheCRAPlanisadministeredbythebank’sCRAOfficer,andthebank’sCRAOversight Committeemonitorsprogresstowardtheplan’sgoalsandrecommendsperiodicchanges, asappropriate.Thestatusof CRA-relatedactivitiesandprogressinfulfillingthebank’s strategicgoalsisperiodicallyreportedtoexecutivemanagementaswellastheEnterprise RiskandAuditcommitteesof thebank’sboardof directors.Sterlingrepresentedthatthe CRAPlanwillbeupdatedannually,andgoalswillbeupdatedtoreflectthestrategicplan foreachbusinessunit,aswellasforthebankasawhole. SterlingrepresentedthatSterlingBankmetorexceededtheCRAPlan’s2014goals,and thatthebankhasestablishedupdatedCRAgoalsandinitiativesfor2015.Sterlingrepresentedthat,sincetheSterlingBankEvaluation,thebankhasmadecommunitydevelopmentloansandinvestmentsfocusedonsupportingtheconstructionorfinancingof affordablehousingandhospitalswithinitsassessmentarea.Sterlinghasalsomadecontributions toprovideeducationalprogramsthatbenefitLMIandminorityindividuals,including donationstosupportschoolsservingminorityandLMIstudentsandtohelpthosestudentsmoveontohighereducation,andhostinganumberof seminarsonhomeownership inLMIareaswithinitsassessmentarea.Thebankmakescharitabledonationstononprofit communitygroupswithintheNewYorkCityandNewJerseyareasthroughitscharitable foundationandhasprovidedsupportforfundraisingeventsandprovidedgrantsfocusing oneducationinitiatives. Sterlinghashostedanumberof financialseminarsonhomeownershipinLMIareaswithin itsassessmentarea,anditsCRAPlanincludesafocusonhostingseminarsonelderfinancialabuse,financialliteracy,homeownershipcounseling,andfirst-timehomebuying;and onlaunchingaprogramaimedatincreasinglendingtowomen-ownedsmallbusinesses whileprovidingaccesstonetworking,education,andcapital.Further,SterlingBankstaff responsibleforsmallbusinessdevelopmenthavebeenattendingcommunityseminars anddiscussingsmallbusinessopportunitiesinthebank’sassessmentareaandintendto continuesuchoutreachefforts. SterlingBankoffersasuiteof productstoaddressthecreditneedsof LMIborrowers, includingFHA,VeteransAdministration,andFannieMaeloanproducts,andparticipates intheFHLBNY’sFirstTimeHomebuyersProgram.SterlingBankhasalsopartneredwith communitygroupsthatprovidehomeowner-relatedservicesinLMIcommunitiesinNew YorkCityandprovidedfundingforthedevelopmentandpreservationof affordablehousinginthesuburbsaroundNewYorkCity.Sterlingrepresentedthatithasengagedinvari-

LegalDevelopments:SecondQuarter,2015 229 ousoutreacheffortswithinitsassessmentarea,includingmarketingefforts,engagement withcommunitygroups,andeffortstooffereducationalprogrammingtoLMIcommunitieswithinthisassessmentarearegardingproductsofferedbythebank.SterlingBankconductedadirect-mailsolicitationforthebank’shomeimprovementloanproducttohomeownersinallLMIcensustractsintheirassessmentareainDecember2014andintendsto conductsimilareffortsin2015. Inaddition,SterlingBankrecentlyaddedanewsalesteamwithexperienceindirectlending tostateandlocalgovernments,not-for-profithealthcare,andhighereducationalinstitutions,andexpectstoexpanditseffortsinlendingtothosegroups.SterlingBankoffers smallbusinesscreditproductsthroughtheSBA’s504and7(a)programs,whichbenefit smallfor-profitandnon-for-profitbusinesses.SterlingBanklendingstaff activelyparticipateincommunityeventsspecificallytargetedatsmallbusinessowners.SterlingBankalso workswithallof theNewYorkStateSmallBusinessDevelopmentCentersthroughoutits communityfootprint,whichprovideinformationregardingtheprocessof smallbusiness financingandopportunities. C.FairLendingandOtherConsumerProtectionLaws TheBoardhasconsideredtherecordsof SterlingBankandHudsonValleyBankincomplyingwithfairlendingandotherconsumerprotectionlaws.Aspartof itsevaluation,the BoardreviewedSterlingBank’sandHudsonValleyBank’srecordsof performanceunder fairlendinglaws,thecommentsreceivedontheproposalandSterling’sresponse,the OCC’sviewsregardingSterlingBank’sfairlendingpoliciesandprocedures,andotherconfidentialsupervisoryinformation.TheBoardalsoconferredwiththeOCCconcerningthe commentsreceivedontheproposal. TheBoardhasconsultedwiththeOCCregardingitsevaluationof compliancewithfair lendinglawsandregulationsbySterlingBankandHudsonValleyBank.TheOCCrecently reviewedthecomplianceprogramsof SterlingBankandHudsonValleyBank,focusingon theinstitutions’fairlendingrisk.TheOCChadnosupervisoryconcernsregardingeither bank’scompliancewithfairlendinglawsandregulations. Asexplainedabove,SterlingBankhasdeterminedtoincreaseitsmarketingandoutreach effortstobetterservetheneedsof itscommunitiesandhasadopteditsrevisedCRAPlan. Althoughthebankintendstoremainprimarilyacommerciallender,itexpectstoincrease itsoutreacheffortsforresidentialmortgages.SterlingBankalsostatedthatitwillcontinue pursuingtheothercommunitydevelopmentandCRA-relatedinitiativessetforthinits revisedCRAPlan.SterlingplanstoreassessthegoalsandobjectivesinitsCRAPlanto determineif anyadjustmentsarenecessarytoreflecttheacquisitionof HudsonValley. SterlingBank’sFairLendingProgram.SterlingandSterlingBankhaveestablishedpolicies andprocedurestohelpensurecompliancewithallfairlendingandotherconsumerprotectionlawsandregulations.ThesepoliciesandprocedureshavebeenreviewedintheexaminationprocessbytheOCC,whichconsideredthemsatisfactory.SterlingBankintendsto implementthesepoliciesandproceduresacrossthecombinedorganizationfollowingconsummationof thetransaction. SterlingBankmaintainsanauditprogramforcompliancewiththeseprogramsandprocedures,andprovidescompliancetrainingandeducationforallemployees,includingmaking additionaltrainingrequiredforemployeesengagedinmortgageloanorigination,processing,underwriting,andcreditdecisionmaking.Thetrainingincludesprogramsonthe bank’spoliciesandproceduresandonhowtoidentifyandpreventabusiveorpredatory lending.

230 FederalReserveBulletin|August2015 SterlingBankhasestablishedafairlendingprogramthatisreviewedandapprovedannuallybytheEnterpriseRiskManagementCommitteeof theboardof directors.Sterling Bank’sComplianceRiskManagementDepartment(“ComplianceDepartment”)isresponsibleformanagingthebank’sfairlendingcomplianceprogram,includingtheassessment of fairlendingcomplianceandanyresultingremediationactivity.TheComplianceDepartmentregularlyassessesfairlendingcompliancethroughamonitoringandtestingregime andoverseestheresultingremediationactivitytoensureallfindingsareeffectivelymitigated.TheComplianceDepartmentalsoconductsquarterlyfairlendingriskassessments toidentifyandmeasurerisksinthebank’slendingprocessesandconductsstatisticalanalysestodetectpracticesthatcouldresultindisparatetreatmentorpricingdiscrimination involvingloanapplicants. SterlingBankmaintainsasecondaryreviewprocessforalldeniedconsumer,residential, andsmallbusinessloanapplicationstoensurethatallqualifiedapplicantsareapproved. Thissecondreviewisconductedtoensurethatthebank’sfairlendingstandardsare appliedfairlyanduniformlytoallapplicants,thatallpossibleavenuesof approvalhave beenexploredpriortoformaldenial,andthattheapplicationwasnotdeniedbasedonany prohibitedbasis.Intheeventof arecommendationfordenialorcounter-offerof aloan application,twoseniormanagers,suchasaseniorcreditofficerandaseniorunderwriter, mustreviewtheapplicationindependently.Inaddition,beforemakinganextensionof credit,amemberof thebank’ssecondarymarketingdepartmentreviewsthetermsof the loan,inparticularloanpricing.Intheeventof non-compliancewiththebank’spolicies,an appropriateadjustmenttopricingwillbemade. D.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Sterlingrepresentedthattheproposalwouldprovidecustomersof thecombined organizationaccesstoanexpandedbranchnetworkacrosstheNewYorkmetropolitan areaandwouldofferadditionalorexpandedservicestocurrentSterlingBankandHudson ValleyBankcustomers,includingexistingspecialtyfinanceanddepositproductsnot offeredtocurrentcustomersof theotherinstitution.Sterlingassertedthatthecombined organizationwouldbebetterabletoservelarger,morediverseclients,particularlyinthe middlemarketsegment,andthepotentialcostsavingsgeneratedbytheintegrationof the twoinstitutionswouldprovideopportunitiestopassthosesavingsontotheircustomers. Further,Sterlingstatedthatthecombinedorganizationwouldbestrengthenedbythe complementaryaspectsof thetwoentities’businesses,includingcustomerfocus, geographiccoverage,businessorientation,andcompatibilityof thecompanies’managementandoperatingstyles,aswellasthecombinedexperienceandexpertiseof theirrespectivemanagementandemployees,resultinginastrongerandmorestablefranchise. E.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA;theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws;consultationswiththeOCC;confidentialsupervisoryinformation;informationprovidedbySterling,includingSterling’srepresentationsconcerningitsCRAPlan;andthepubliccommentsontheproposal.Basedon thatreview,theBoardbelievesthatSterlingishelpingtomeetthecreditneedsof thecommunitiesitservesandthattheproposalwouldresultinpublicbenefits.Accordingly,the Boardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval.

LegalDevelopments:SecondQuarter,2015 231 FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”28 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.29These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.30 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Sterlingwouldhave approximately$10.6billioninconsolidatedassetsand,byanyof anumberof alternative measuresof firmsize,Sterlingwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStates absentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactors arenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.31Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe 28 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 29 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 30 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 31 ThecommentertwicerequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHC ActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately

232 FederalReserveBulletin|August2015 BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebySterlingwith alltheconditionsimposedinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonanycommitmentsmadetotheBoardinconnectionwiththeapplication.For purposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,as such,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof NewYorkactingpursuanttodelegated authority. Byorderof theBoardof Governors,effectiveJune15,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Merchants & Farmers Bancshares, Inc. Leesville, Louisiana OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2015–17(June15,2015) Merchants&FarmersBancshares,Inc.(“M&F”)hasrequestedtheBoard’sapprovalunder section3of theBankHoldingCompanyAct(“BHCAct”)1toacquireVernonBancshares, Inc.(“Vernon”),andtherebyindirectlyacquireitssubsidiarybank,TheVernonBank (“VernonBank”),allof Leesville,Louisiana.Followingtheproposedacquisition,Vernon Bank,astatenonmemberbank,wouldbemergedintoM&F’ssubsidiarystatenonmember bank,Merchants&FarmersBankandTrustCompany(“M&FBank”),Leesville, Louisiana.2 representtheirviews.TheBoardhasconsideredthecommenter’srequestsinlightofallthefactsofrecord.In theBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact, submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’s requestsdonotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublichearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublichearingontheproposalaredenied. Thecommenteralsotwicerequestedanextensionofthecommentperiod.TheBoardprovidesapubliccommentperiodforanapplicationtoprovideinterestedpersonstheopportunitytosubmitinformationandviews relatedtothestatutoryfactorsitmustconsiderundertheBHCAct.TheBoard’sRulesofProcedure(“Rules”) alsoestablishaframework,basedontheschedulesfollowedbymanycourts,thatlimitsiterativeresponses betweenapplicantsandcommenters.TheBoard’sRulescontemplatethatthepubliccommentperiodwillnot beextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime. Thecommenter’srequestsforadditionaltimetocommentdonotidentifycircumstancesthatwouldwarrantan extensionofthepubliccommentperiodforthisproposal.Accordingly,therequestsforanextensionofthe commentperiodaredenied. 1 12U.S.C.§1842(a)(5). 2 ThemergerofVernonBankintoM&FBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct,12U.S.C.§1828(c).The FDICapprovedthemergeronMarch25,2015.

LegalDevelopments:SecondQuarter,2015 233 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister9720(2015)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. M&F,withconsolidatedassetsof approximately$320.8million,isthe2099thlargest insureddepositoryorganizationintheUnitedStates.4M&FBankoperatesonlyinLouisianaandisthe47thlargestdepositoryinstitutioninthatstate,controllingdepositsof approximately$252.5million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinLouisiana.5 Vernon,withconsolidatedassetsof approximately$78.6million,isthe5037thlargest insureddepositoryorganizationintheUnitedStates.VernoncontrolsVernonBank,which isthe113thlargestdepositoryinstitutioninLouisiana.VernonBank,whichoperatesonly inLouisiana,controlsdepositsof approximately$69.2million,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,M&Fwouldbecomethe1688thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$399.4million,whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnitedStates.M&FBankwouldcontroltotaldepositsof approximately $315.0million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InLouisiana,M&Fwouldbecomethe 36thlargestdepositoryorganization,controllingdepositsof approximately$321.7million, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitiestobeserved.6 M&F’sandVernon’ssubsidiarydepositoryinstitutionscompetedirectlyintheVernon/ Beauregardarea,Louisianabankingmarket(“Vernon/Beauregardbankingmarket”).7The Boardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlight of allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativeshareof totaldepositsininsured depositoryinstitutionsinthemarket(“marketdeposits”)thatM&Fwouldcontrolupon 3 12CFR262.3(b). 4 Nationwidedeposit,asset,andrankingdataareasofDecember31,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsandloan associations. 5 Statedeposit,marketshare,andrankingdataareasofJune30,2014,unlessotherwisenoted. 6 12U.S.C.§1842(c)(1). 7 TheVernon/BeauregardbankingmarketisdefinedasVernonParishandthenorthernhalfofBeauregardParish,bothofLouisiana.

234 FederalReserveBulletin|August2015 consummationof theproposal;8theconcentrationlevelsof marketdepositsandthe increaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)underthe Departmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMerger Guidelines”);9andothercharacteristicsof themarket. IntheVernon/Beauregardbankingmarket,thechangeinconcentrationlevelandtheconcentrationlevelonconsummationwouldexceedthethresholdlevelsintheDOJBank MergerGuidelines.M&FBankisthelargestinsureddepositoryinstitutionintheVernon/ Beauregardbankingmarket,controllingdepositsof approximately$182.6million,which representapproximately25.8percentof marketdeposits.VernonBankisthefifthlargest insureddepositoryinstitutioninthemarket,controllingdepositsof approximately $69.2million,whichrepresentapproximately9.7percentof marketdeposits.Onconsummationof theproposal,M&FBankwouldremainthelargestdepositoryinstitutioninthe Vernon/Beauregardbankingmarket,controllingdepositsof approximately$251.7million. ThemarketconcentrationlevelintheVernon/Beauregardbankingmarketasmeasuredby theHHIwouldincreaseby503points,from1889to2392,andthemarketshareof the combinedentitywouldrepresentapproximately35.5percentof marketdeposits. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitioninthemarket.10Severalfactorsindicatethattheincreaseinconcentrationin theVernon/Beauregardbankingmarket,asmeasuredbytheHHI,andthemarketshareof thecombinedorganizationoverstatethepotentialcompetitiveeffectsof theproposalinthe market. TheBoardhasconsideredthecompetitiveinfluenceof twoactivecreditunions,Barksdale FederalCreditUnion(“BarksdaleCreditUnion”),BossierCity,Louisiana,andNavyFederalCreditUnion(“NavyFederal”),Vienna,Virginia,intheVernon/Beauregardbanking marketanddeterminedthattheactivitiesof thecreditunionsexertacompetitiveinfluence thatmitigates,inpart,thepotentialeffectsof theproposal.11Eachof thesecreditunions offersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhas membershipcriteriathatincludeamajorityof theresidentsintheVernon/Beauregard 8 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989),andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50-percentweightedbasis.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,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/10-at- 938.html. 10 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andtheresultinglevelofconcentrationin,abankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 11 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.ChemicalFinancialCorporation,FRBOrderNo.2015-13(April20,2015);CentralBankof AudrainCounty,FRBOrderNo.2014-17(October17,2014);ChemicalFinancialCorporation,FRBOrderNo. 2014-16(September30,2014);ANBBank,FRBOrderNo.2014-14(September11,2014);OldNationalBancorp,FRBOrderNo.2014-13(July14,2014);FirstInterstateBancSystem,Inc.,FRBOrderNo.2014-11 (June30,2014);MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012–12(November14,2012);Old NationalBancorp,FRBOrderNo.2012–9(August30,2012);andUnitedBankshares,Inc.(orderdatedJune20, 2011),97FederalReserveBulletin19(2ndQuar.2011).

LegalDevelopments:SecondQuarter,2015 235 bankingmarket.12TheBoardfindsthatthesecircumstanceswarrantincludingthedeposits of thesecreditunionsata50-percentweightinestimatingmarketinfluence.13Adjustingto reflectcompetitionbythesecreditunionsinthemarket,themarketconcentrationlevelin theVernon/BeauregardbankingmarketasmeasuredbytheHHIwouldincreaseby389, fromalevelof 1582to1971,andthemarketshareof M&Fresultingfromthetransaction wouldincreaseinthemarketfrom22.7percentto31.2percent. Afterconsummationof theproposal,themergedentitywouldfacecompetitionfromnine competitorsinthemarket,somewithasignificantpresenceinthemarket.Thesecondand thirdlargestcompetitorsinthemarketwouldcontrolapproximately21.3percentand 17.5percentof marketdeposits,respectively,andthefourthlargestcompetitorinthemarketwouldcontrolapproximately11.0percentof marketdeposits,whenweightingthe depositsof BarksdaleCreditUnionandNavyFederalat50percent. TherecordalsoindicatesthattheVernon/Beauregardbankingmarketmaybeattractivefor entryandexpansionbybankcompetitors.In2008,NavyFederalenteredthemarket,and thefourthlargestbankcompetitorinthemarketisexpandingitspresenceinthemarketby openingasecondbranch. TheDOJconductedareviewof thepotentialcompetitiveeffectsof themergerandhas advisedtheBoardthatconsummationwouldnotbelikelytohaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtothe proposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheVernon/Beauregardbankingmarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedon bothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,earnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefuturepros- 12 Notably,themembershipcriteriaofbothBarksdaleCreditUnionandNavyFederalinclude,amongothers, activeandretiredmilitarypersonnelandtheirfamilies.AsthelargestemployerintheVernon/Beauregard bankingmarketistheUnitedStatesArmyBaseatFortPolk,andbecauseasignificantpopulationofactive andretiredmilitarypersonnelandtheirfamilymembersresideintheVernon/Beauregardbankingmarket,a majorityoftheresidentsinthebankingmarketareeligibletojointhesecreditunions. 13 Weightingthedepositsat50percenttakesintoaccountthelimitedlendingdonebythesecreditunionstosmall businessesrelativetocommercialbanks’lendinglevels.

236 FederalReserveBulletin|August2015 pectsof theorganizationsinvolvedintheproposalinlightof thefinancialandmanagerial resourcesandtheproposedbusinessplan. M&FandVernonarebothwellcapitalizedandwouldremainsoonconsummationof the proposal.Thetransactionisstructuredasanallcashdeal,witheachshareof Vernonbeing purchaseddirectly,basedupontheagreedprice.14Theassetquality,earnings,andliquidity of M&FandVernonareconsistentwithapproval,andM&Fappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwithapproval. Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficient financialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of M&F,Vernon,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyM&F,theBoard’ssupervisoryexperiencesandthose of otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’ recordsof compliancewithapplicablebankingandanti-money-launderinglaws. M&F,Vernon,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.M&F’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof M&Fhavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors.15 TheBoardalsohasconsideredM&F’splansforimplementingtheproposal.M&Fwould implementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition, M&F’sandVernon’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andM&FplanstointegrateVernon’sexistingmanagementandpersonnelinamannerthataugmentsM&F’smanagement. Basedonallthefactsof record,includingM&F’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof M&FandVernonincombattingmoney-launderingactivities, areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedand takeintoaccounttherecordsof therelevantdepositoryinstitutionsundertheCommunity ReinvestmentAct(“CRA”).16TheCRArequiresthefederalfinancialsupervisoryagencies toencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,17and 14 M&Fwouldfundthetransactionwithavailablecashonhandandthroughtheliquidationofmarketablesecurities.M&Fhastheresourcestoeffecttheproposedtransaction. 15 TheseniormanagementofM&FandM&FBankwouldremainthesameafterconsummatingtheacquisition. 16 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 17 12U.S.C.§2901(b).

LegalDevelopments:SecondQuarter,2015 237 requirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevant depositoryinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionary proposals.18 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof M&FBankandVernonBank,informationprovidedbyM&F,and confidentialsupervisoryinformation. A.Recordsof PerformanceundertheCRA AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.19TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.20Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsideration intheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’soverallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. CRAPerformanceof M&FBank.M&FBankwasassignedanoverall“satisfactory”rating atitsmostrecentCRAperformanceevaluationbytheFDICasof June2012(“M&FBank Evaluation”).21Examinersdeterminedthatthebank’saveragequarterlynetloan-to-depositratiowasreasonablegiventhebank’sassetsize,financialcondition,andassessment areacreditneeds.Inaddition,examinersfoundthatthebankexhibitedagoodrecordof lendingwithintheassessmentarea,withamajorityof bank’sloansmadewithintheassessmentarea.Examinersalsonotedthatthebank’sgeographicdistributionof lending reflectedasatisfactorypenetrationandloandispersionthroughouttheassessmentarea. Further,thebank’slendingdistributiontoborrowersreflectedgoodresponsivenesstobusinessesof differentsizesandindividualsof differentincomelevels,particularlyLMIborrowers,aswellasgoodperformanceinmeetingthecreditneedsof smallbusinessesinthe assessmentarea. CRAPerformanceof VernonBank.VernonBankwasassignedanoverall“satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDICinMarch2011(“Vernon BankEvaluation”).22Examinersdeterminedthatthebank’saveragequarterlynetloan-todepositratiowassatisfactorygiventhebank’sresourcesandassessmentareacreditneeds. Examinersnotedthatasubstantialmajorityof thebank’sloansweremadewithinits assessmentarea,demonstratingthebank’swillingnesstomeetthecreditneedsof itsassessmentarea.Further,examinersfoundthatthebank’sgeographicdistributionof loans throughouttheassessmentareawasreasonable.Examinersalsonotedthatthebank’sdistributionof loansreflectedreasonablepenetrationamongbusinessesof differentsizesand 18 12U.S.C.§2903. 19 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 20 12U.S.C.§2906. 21 TheM&FBankEvaluationwasconductedusingSmallInstitutionCRAExaminationProcedures,andexaminersreviewedthebank’slendingactivityfromApril23,2007,throughJune5,2012.TheM&FBankEvaluation includedafull-scopereviewofVernonParishandCalcasieuParish,bothofLouisiana.Examinersgavemore weighttotheVernonParishnon-MSA(MetropolitanStatisticalArea),basedonthepercentagesofM&F Bank’stotalloans,deposits,andbankingofficeslocatedintheVernonParish. 22 TheVernonBankEvaluationwasconductedusingSmallInstitutionCRAExaminationProcedures.Examiners reviewedthebank’slendingactivityfromFebruary6,2006,throughMarch7,2011.TheVernonBankEvaluationincludedanevaluationofVernonParish.

238 FederalReserveBulletin|August2015 individualsof differentincomelevels,aswellasreasonableperformanceinmeetingthe creditneedsof smallbusinessesintheassessmentarea. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. M&Frepresentsthattheproposalwouldprovidecustomersof thecombinedorganization accesstoanexpandedbranchnetworkandwouldofferadditionalorexpandedservicesto currentVernonBankcustomers,includingexpandedaccesstomoreATMlocationsand extendedbranchhours.M&Falsostatesthatthecombinedorganization’slargerlending limitwouldallowM&Ftomakelargercommercialloanstoitscustomers.Further,M&F representsthatM&FBankwillcontinuouslymonitortheCRAperformanceof the combinedentityinordertoensurethattheorganization’sobligationsthereunderaremet. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyM&F,andconfidential supervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceand consumercomplianceprogramsof M&FBankandVernonBank,reviewof examination reports,andconsultationswithotheragencies,theBoardconcludesthattheconvenience andneedsfactor,includingtheCRArecordsof theinsureddepositoryinstitutionsinvolved inthistransaction,isconsistentwithapprovalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”23 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.24These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution 23 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 24 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

LegalDevelopments:SecondQuarter,2015 239 thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.25 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,M&Fwouldhaveapproximately$399.4million inconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.TheBoardgenerally presumesthatamergerthatinvolvesanacquisitionof lessthan$2billioninassets,or resultsinafirmwithlessthan$25billioninconsolidatedassets,willnotposesignificant riskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransaction wouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyM&Fwithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Atlantaactingunderdelegated authority. Byorderof theBoardof Governors,effectiveJune15,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 25 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

240 FederalReserveBulletin|August2015 Order Issued Under Federal Reserve Act The Bank of Versailles Versailles, Missouri OrderApprovingEstablishmentof aBranch FBROrderNo.2015–14(May7,2015) TheBankof Versailles(“BOV”),Versailles,Missouri,astatememberbank,hasrequested theBoard’sapprovalundersection9of theFederalReserveAct(“FRA”)1andtheBoard’s RegulationH2toestablishabranchat76GrandPointBoulevardinSunriseBeach,Missouri(the“SunriseBeachbranch”). Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredthenoticeandallcomments receivedinlightof thefactorsspecifiedintheFRA. BOVisthe109thlargestdepositoryinstitutioninMissouri,controllingapproximately $197millionindeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthestate.4BOV’smainofficeisinVersailles,Missouri,andBOVhasthreeadditionalbranchesinMissouri.5 UndertheBoard’sRegulationH,whichimplementssection9of theFRA,6thefactorsthat theBoardmustconsiderinactingonbranchapplicationsinclude(1)thefinancialhistory andconditionof theapplyingbankandthegeneralcharacterof itsmanagement;(2)the adequacyof thebank’scapitalanditsfutureearningsprospects;(3)theconvenience andneedsof thecommunitytobeservedbythebranch;(4)inthecaseof brancheswith deposit-takingcapability,thebank’sperformanceundertheCommunityReinvestmentAct (“CRA”);7and(5)whetherthebank’sinvestmentinbankpremisesinestablishingthe branchsatisfiescertaincriteria. TheBoardhasconsideredtheapplicationinlightof thesefactorsandapubliccomment receivedfromtwoindividualsregardingtheproposal.Thecommentersobjectedtotheproposal,allegingthat,becauseBOVwasunabletoprovidethecommenterswithcertaindocumentstheyrequestedand,also,failedtomaintaincertaincustomerinformation,itfailsto complywiththerecordkeepingandreportingrequirementsof theBankSecrecyAct (“BSA”). Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof BOV,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,andinformationprovidedby BOV.BOViswellcapitalizedandwouldremainsoonconsummationof theproposal. 1 12U.S.C.§321etseq. 2 12CFR208. 3 12CFR262.3(b). 4 DataareasofJune30,2014.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savings associations,andsavingsbanks. 5 BOV’sbranchesarelocatedinCamdenandMorgancounties. 6 12CFR208.6(b). 7 12U.S.C.§2901etseq.

LegalDevelopments:SecondQuarter,2015 241 Afterconsideringallthefactsof record,theBoardconcludesthatthefinancialhistoryand condition,capitaladequacy,andfutureearningsprospectsof BOVareconsistentwith approvalof theproposal.TheBoardalsohasreviewedBOV’sproposedinvestmentinthe SunriseBeachbranchandconcludesthattheinvestmentisconsistentwithregulatorylimitationsoninvestmentinbankpremises.8 InconsideringBOV’smanagerialresources,theBoardhasreviewedBOV’sexamination record,includingassessmentsof itsmanagement,risk-managementsystems,andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithBOVandBOV’s recordof compliancewithapplicablebankinglaws,includinganti-money-launderinglaws. Inaddition,theBoardhasconsideredthecommentontheproposal.Thecommenters allegethatBOVdoesnotcomplywiththerecordkeepingrequirementsof theBSAandthat BOVdoesnotfollowthecustomeridentificationrequirementsof theBSA.BOVwas unabletocomplywithportionsof thecommenters’requestduetoatemporarycomputer failure,whichresultedinthelossof somedatathatcouldnotberetrievedfromdocument imagingsystems.9BOValsoassertsthatitisincompliancewithBSArequirementsandthat itfollowstheapplicablecustomeridentificationrequirementsof theBSA. BOVisconsideredtobewellmanaged.Priortothefilingof thisapplication,theFederal ReserveBankof KansasCity(“ReserveBank”)conductedareviewof accountactivity andaccountstatementspertainingtocommenters’businessaccountatBOV,includingthe bankpresident’sadministrationof thisaccount,concurrentwitharegularlyscheduled examination.Thereviewinvestigatedallegationsraisedbycommentersregardingrecordkeepingandtheadministrationof thisaccount.Examinersreviewedsamplesof account statementsprovidedbyBOVandconsideredtheadministrationof thecommenters’businessaccounttobeappropriate.ExaminersalsoconcludedthatBOV’sBSA/anti-moneylaunderingcomplianceprogramwassatisfactory.Inaddition,examinersconfirmedthat BOVhasmanagementinformationsystemsthatcapturerelevantcustomeridentification dataatthetimeof accountopening. Basedonthisreviewandallthefactsof record,theBoardconcludesthatthefinancialand managerialfactors,aswellastherecordsof effectivenessof BOVincombattingmoneylaunderingactivities,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations TheBoardalsohasconsideredtheconvenienceandneedsof thecommunitytobeserved, takingintoaccountBOV’sperformanceundertheCRA.TheCRArequiresthefederal financialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation.10Inaddition,theCRArequirestheappropriatefederalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecordof meetingthe creditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.11 8 12CFR208.21(a). 9 ThecommentersareformerbusinesspartnersofthecurrentpresidentofBOVinafailedrealestateventure. ThecommentersrequestedfromBOVcertainbankaccountrecordsrelatedtotheventureaspartoftheir ongoingpersonalbankruptcycourtproceedings.Thecourtdeniedcommenters’motiontocompelBOVtoproducealldocumentsrelatedtothebusinessaccountsofthefailedrealestateventure.Instead,BOVwasdirected toproduceasampleofthedocumentscommentersrequested. 10 12U.S.C.§2901(b). 11 12U.S.C.§2903.

242 FederalReserveBulletin|August2015 AsprovidedintheCRA,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof thatinstitution.12TheCRArequiresthattheappropriatefederalfinancialsupervisorfora depositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meeting thecreditneedsof itsentirecommunity,includingLMIneighborhoods.13Aninstitution’s mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor.14 TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof BOVandconfidentialsupervisoryinformation.BOVwasassigned anoverall“satisfactory”ratingatitsCRAperformanceevaluationbytheReserveBankas of February27,2012.BOVwasevaluatedundertheSmallBankExaminationprocedures, whichconsiderfactorssuchasBOV’sloan-to-depositratioandlendinginsideitsassessmentarea. Examinersreviewedasampleof residentialrealestateandcommercialloansoriginated betweenDecember2009andNovember2011. ExaminersfoundthatBOVwasreasonablyresponsivetothecreditneedsof itsassessment area.ExaminersnotedthatBOVextendedthemajorityof itsloansinsideitsassessment areaandthatitsdistributionof loanstoLMIborrowerswasreasonable.Examinersalso notedthatBOV’slendingtosmallbusinesseswasexcellent,penetratingallincomelevels. BOVrepresentsthattheproposedSunriseBeachbranchwouldprovidepublicbenefitsby enablingcustomerslivingintheSunriseBeachareatoaccessbankingservicesmoreconveniently.Currently,customerslivinginSunriseBeachmustcrossatollbridgetoaccessthe nearestBOVbranchandareseveralmilesawayfromabankbranchof anykind.TheproposedbranchwouldbeconvenientlylocatedintheSunriseBeachcommunity. Basedonallthefactsof recordandforthereasonsdescribedinthisorder,theBoardconcludesthattheconvenienceandneedsfactor,includingBOV’sCRAperformance,isconsistentwithapprovalof theapplication. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.15TheBoard’sapprovalisspecificallyconditionedonBOV’scompliancewithallcommitmentsmadetotheBoardinconnectionwith theproposalaswellasallconditionsimposedinthisorder.ThecommitmentsandconditionsreliedonbytheBoardaredeemedtobeconditionsimposedinwritinginconnection 12 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,5Fed.Reg.11642,11665(2010) (“InteragencyQ&AsonCRA”). 13 12U.S.C.§2906. 14 SeeInteragencyQ&AsonCRA,75Fed.Reg.11642(2010). 15 ThecommentersonthisproposalrequestthattheBoardholdapublichearingontheproposal.Underitsrules, theBoardmay,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunity toproviderelevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.12CFR 262.3(e).TheBoardhasconsideredthecommenters’requestinlightofallthefactsofrecord.IntheBoard’s view,thecommentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submitted awrittencommentthattheBoardhasconsideredinactingontheproposal.Inaddition,therequestdoesnot demonstratewhythewrittencommentdoesnotpresentthecommenters’viewsadequatelyorwhyahearing otherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoard hasdeterminedthatapublichearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestfora publichearingontheproposalisdenied.

LegalDevelopments:SecondQuarter,2015 243 withitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunder applicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBankactingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveMay7,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

245 Federal Reserve BULLETIN January 2016 Vol. 102, No. 1 Legal Developments: Third Quarter, 2015 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act CIT Group, Inc. Livingston, New Jersey OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2015–20(July19,2015) CITGroup,Inc.(“CITGroup”),Livingston,NewJersey,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1andits subsidiary,CarbonMergerSubLLC,NewYork,NewYork,haverequestedtheBoard’s approvalundersection3of theBHCAct2toacquireIMBHoldcoLLC(“IMBHoldco”) andtherebyindirectlyacquireOneWestBank,NationalAssociation(“OneWestBank”), bothof Pasadena,California.Immediatelyfollowingtheproposedacquisition,CIT Group’ssubsidiarybank,CITBank,SaltLakeCity,Utah,wouldbemergedintoOneWest Bank,withOneWestBankbeingthesurvivingentity.3 CITGroup,withconsolidatedassetsof approximately$47.9billion,isthe42ndlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$15.9billionindeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.4CITGroupcontrolsCITBank,which operatesasingle,nonretailbankingofficeinSaltLakeCity,Utah,solicitingnationwide depositsthroughanInternet-baseddeposit-takingplatform.CITBankisthe10thlargest insureddepositoryinstitutioninUtah,withapproximately3.1percentof thetotaldeposits ininsureddepositoryinstitutionsinthatstate. IMBHoldco,withtotalconsolidatedassetsof $21.8billion,isthe70thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$14.1billionin deposits,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.IMBHoldcocontrolsOneWestBank,which operatessolelyinCalifornia.OneWestBankisthe13thlargestinsureddepositoryinstitutioninCalifornia,withapproximately1.4percentof thetotaldepositsininsureddepositoryinstitutionsinthatstate. 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 ThemergerofCITBankintoOneWestBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).Uponconsummationofthebankmerger,CITGroupintendstochangethenameofthecombinedbanktoCITBank,National Association. 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2014,unlessotherwisenoted.Statedepositdata areasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,savingsbanks,andsavingsandloanassociations.

246 FederalReserveBulletin|January2016 Onconsummationof thisproposal,CITGroupwouldbecomethe41stlargestinsured depositoryorganizationintheUnitedStatesbydeposits,controllingapproximately$30billionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates.CITGroupwouldbecomethe36thlargestdepository organizationintheUnitedStatesbyassets,withconsolidatedassetsof approximately $70billion.BecauseCITBankandOneWestBankdonothaveoverlappingoperations,the combinedbankwouldcontinuetorankasthe10thand13thlargestinsureddepository institutioninUtahandCalifornia,respectively. PublicCommentonProposal Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(79FederalRegister51333(August28,2014)and 80FederalRegister7595(February11,2015))andinaccordancewiththeBoard’sRegulationYandRulesof Procedure.5Thetimeforsubmittingcommentshasexpired.TheBoard extendedtheinitialperiodforpubliccommenttoaccommodatethebroadpublicinterestin thisproposal,providinginterestedpersonsuntilFebruary26,2015,atotalperiodof approximatelysixmonths,tosubmitwrittencomments. Inlightof thesignificantpublicinterestintheproposal,theBoardheldapublicmeetingin LosAngeles,California,toprovideinterestedpersonsanopportunitytopresentoralcommentsonthefactorsthattheBoardmustreviewundertheBHCAct.6Approximately111 individualsprovidedoraltestimonyatthepublicmeeting,asubsetof whichalsosubmitted writtencomments.7Intotal,approximately2,364individualsandorganizationssubmitted commentsontheproposalorally,inwriting,orboth.Commentersincludedcommunity groups,nonprofitorganizations,customersof thetwobankingorganizations,amemberof Congress,andotherinterestedorganizationsandindividuals. Alargenumberof commenterssupportedtheproposal.8Manyof thesecommenterscontendedthattheproposalwouldbenefitcommunitiesinCalifornia,includingthrough increasedemployment,businessdevelopmentopportunities,andaccesstoresourcesand servicesprovidedbythecombinedinstitution.CommentersalsocommendedOneWest Bankforitscommitmenttolocalcommunitiesanddescribedfavorableexperienceswith thesmallbusiness,communitydevelopment,andmortgageprogramsof theOneWestorganization.Inaddition,commenterspraisedCITGroupandIMBHoldco’scharitablecontributionsandnotedthatofficersandemployeesof theseinstitutionsfrequentlyprovidevaluableresourcesandservicestocommunityorganizations. Asignificantnumberof commenterseitheropposedtheproposal,requestedthattheBoard approvetheproposalonlysubjecttocertainconditions,orexpressedconcernsaboutthe proposal.9Manycommentersquestionedwhethertheproposalwouldresultinpublicben- 5 12CFR225.16(b);12CFR262.3(b). 6 ThepublicmeetingwasheldjointlybytheBoardandtheOCConFebruary26,2015,attheLosAngeles BranchoftheFederalReserveBankofSanFrancisco. 7 TheBoardpermittedcommenterswhorequestedtoparticipateinthepublicmeetingbutwereunabletoattend tohavetheirwrittencommentspresentedbyotherparticipantsatthemeeting. 8 Approximately2,177commenterssupportedtheproposal,ofwhichapproximately2,093commenterssubmittedsubstantiallyidenticalformletters.Ofthesecommenters,approximately51commentersprovidedoralcommentsinsupportoftheproposal. 9 Approximately187commentersopposedtheproposal.Ofthesecommenters,approximately39commenters submittedindividualizedwrittencomments,andapproximately88commenterssubmittedsubstantiallyidenticalformletters.Approximately60personsprovidedoralcommentsinoppositiontotheproposal.Twocommenters,theCaliforniaReinvestmentCoalitionandNationalPeople’sAction,submittedpetitionsinoppositiontotheproposal,withthenamesofapproximately15,559and6,500individuals,respectively.

LegalDevelopments:ThirdQuarter,2015 247 efits,arguingthatbothorganizationsarethesuccessorstofailedinstitutionsandhave receivedsignificantgovernmentassistancesince2008.Commentersalsoexpressedconcerns abouttheimpactof theproposalonthefinancialstabilityof theU.S.bankingorfinancial systemgiventhatthecombinedorganizationwouldhavemorethan$50billioninassets.In addition,commentersexpressedconcernsaboutthelevelof CITBank’ssmallbusiness lendingincertainmarketsandarguedthatCITBankshouldinvestmoreinthecommunitiesinwhichitacceptsInternetdeposits. Asignificantnumberof commentsinoppositiontotheproposalrelatedtoOneWestBank. Manycommenterscriticizedthemortgagelending,servicing,andforeclosurepracticesof OneWestBank,includingwithrespecttoitshomeequityconversionmortgageloan (“reversemortgageloan”)products.10CommentersallegedthatOneWestBank,among otherthings,engagedinwrongfulforeclosures,deprivedconsumersof theirproperty, unfairlydeniedmortgagemodificationsorengagedinharmfulservicingtacticsduringthe lossmitigationprocess,deceivedmortgageborrowersandfailedtoinformthemof their rights,andforeclosedimproperlyuponthehousesof nonborrowingspouses. ManycommentersalsoraisedconcernsaboutOneWestBank’sperformanceunderthe CommunityReinvestmentAct(“CRA”)11andthebank’scompliancewithfairlendinglaws andregulations.Inthisregard,commentersallegedthatOneWestBankdoesnotmeetthe needsof low-andmoderate-income(“LMI”)andminoritycommunitiesinitsproduct offerings,charitablecontributions,smallbusinesslending,branchlocations,andmarketing. Anumberof commentersallegedthatthereareracialdisparitiesinthebank’ssmallbusinesslendinganditsoriginationandservicingof certainmortgageproducts. Anumberof commentersexpressedconcernsregardingtheimpactof theproposalon financialstability,assertingthattheproposalwouldresultinaninstitutionwithgreater than$50billioninassetsthatwouldbe“toobigtofail.”Somecommentersallegedthat CITGroupismateriallyinterconnectedwiththeeconomyandwithothercompaniesthat areimportanttothestabilityof thefinancialsystem.Commentersalsoraisedconcerns abouttheamountof assetsatthecombinedorganizationthatwouldnothaveobservable marketprices. InevaluatingthestatutoryfactorsundertheBHCAct,theBoardconsideredtheinformationandviewspresentedbyallcommenters,includinginformationpresentedatthepublic meetingandinwrittensubmissions.TheBoardalsoconsideredalltheinformationpresentedintheapplicationandsupplementalfilingsbyCITGroup,variousreportsfiledby therelevantcompanies,publiclyavailableinformation,andotherinformationandreports. Inaddition,theBoardconsultedwiththerelevantfinancialsupervisoryagenciesand reviewedconfidentialsupervisoryinformation,includingexaminationreportsonthe depositoryinstitutionholdingcompaniesandthedepositoryinstitutionsinvolved.Aftera reviewof allthefactsof record,andforthereasonsdiscussedinthisorder,theBoardhas concludedthatthestatutoryfactorsitisrequiredtoconsiderundertheBHCActareconsistentwithapprovalof theproposal. 10 Commentersallegedthatthenumberofconsumercomplaintsthebankhasreceivedconcerningreversemortgageloansareindicativeofissueswithitslendingandservicingpracticesregardingthisproduct. 11 12U.S.C.§2901etseq.

248 FederalReserveBulletin|January2016 FactorsGoverningBoardReviewof theTransaction TheBHCActsetsforththefactorsthattheBoardmustconsiderwhenreviewingtheformationof abankholdingcompanyortheacquisitionof banks.12Thesefactorsincludethe competitiveeffectsof theproposalintherelevantgeographicmarkets;thefinancialand managerialresourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposal;theeffectivenessof theinvolvedinstitutionsincombattingmoney-launderingactivities;theconvenienceandneedsof thecommunitiestobeserved,includingtherecordsof performanceundertheCRAof theinsureddepositoryinstitutionsinvolvedinthetransaction;andtheextenttowhichtheproposalwouldresultingreaterormoreconcentrated riskstothestabilityof theUnitedStatesbankingorfinancialsystem.Inproposalsinvolvinginterstatebankacquisitionsbybankholdingcompanies,theBoardalsomustconsider theconcentrationof depositsasapercentageof thetotaldepositscontrolledbyinsured depositoryinstitutionsintheUnitedStatesandinrelevantindividualstates,aswellascompliancewiththeotherprovisionsof section3(d)of theBHCAct. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto whetherthetransactionisprohibitedunderstatelaw.13Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.14Inaddition,theBoardmaynotapprove aninterstateapplicationif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates,or 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.15 Forpurposesof theBHCAct,thehomestateof CITGroupisUtah,andOneWestBank’s homestateisCalifornia.16CITGroupiswellcapitalizedandwellmanagedunderapplicablelaw,andCITBankhasasatisfactoryCRArating.Therearenominimumage requirementsunderCalifornialawthatapplytoCITGroup’sacquisitionof IMBHoldco andOneWestBank.17 Onconsummationof theproposedtransaction,CITGroupwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsinthe 12 12U.S.C.§1842(c). 13 12U.S.C.§1842(d)(1)(A). 14 12U.S.C.§1842(d)(1)(B). 15 12U.S.C.§1842(d)(2)(A),(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See 12U.S.C.§1841(o)(4)–(7). 16 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Anationalbank’shomestateisthestateinwhichthemain officeofthebankislocated. 17 TheonlyagerequirementunderCaliforniastatelawconcernsinterstatebankmergerswherethesurvivingbank isanout-of-statebank.SeeCal.Fin.Code§1685(a).However,thisagerequirementisnotapplicabletothe proposedtransaction,whichinvolvesmergersofholdingcompaniesandaninterstatebankmergerwherethe survivingbankwillbeanationalbankthatmaintainsitsmainofficeinCalifornia.

LegalDevelopments:ThirdQuarter,2015 249 UnitedStates.Inaddition,thecombinedorganizationwouldcontrol$14.1billion(or approximately1.4percent)and$13.9billion(orapproximately3.1percent)of thetotal amountof depositsof insureddepositoryinstitutionsinCaliforniaandUtah,respectively, whicharethetwostatesinwhichthecombinedorganizationwouldhaveoperationsupon consummationof theproposal.Accordingly,inlightof allthefactsof record,theBoardis notprohibitedfromapprovingtheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.18 CITGroupandIMBHoldcodonotdirectlycompeteinanyretailbankingmarket.Based onallthefactsof record,includingthedifferencesinbusinessmodels,products,andmethodsforprovidingservicestocustomers,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthat competitiveconsiderationsareconsistentwithapproval.19 Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedon bothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. CITGroupandCITBankarewellcapitalized,andthecombinedorganizationwould remainsoonconsummationof theproposedacquisition.Theproposedtransactionisa bankholdingcompanymergerthatisstructuredasacashandshareexchange.20Theasset quality,earnings,andliquidityof CITBankandOneWestBankareconsistentwith approval,andCITGroupappearstohaveadequateresourcestoabsorbthecostsof the 18 12U.S.C.§1842(c)(1)(B). 19 TheDepartmentofJusticehasadvisedtheBoardthatconsummationoftheproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. 20 Asproposed,IMBHoldcowouldultimatelybemergedintoCITGroup,andeachIMBHoldcoownership interestwouldbeconvertedintoarighttoreceiveCITGroupcommonstockandcash,basedonanexchange ratio.CITGrouphasthefinancialresourcestofundtheexchange.

250 FederalReserveBulletin|January2016 proposalandtocompleteintegrationof theinstitutions’operations.Inaddition,future prospectsareconsideredconsistentwithapproval.Basedonitsreviewof therecord,the BoardfindsthatCITGrouphassufficientfinancialresourcestoeffecttheproposal.21 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of CITGroup,IMBHoldco,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyCITGroup,theBoard’ssupervisoryexperienceswithCITGroupandIMBHoldcoandthoseof otherrelevantbanksupervisory agencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicablebankingandanti-money-launderinglaws. CITGroup,IMBHoldco,andtheirsubsidiarydepositoryinstitutionsareeachconsidered tobewellmanaged.CITGroup’sexistingrisk-managementprogramanditsdirectorate andseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof CITGrouphavesubstantialknowledgeandexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredCITGroup’splansforimplementingtheproposal.CIT Groupisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof the post-acquisitionintegrationprocessforthisproposal.CITGroupwouldimplementits risk-managementpolicies,procedures,andcontrolsatthecombinedorganization,which wouldbesupplementedtoaddresstheadditionalbusinesslinesandrisksassociated withIMBHoldco’sandOneWestBank’soperations,andtheseareconsideredacceptable fromasupervisoryperspective.Inaddition,managementof CITGroupandIMBHoldco hastheexperienceandresourcesthatshouldallowthecombinedorganizationtooperatein asafeandsoundmanner,22andCITGroupplanstointegrateOneWestBank’sexisting managementandpersonnelinamannerthataugmentsCITGroup’smanagement.23 21 SomecommentersallegedthatCITGroupplanstopaydividendstoshareholdersbeforebecomingsubjectto enhancedprudentialstandardspursuanttosection165oftheDodd-FrankWallStreetReformandConsumer ProtectionAct(“Dodd-FrankAct”),Pub.L.No.111-203,124Stat.1376,1423–32(2010),codifiedat12U.S.C. §5365,andtheBoard’sRegulationYY,12CFRPart252.TheBoardhasconsideredthefinancialresourcesof thecombinedorganization,includingtheeffectofanticipatedcapitaldistributions,andconcludesthatfinancial considerationsareconsistentwithapproval. 22 CommentersallegedthatCITGroupwouldpayexcessivecompensationtotheexecutivesfromIMBHoldco andOneWestBankwhowouldbecomeexecutivesofthecombinedorganization.CITGrouphastheresources topaytheproposedcompensation,andthelevelofcompensationdoesnotraisesafetyandsoundnessconcerns.IndeterminingincentivecompensationforexecutivesatIMBHoldcoandOneWestBank,aswellas thoseatCITGroup,theapplicantalsoisexpectedtofollowtheguidanceissuedbytheBoardregardingincentivecompensation.SeeGuidanceonSoundIncentiveCompensationPolicies,75FederalRegister36396(June25, 2010). Inaddition,somecommentersexpressedconcernsregardingthecombinedorganization’smanagerialresources tocomplywithenhancedprudentialstandardspursuanttosection165oftheDodd-FrankActandtheBoard’s RegulationYY.CITGrouphasthefinancialandmanagerialresourcestocomplywiththeBoard’sregulations implementingsection165oftheDodd-FrankAct,andtheBoardwillmonitorCITGroup’scompliancewith theseregulationsthroughthesupervisoryprocess. 23 Onconsummation,thechairmanofIMBHoldcoandadirectorofOneWestBankwouldbeaddedtoCIT Group’sboardofdirectors.Inaddition,thechairmanoftheboardsofIMBHoldcoandOneWestBankwould holdtheseniorexecutiveofficerpositionsofvicechairmanofCITGroupandchairmanofthecombined bank,whilethepresidentofIMBHoldcoandOneWestBankwouldbecomeaco-presidentofCITGroupand presidentandchiefexecutiveofficerofthecombinedbank. SomecommentersexpressedconcernsaboutCITGroup’smanagerialresourcestoserviceresidentialmortgages andreversemortgageloans,givenCITGroup’srelativelackofexperienceinmortgageservicing.Asmentioned above,CITGroupplanstointegrateOneWestBank’sexistingmanagementandpersonnelinamannerthat augmentsCITGroup’smanagementandcapacityconsistentwiththecombinedorganization’sscopeofactivities,andCITGrouphasdevotedsubstantialresourcestoplanningfortheintegrationofOneWestBank’sbusinessoperations.

LegalDevelopments:ThirdQuarter,2015 251 Basedonallthefactsof record,includingCITGroup’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionsafterconsummation,andcommentsreceivedontheproposal,24theBoardconcludesthatconsiderations relatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof CITGroupandIMB Holdcoincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthe creditneedsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublic benefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutionsundertheCRA.25Inaddition,theBoardconsidersthebanks’ overallcompliancerecord,theresultsof recentfairlendingexaminationsandothersupervisoryassessments;thesupervisoryviewsof examiners;othersupervisoryinformation;and commentsreceivedontheproposal.TheBoardalsomayconsidertheapplicantinstitution’sbusinessmodel,marketingandoutreachplans,plansfollowingconsummation,and anyotherinformationtheBoarddeemsrelevant. Inconsideringthisproposal,theBoardhasconsideredallthefactsof record,including reportsof examinationof theCRAperformanceof CITBankandOneWestBank,thefair lendingandcompliancerecordsof bothbanks,confidentialsupervisoryinformation,informationprovidedbyCITGroup,andpubliccommentsreceivedontheproposal.TheBoard alsoconsultedwiththeConsumerFinancialProtectionBureau(“CFPB”)andtheOCC concerningtheirevaluationsof OneWestBank’scompliancewithfairlendingandconsumerprotectionlawsandregulationsandthecommentsreceivedontheproposal.The CFPBdidnotidentifyanysupervisoryconcernsregardingOneWestBank.26TheOCC consideredthecommentsopposingtheproposal,includingallegationsagainstOneWest Bank,aspartof theOCC’sreviewof theproposedmergerof OneWestBankandCIT Bankandhasapprovedthebankmerger. A.Summaryof PublicCommentsonConvenienceandNeeds Asnotedabove,theBoardheldapublicmeetingtofacilitatereceivingcommentsonthe proposalfrominterestedmembersof thepublic.Asignificantnumberof commentswere submitted,orallyand/orinwriting,throughthisprocess. 24 CommentersexpressedconcernaboutthelevelofracialandethnicdiversityamongOneWestBank’semployees andofficersandaboutOneWestBank’seffortstodobusinesswithminority-ownedsuppliers.However,other commenterspraisedOneWestBank’sdiversity,statingthatminorityindividualsrepresentedagoodproportion ofthemakeupofOneWestBank’semployeesandexecutivesandthatthecombinedbankwouldincluderepresentativesfromHispanic,Asian,andAfricanAmericancommunitiesonitsboardofdirectorsandwould establishspendingtargetswithwomenandminority-ownedbusinesses.TheBoardbelievesthatthesecontentionsandconcernsareoutsidethelimitedstatutoryfactorsthattheBoardisauthorizedtoconsiderwhen reviewinganapplicationundertheBHCAct.SeeBankofAmericaCorporation,90FederalReserveBulletin 217,223n.31(2004);seealsoWesternBancshares,Inc.v.BoardofGovernors,480F.2d749(10thCir.1973) (“WesternBancshares”). 25 12U.S.C.§1842(c)(2). 26 SeveralcommentersrepresentedthattheyhadfiledcomplaintswiththeCFPBregardingOneWestBank’s mortgageforeclosurepractices.

252 FederalReserveBulletin|January2016 Manycommenterssupportedtheproposal.27Thesecommentersgenerallybelievedthatthe CITGroupandOneWestBankorganizationsprovidevaluableservicestotheircommunities.Inparticular,commenterscontendedthattheproposalwouldresultinastrongbank thatwouldsupporttheretentionandcreationof jobsinthecommunitiesitserves.CommentersalsocontendedthattheproposalwouldexpandopportunitiesforLMIandminorityborrowersandbusinessesbyincreasingaccesstocreditandfosteringpartnershipopportunitiesbetweenthecombinedorganizationandgroupsthatserveLMIandminority individuals.ThesecommentersalsopraisedOneWestBankanditsmanagementforthe bank’scommunityoutreacheffortsandsupportforvariouscommunitydevelopmentprogramsandinitiatives,includingprogramsthathelpprovidemortgagecounselingforminorityborrowers,mentoringforat-riskyouth,andservicesandassistanceforservice-disabled veterans.CommentersalsonotedOneWestBank’ssupportforschool,faith-based,arts, andfinancialliteracyprograms,manyof whichtargetminorityandLMIindividuals. TheBoardreceivedalargenumberof commentsopposingtheproposalonthebasisof the CRArecordsof theinvolvedinstitutions.Asignificantnumberof commentsallegedthat CITBankisnotmeetingitsobligationstohelpmeetthecreditneedsof allthecommunitiesacrosstheUnitedStatesfromwhichitcollectsdepositsthroughitsInternet-based deposit-takingplatform.28Manycommentersalsoexpressedconcernsthatthecombined organization’sfutureperformanceundertheCRAwillnotbecommensuratewiththecombinedbank’ssizeandcapacity. TheBoardalsoreceivedasignificantnumberof commentsthatwerecriticalof OneWest Bank’sCRAperformancerecord,includingits“lowsatisfactory”ratingontheInvestment TestinitsmostrecentCRAevaluation.Commenterscriticizedthenumberof branches maintainedbyOneWestBankinLMIcensustractsandthelevelof loanstobusinesses withlessthan$1millioninannualrevenuesextendedbyOneWestBank.Additionally, commentersallegedthatthebank’scommunitydevelopmentlendingandinvestmentactivitieshavenotbeenadequatelyresponsivetocommunitycreditneeds.29Commentersalso allegedracialdisparitiesinOneWestBank’slendingactivities.Somecommentersalleged thatOneWestBankmadeadisproportionatelylownumberof homemortgageloansto AsianandAfricanAmericanborrowersintheLosAngeles,California,areabasedondata reportedfor2012undertheHomeMortgageDisclosureActof 1975(“HMDA”).30 Asignificantnumberof commentersallegedthatOneWestBank’smortgageservicingand foreclosurepracticesandpoliciesharmedconsumersanddidnotcomplywithlegalrequirements,includingthoseof theCaliforniaHomeownerBillof Rights.31Inparticular,commentersallegedthatOneWestBankfailedtokeepaccuraterecordsandpaperworkrelated tomortgageloansaspartof theloanmodificationandforeclosureprocesses;unfairly 27 AnumberofcommentersallegedthatOneWestBankinappropriatelysolicitedpubliccommentsinsupportof theapplication,includingbyprovidingfinancialincentives.TheBoardinvitescommentsfromallmembersof thepublicthathaveaninterestintheapplication.TheBoardconsidersalltimelyandsubstantivecommentson anapplicationwithoutregardtothecommenters’motivationforsupportingoropposingtheapplication. 28 Forexample,onecommenterallegedthatCITBankhascollectedasignificantamountofdepositsfromMonroeCounty,NewYork,buthasprovidedonlyminimalsmallbusinesslendinginthearea,withnoneofthe lendinggoingtobusinesseswithannualrevenuesoflessthan$1million. 29 Commentersallegedthat,comparedtoitspeers,OneWestBankhasalowlevelofcharitablecontributionsas apercentageofdepositsandthatonlyasmallpercentageofthebank’scharitablecontributionsaredirected towardssupportingaffordablehousing.Moreover,commentersallegedthatOneWestBankhasnomultifamily loanproducttosupportaffordablehousingdevelopment. 30 12U.S.C.§2801etseq. 31 2012Cal.Stat.2314(codifiedinscatteredsectionsofCal.Civ.Code).

LegalDevelopments:ThirdQuarter,2015 253 acceleratedloansanddeniedloanmodifications;32failedtoprovideasinglepointof contacttoassistborrowers;pursuedforeclosureproceedingsagainstborrowersduringtheloan modificationprocess;inappropriatelyadvisedborrowerstodefaultontheirloansinorder toqualifyforloanmodificationprogramsandsubsequentlyforeclosedonthedefaulted loans;andfailedtoinformconsumersof theirrightsatthetimeof reversemortgageloan origination,maturity,ordefault.CommentersalsoallegedthatOneWestBankprohibited thespouseandotherrelatedpartiestodeceasedreversemortgageloanborrowersfromsatisfyingthemortgageandretainingtheproperty,andimproperlyrequiredtheestatesof reversemortgageloanborrowerstorecordtrustsinpublicpropertyrecords.Commenters alsocontendedthatOneWestBankinflatedpropertyappraisalsandtherebyfrustratedthe effortsof thesurvivingspouseandheirsof deceasedreversemortgageloanborrowersto keeptheirfamilyhomes.33SomecommentersalsoallegedthatOneWestBankhasallowed itsstockof foreclosedrealpropertytofallintodisrepairandtherebyhascontributedto blightin,andadverselyaffected,therelevantcommunities. B.TheBusinessesof theInvolvedInstitutions CITGroupisprimarilyacommerciallenderthatprovidesfinancing,leasing,andadvisory servicestomiddlemarketcompaniesinNorthAmericainavarietyof industries,and equipmentfinancingandleasingtocompaniesworldwideinthetransportationindustry. CITGroupisamongthelargestoriginatorsof SmallBusinessAdministration(“SBA”) 7(a)loans,whichhelpstart-upandexistingsmallbusinesses.Consistentwiththeconsolidatedorganization’sbusinessfocus,CITBankofferscommercialcreditproductstomiddle marketcompaniesinvariousindustriesthroughouttheUnitedStates,withcommercialand industrialloansmakingupapproximately70percent,whileresidentialrealestateloans makinguponly3percent,of thebank’stotalloanportfolio.34WhileCITBankdoesnot makeasignificantamountof smallbusinessloanswithinitsSaltLakeCity,Utah,assessmentarea,almost9percentof CITBank’ssmallbusinessloansoriginatednationallywere originatedtobusinesseslocatedinLMIcensustracts. IMBHoldcoandOneWestBankwereorganizedtoacquireassetsandassumedepositsof thefailedIndyMacBank,F.S.B.(“IndyMac”),fromtheFederalDepositInsuranceCorporation(“FDIC”).35OneWestBankoperatesthroughoutSouthernCalifornia,providinga broadrangeof traditionalretailandcommercialbankingproductsandservicesthrougha networkof 73branches.Currently,approximately60percentof totalloansatOneWest Bankareloansobtainedfromtheacquisitionsof IndyMacandtwootherinstitutionsfrom theFDIC.36OneWestBankhasbeenfocusingitseffortsontransformingfromathrifttoa commercialbank.37Mostof theloansoriginatedbyOneWestBankthroughitsownopera- 32 Forexample,commentersallegedthat,onthebasisofperformancedatareportedbyservicersparticipatingin theHomeAffordableModificationProgram(“HAMP”),OneWestBankwasmorelikelytoforecloseonits borrowersthanotherbanks. 33 UnderregulationsoftheDepartmentofHousingandUrbanDevelopment,whenareversemortgageloanis dueandpayable(e.g.,afterthedeathoftheborrower),asurvivingnonborrowingspousecanelecttosatisfythe mortgageandretainthepropertysecuringtheloanforthelesseroftheunpaidprincipalbalanceor95percent oftheproperty’sappraisedvalue.See26CFR206.125(a);DepartmentofHousingandUrbanDevelopment, MortgageeLetterNo.2015-15(June12,2015),availableatportal.hud.gov/hudportal/documents/huddoc?id=15-15ml.pdf. 34 CITBank,ConsolidatedReportofConditionandIncome,at18(dataasofMarch31,2015). 35 OneWestBankalsoacquiredassetsandassumeddepositsoftwofaileddepositoryinstitutions,LaJollaBank, FSB,ofRanchoSantaFe,andFirstFederalBankofCalifornia,F.S.B.,ofSantaMonica,allinCalifornia. 36 Althoughone-to-fourfamilyresidentialloansrepresentapproximately55percentoftotalloans,manyofthese loanswereacquiredintheacquisitionsmentionedabove. 37 OneWestBankalsohassolditsthird-partyresidentialmortgageservicingrights,exitedtheprepaidcardbusiness,andcontinuestoexploreasaleofFinancialFreedomAcquisitionLLC(“FinancialFreedom”),asubsidiaryofOneWestBankengagedinthereversemortgageloanbusiness.

254 FederalReserveBulletin|January2016 tionshavefocusedoncommerciallendingandcommercialrealestatelending,althoughthe bankcontinuestoofferretailandconsumerproductsandservices. C.Recordsof PerformanceundertheCRA TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,38andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includingLMIneighborhoods.39Inadditionto compliancewiththerequirementsof theCRA,fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theapplicant’srace, ethnicity,orcertainothercharacteristics. TheBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformanceof therelevantinstitutions.40The CRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitution prepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecreditneeds of itsentirecommunity,includingLMIneighborhoods.41Aninstitution’smostrecent CRAperformanceevaluationisaparticularlyimportantconsiderationintheapplications processbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdata,inadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulations,toassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans,asapplicable,intheinstitution’sassessmentareas;thegeographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberand amountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamount of homemortgageloanstolow-,moderate-,middle-,andupperincomeindividuals;42the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies.Consequently,theBoardconsiderstheoverallCRArating assignedtothebank’sperformance,aswellasthebank’sratingonthelendingtest,tobe 38 12U.S.C.§2901(b). 39 12U.S.C.§2903. 40 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 41 12U.S.C.§2906. 42 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3).

LegalDevelopments:ThirdQuarter,2015 255 importantindicators,whentakenintoconsiderationwithotherfactors,indetermining whetheradepositoryinstitutionishelpingtomeetthecreditneedsof itscommunities. CRAPerformanceof CITBank.CITBankwasassignedanoverall“Satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFDIC,asof March18,2013(“CIT BankEvaluation”).43Examinersnotedthatthebankoriginatedanadequateamountof communitydevelopmentloans,whichsupportedaffordablehousing,revitalization,andstabilizationinthebank’sassessmentarea.44Examinersalsofoundthelevelof qualified investmentsandgrantstoberesponsivetothecommunitydevelopmentneedsof the bank’sassessmentareaandbroaderstatewidearea.ExaminersfoundCITBank’sprovision of communitydevelopmentservicestobeadequate.45Examinersdidnote,however,that CITBankmadeonlylimiteduseof innovativeorcomplexqualifiedinvestments. CITBank’seffortssincethe2013CRAEvaluation.SincetheCITBankEvaluation,CIT BankhasimplementedanFDIC-approvedCRAstrategicplanthatCITGroupcontends includesmeasurablegoalstoobtainanoutstandingCRArating.46CITGroupstatedthat CITBankincreaseditscommunitydevelopmentloansandinvestmentactivitiesin2013 and2014toalevelthatexceededthetargetlevelneededtoobtainanoutstandingCRAratingunderthestrategicplan.47Similarly,CITGroupreportedthatthelevelof community developmentservicesprovidedbyCITBank’semployeesin2013and2014exceededthe targetnumberof hoursneededtoobtainanoutstandingCRArating. CITGroupnotedthattheorganizationisamajorcommerciallenderandhelpsmeetsthe creditneedsof thecommunitiesitserves,consistentwithitsbusinessfocus,through, amongotherthings,smallbusinesslending.CITGroupisthelargestoriginatorof SBA 7(a)loansintheUnitedStatesandalsooriginatesSBA504certifieddevelopmentcompany programloans.Theseloanshelpstart-upandexistingsmallbusinesseswithfinancing guaranteedforavarietyof generalbusinesspurposesandencourageeconomicdevelopmentwithinacommunitybyprovidingsmallbusinesseswithlong-term,fixed-ratefinancingtoacquiremajorfixedassetsforexpansionormodernization.Moreover,theCITorganizationhasbeenamongthetopsmallbusinesslendersintheUnitedStatesandhas targeteditslendingto,amongothers,women-,veteran-,andminority-ownedbusinesses. CRAPerformanceof OneWestBank.OneWestBankwasassignedanoverall“Satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof February6,2012 43 CITBankisalimitedpurposebankforpurposesoftheCRAandwasevaluatedunderthecommunitydevelopmenttest.TheevaluationperiodfortheCITBankEvaluationwasfromNovember15,2010,through December31,2012.ExaminersreviewedthelevelofCITBank’squalifiedcommunitydevelopmentloans, investments,grants,andservicesinthebank’sdesignatedassessmentareaofSaltLakeCounty,Utah.ExaminersalsoevaluatedthequalifiedcommunitydevelopmentactivitiesofCITGroupoverthesameevaluation period. 44 SeveralcommenterscriticizedCITBankfordesignatingSaltLakeCounty,Utah,asitsCRAassessmentarea whilesolicitingdepositsnationwide.UndertheCRA,depositoryinstitutionsdelineatetheirownassessment areas,subjecttocertaincriteria,andexaminersinvestigatewhethertheexaminedinstitution’sassessmentareas complywiththesecriteria.See,e.g.,12CFR228.41.Inaddition,whenexaminingalimitedpurposebanksuch asCITBankundertheCRA,examinersconsidercommunitydevelopmentactivitiesengagedinbythebank outsideitsassessmentareasifthebankhasadequatelyaddressedtheneedsofitsassessmentareas.See,e.g., 12CFR228.25(e). 45 Thebank’semployeesvolunteeredtheirskillsandexpertisetothecreditcommitteesandboardsofanumberof localnonprofitorganizationsthatprimarilyservedtheneedsofLMIfamiliesintheassessmentarea. 46 TheCRAregulationsprovidethattheappropriatefederalbankingagencywillassessabank’srecordofmeetingthecreditneedsofitsassessmentareasunderastrategicplanif,amongotherthings,thebankinvitespublic commentontheplanandtheplanisapprovedbysuchagency.TheFDICapprovedCITBank’sstrategicplan datedJanuary2013,pursuantto12CFR345.27. 47 CITBankreportedthatitmadeitscommunityinvestmentsinnonprofitorganizationsfocusingonsupporting affordablehousing;alleviatingpoverty,homelessness,andunemployment;promotingcommunitydevelopment; andprovidingforeclosurecounseling.

256 FederalReserveBulletin|January2016 (“OneWestBankEvaluation”).48OneWestBankreceiveda“HighSatisfactory”ratingfor theLendingTest,a“LowSatisfactory”ratingontheInvestmentTest,anda“HighSatisfactory”ratingontheServiceTest.49ExaminersnotedthatOneWestBank’sgeographic distributionof loanswasexcellentandthatthebank’scommunitydevelopmentlending performancewasgood. ExaminersnotedthatOneWestBank’soveralllendinglevelsreflectedadequateresponsivenesstoassessmentareacreditneedsgiventhebank’sbusinessstrategy,volumeof lending, andcompetition.50Examinersfoundthatthebank’sgeographicdistributionof home mortgageloans,homerefinancelending,andhomepurchaselendingwasexcellent,and thatthebank’sdistributionof multifamilylendingwasgood.Examinersalsonotedthat OneWestBankexhibitedgoodcommunitydevelopmentlendingperformance.Examiners foundthatthebankengagedinahighvolumeof communitydevelopmentlendingthat addressedidentifiedcommunityneedsandmadeextensiveuseof flexibleandinnovative lendingproducts,primarilyalargeofferingof lossmitigationprogramsthroughoutall assessmentareas. Examinersratedthebank’sperformanceundertheInvestmentTestas“LowSatisfactory,” withthedollarvolumeof qualifyinginvestments,grants,anddonationsbeingviewedas adequate.51Nevertheless,examinersnotedthatthebank’sinvestmentactivitiesexhibited goodresponsivenesstothecreditandcommunitydevelopmentneedsof theLosAngeles AA.52Moreover,examinersnotedthebank’scommitmenttohelpmeetidentifiedcommunitydevelopmentneeds,includingthroughthebankmanagement’sroleinleadingthe “StepstoSuccess”program,whichpromotesfinancialliteracyamongLMIandat-risk youthintheLosAngelesAA.Examinerscalledtheprogram“innovative”and“theonly oneof itskind.” InevaluatingtheServiceTest,examinersfoundthatthebank’sbranchdistributioninits assessmentareaswasgood,with13percentof allbrancheslocatedinLMIcensustracts. 48 TheOneWestBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.TheevaluationperiodfortheOneWestBankEvaluationwasfromMarch19,2009,throughSeptember30,2011.Atthe requestofOneWestBank’smanagement,examinersalsoconsideredHMDA-reportableloansoriginatedby FinancialFreedom. 49 TheOneWestBankEvaluationincludedafull-scopeassessmentreviewoftheLosAngeles–LongBeach– Glendale,CaliforniaMetropolitanDivision(“LosAngelesAA”).Alimited-scopereviewwasperformedinthe Oxnard–ThousandOaks–Ventura,CaliforniaMetropolitanStatisticalArea(“MSA”);theRiverside–San Bernardino–Ontario,CaliforniaMSA;theSanDiego–Carlsbad–SanMarcos,CaliforniaMSA;andtheSanta Ana–Anaheim–Irvine,CaliforniaMetropolitanDivision. 50 WithrespecttotheLendingTest,examinersplacedmoreweightonOneWestBank’sperformanceintheLos AngelesAA.Examinersnotedthatwhilethebankhelda4.72percentmarketsharebytotaldollarsofdeposits intheLosAngelesAA,itonlyhelda0.23percentmarketshareofHMDAloans.Examinersfoundthisdisparitytobereasonablyexplainedontwobases.First,theLosAngelesAAsawhighcompetitioninmortgage lending,asseveralmajorbankswerethedominanthomemortgagelendersinthearea.Second,thebank’sbusinessfocuswasonimprovingtheperformanceofexistingloansthroughmodificationprograms,suchas HAMP,ratherthanonloanorigination. 51 SomecommentersallegedthatOneWestBankhasapoorrecordofcharitabledonationscomparedtopeer institutions.TheBoardnotesthatneithertheCRAnortheagencies’implementingrulesrequirethatinstitutionsengageincharitablegiving. 52 Forexample,withintheLosAngelesAA,thebankinvestedinLowIncomeHousingTaxCredits(“LIHTC”) thathelpedfundanaffordablehousingprojectandplaceddepositswithninedifferentminority-owned financialinstitutions.See26U.S.C.§42. CommenterscriticizedOneWestBankforinvestingprimarilyinCRA-qualifyingmortgage-backedsecurities andnotmakingequityequivalentinvestments.Inaddition,anumberofcommentersallegedthatCITGroup andOneWestBankprovidedgrantstoorganizationsinreturnfortheirsupportofthemergerproposaland refusedtoinvestinorlendtoorganizationsthatopposedtheproposal.TheCRAdoesnotrequirethatinstitutionsmeetthecreditneedsofthecommunitiestheyservebymakingequityequivalentinvestmentsanddoes notauthorizethefederalbankingagenciestodirectabank’scommunitydevelopmentinvestmentorlending activitiestospecificgroups,individuals,projects,ortypesofinvestments.

LegalDevelopments:ThirdQuarter,2015 257 Examinersnotedthattheoperatinghoursof thebank’sbranchesweregenerallysimilarat alllocations,regardlessof theincomelevelof thegeography.Examinersobservedthat,duringtheevaluationperiodintheLosAngelesAA,OneWestBankprovidedarelativelyhigh levelof communitydevelopmentservicesthatwereresponsivetoavarietyof community developmentneedsandthatthebank’sboardandmanagementhaddevelopedrelationshipstoensurecontinuedinnovativeandsustainablecommunitydevelopmentservices.53 OneWestBank’seffortssincethe2012CRAEvaluation.CITGrouprepresentedthatsince OneWestBank’slastCRAevaluation,thebankincreaseditscommunitydevelopment lendingalmosttenfold.Intermsof services,OneWestBankemployeeshaveprovided numeroushoursof communityservicesince2011.OneWestBankalsohaspartneredwith OperationHOPE,anonprofitentitythatteachesfinancialliteracy,tocreatetheHope Insideprogram,whichofferssmallbusinesscounselingatOneWestBank’sNorthridge, California,branchoffice.Inaddition,OneWestBankhasmorethandoubleditsamountof LIHTCcommitments,andthebank’saffordablehousinginvestmentshaveresultedinthe creationof numerousaffordablehousingunits.OneWestBankalsohasprovidedgrants thathaveallowednumerousindividualstoreceivehomebuyereducationandforeclosure preventioncounseling. CRAEffortsof theCombinedOrganization.CITGrouprepresentsthatthecombinedbank wouldimplementacommunitybenefitsplantohelpmeettheneedsof thecombined bank’sCRAassessmentareas.54Underthatplan,thecombinedbankwouldextend $3.8billioninCRA-reportablelendinginitsassessmentareas;meetorexceedpeerbenchmarksforlendingtoLMIborrowersandinLMIcensustracts;achievePreferredLender statusundertheSBAPreferredLendersProgram;developasmallbusinessloanandtechnicalassistancereferralprogramtoreferbusinessestocommunitydevelopmentfinancial 53 Technicalandfinancialassistanceprovidedincludedfundraising,financialeducation,andserviceonvarious boardsofdirectorswithorganizationswhoseprimaryfocuswasprovidingassistancetoLMIindividuals.The bankalsoprovidededucationtocustomersseekingloanmodificationsthroughvideosandinformationposted onthebank’swebsite. SomecommenterscriticizedOneWestBankfornotprovidingcheckingaccountsforLMIconsumers,alleging thatOneWestBankrequiresthatcustomersmakeaninitialdepositofatleast$100andmaintaina$1,000 depositbalancetoreceivepaperaccountstatementswithoutpayingamonthlyfee.CITGrouprepresentsthat thecombinedbankwillreduceitsaffordablecheckingaccountopeningbalancerequirementto$25. SomecommentersurgedOneWestBanktocommittowaivingATMfeesforpublicassistancerecipients. AlthoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsofcommunitiesbymaking certainproductsorservicesavailableoncertaintermsoratcertainrates,theCRAneitherrequiresaninstitutiontoprovideanyspecifictypesofproductsorservicesnorprescribesthecostschargedforthem. 54 AnumberofcommenterscriticizedCITGroup’sCRAplanforthecombinedbank,allegingthattheCRA plansetslowerCRAactivitygoalsthancommitmentsmadebyotherbanksoperatinginsouthernCalifornia.A commenterallegedthatCITGroupunderreportedthecombinedbank’sCaliforniadeposits,therebymakingit moredifficulttocomparethecombinedbank’sproposedCRAactivitieswiththatofotherdepositoryinstitutions.AnothercommenterallegedthattheCRAplanforthecombinedorganizationproposesfewerCRA activitiesthanhadbeencommittedbytheproposedpresidentandchiefexecutiveofficerofthecombinedbank duringhisserviceasanexecutiveatanotherfinancialinstitution. TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,CitigroupInc.,88FederalReserveBulletin485(2002);FifthThirdBancorp,80FederalReserve Bulletin838,841(1994).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethecreditneedsofitsCRAassessmentareas. SomecommentersallegedthatOneWestBankisperformingpoorlycomparedtothegoalssetinthebank’s existingCRAstrategicplan.ThisplanisnotintendedtoformthebasisfortheOCC’sevaluationofthecombinedbank’sCRAperformancepursuantto12CFR25.27.TheOCCwillexaminethecombinedbankunder theCRAlending,investment,andservicetestsapplicabletolargebanks. Commentersexpressedconcernsthatthecombinedbank’sCRAassessmentareaswillnotincludetheentire areafromwhichthecombinedbanksolicitsdeposits.Asnotedabove,CITBanksolicits,andthecombined bankexpectstosolicit,depositsnationwidethroughtheInternet.Asnotedabove,undertheCRA,depository institutionsdelineatetheirownassessmentareas,subjecttocertaincriteria,andexaminersinvestigatewhether theexaminedinstitution’sassessmentareascomplywiththesecriteria.See,e.g.,12CFR228.41.

258 FederalReserveBulletin|January2016 institutions;anddevelopapolicytoprefernonprofitorganizationswhensellingcertainreal estateanddistressedloansoriginatedbythecombinedbank. CITGroupalsorepresentsthatthecombinedbankwouldmakeCRAqualifiedinvestmentsatalevelof 8percentof tier1deployedcapitalandwoulddonate$5millionannuallytononprofitorganizationsthatprovideorsupportaffordablehousing,education, financialliteracy,workforcedevelopment,healthandhumanservicestoLMIindividuals, programsforat-riskyouth,andtechnicalassistanceforsmallbusinessowners.Inaddition, CITGroupstatedthatthecombinedbankwouldlocate15percentof itsbranchesand ATMsinLMIcensustractsandwouldprovide2,100hoursof CRAvolunteerservice. CITGrouphasrepresentedthatOneWestBank’scommercialandconsumerlendingplatformswouldcomplementCITGroup’ssmallandmiddlemarketfinancingplatforms.CIT GroupfurtherassertsthattheproposalwouldaccelerateCITGroup’stransformationinto amoretraditionalcommercialbankingorganizationwithabalancedretailandcommercial operationthatincludesOneWestBank’straditionalretailbranchdeposit-fundingbase. InresponsetoallegationsregardingCITBank’sCRAperformance,CITGroupnotedthat CITBankreceiveda“Satisfactory”ratinginitsmostrecentCRApublicevaluation.Moreover,CITGroupstatedthattheenhancedlendingandearningcapacityof thecombined organizationwouldimproveitsabilitytomeetitsCRAobligations. OneWestBank’sactivitiesinLMIcommunitieslargelyreflectthebranchnetworkof the institutionswhoseassetsandliabilitiesOneWestBankhasacquired.Sinceitsformation, OneWestBankhastakenstepstoincreaseitspresenceinLMIcommunities,including throughpartnershipswithbusinesseslocatedinthesecommunities. OneWestBank’ssmallbusinesslendingtobusinesseswithlessthan$1millioninrevenues isinlinewithpeerinstitutions.Moreover,OneWestBankisasignificantparticipantinthe SBA’s504LoanProgram,whichprovidesfinancingformajorfixedassetssuchasequipmentandrealestate;theseSBAloanstendtobelargerinsizeand,consequently,tendtobe madetobusinesseswithmorethan$1millioninannualrevenues.Moreover,CITGroupis oneof thelargestSBAlenders. Inresponsetocommenters’contentionthatOneWestBankhasapoorrecordinmortgage foreclosuresandreversemortgageloanservicing,OneWestBankarguedthatmanyof the allegedmortgageservicingissuesrelatebacktopracticesengagedinbyIndyMacpriorto OneWestBank’sacquisitionof IndyMacassetsfromtheFDICasreceiverof IndyMac. OneWestBankalsonotedthat,aspartof amortgageforeclosureConsentOrderwiththe OCC,thebankremediatedharmsresultingfrompastdeficienciesinconnectionwiththe IndependentForeclosureReviewandinstitutedextensivechangestoitsresidential mortgageservicingandforeclosureactivitiestoensurethattheseactivitiesareconductedin asafeandsoundmannergoingforward.55 55 TheConsentOrderresultedfrominteragencyon-sitereviewsofseveralmortgageservicingcompanies,includingOneWestBank,thatfoundcriticalweaknessesintheseservicers’mortgageservicingandforeclosureprocessesthatresultedinunsafeandunsoundpractices.OneWestBankandtheOfficeofThriftSupervision enteredintotheorderonApril13,2011,relatingtothebank’smortgageservicingandforeclosureactivities.In connectionwithOneWestBank’sconversionintoanationalbank,theorder’stermswerefullyincorporated intoaConsentOrderissuedbytheOCCagainstOneWestBankonMarch11,2014. BetweenApril2011andApril2012,theOCCandtheBoardissuedenforcementactionsagainst15mortgage loanservicersinadditiontoOneWestBankfordeficientpracticesinmortgageloanservicingandforeclosureprocessing.Inadditiontomandatingthecorrectionofservicingpractices,theactionsrequiredtheservicerstohireindependentconsultantstoconductfilereviewstodetermineifborrowerssufferedfinancial injuryandwereeligibleforfinancialremediation.

LegalDevelopments:ThirdQuarter,2015 259 Aspartof itsapprovalof thebankmerger,theOCChasrequiredthecombinedbankto submitarevisedpublicCRAplan,withinputfrommembersof thepublic,fortheOCC’s reviewandwrittendeterminationof nosupervisoryobjection.56Inparticular,theplan must,amongotherthings,providedetailsconcerningtheactionsthebankwilltaketo ensurethatonaprospectivebasisthebankishelpingtomeetthecreditneedsof itsassessmentarea,includingdetailsregardingaffordablemultifamilyhousinglending,smallbusinesslendinginLMIgeographies,andinvestmentstargetedtowardsLMIgeographiesand individuals.Therevisedplanalsomustcontainmeasurableannualgoalsandtimetablesfor theachievementof thosegoals.Inaddition,thebankmustprovidereportstotheOCC indicatingtheresultsof thebank’seffortstoimplementtheplan.57 Branching.SomecommenterscriticizedOneWestBank’sdistributionof branchesinlowincomecensustracts,allegingthattwoof OneWestBank’s73brancheswereinsuchcensus tracts.AsnotedintheOneWestBankEvaluation,OCCexaminersfoundthat11middleandupper-incomebranchesinthebank’sassessmentareashaveatleast33percentormore LMIfamilypopulation,andthatOneWestBankservesalargerportionof theLMIpopulationduetothelargepercentageof LMIfamiliesresidinginthevariouscensustracts. SomecommentersallegedthatOneWestBankhasadisproportionatelylownumberof branchesinminorityneighborhoods.OneWestBank’sbranchnetworkwasinheritedfrom IndyMacandtwootherfaileddepositoryinstitutions.OneWestBank’spolicyonbranchingrecognizesthepotentialimpactof anybranchopenings,closures,consolidations,and relocationsonminorityresidents. SeveralcommentersexpressedconcernsaboutOneWestBank’srecordof branchclosings, allegingthatOneWestBank’sbranchclosingsinthelastfiveyearshavehadadisproportionatelynegativeeffectonLMIandminorityneighborhoods.IntheOneWestBankEvaluation,OCCexaminersnotedthatthebank’sclosingandopeningof branchesintheassessmentareasreceivingfull-scopereviewsdidnotadverselyaffecttheaccessibilityof branches,particularlyinLMIgeographies.Duringtheevaluationperiod,OneWestBank consolidatedthreebranchesandrelocatedonebranch,allwithinupper-incomecensus tracts.Moreover,theBoardhasconsideredthefactthatfederalbankinglawprovidesaspecificmechanismforaddressingbranchclosings,includingtheprovisionof noticetothe publicandtheappropriatefederalsupervisoryagencybeforethebranchisclosed.58 AcommentercriticizedCITGroupfornotcommittingtoopennewbranchesinunderservedneighborhoods,andanumberof commentersexpressedconcernsthatplanned 56 SomecommentersexpressedconcernsthatthecombinedbankwouldseektoserveLMIneighborhoodsusing technologyandmobilebankingratherthanthroughbranchesandATMs.Inaddition,anumberofcommentersrequestedthatthecombinedbankintroducemoreproductstargetedtoLMIcustomers.Therevisedplanis requiredtodescribehowthecombinedbank’salternativesystemsfordeliveringretailbankingserviceswill effectivelyprovideneededretailbankingservicesinLMIgeographiesortoLMIindividuals.Inaddition,as notedabove,althoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsofcommunitiesbymakingcertainproductsorservicesavailable,theCRAdoesnotrequireaninstitutiontoprovideany specificproductsorservices. 57 TheOCCisalsorequiringthecombinedbanktosubmitacomprehensivebusinessplanfortheagency’sprior writtendeterminationofnosupervisoryobjection.Thebusinessplanmust,amongotherthings,addressthe lendingactivitiesinwhichthebankplanstoengage(alongwiththerelevantcreditpoliciesandproceduresto addressallaspectsofcreditunderwriting,creditadministration,andloanportfoliomanagement)andprovidea plantomeetidentifiedgoalsandobjectives(alongwithtargetdatesandanidentificationofprocesses,personnel,andcontrolsystems). 58 See12U.S.C.§1831r-1,asimplementedbytheJointPolicyStatementRegardingBranchClosings,64Federal Register34844(June29,1999).TheJointPolicyStatementrequiresthatabankprovidethepublicwithatleast 30days’noticeandtheappropriatefederalsupervisoryagencywithatleast90days’noticebeforethedateof theproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdataforthe closure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

260 FederalReserveBulletin|January2016 branchconsolidationsbythecombinedbankwouldhaveanegativeeffectonLMIneighborhoods.OneWestBankexpectstocompletefourbranchrelocationsin2015.Onebranch wasrelocatedfromanupper-incomecensustracttoamiddle-incomecensustract,two brancheswillberelocatedfrommiddle-incomecensustractstomoderate-incomecensus tracts,andonebranchwillmovetoanewlocationwithinitslow-incomecensustract.The federalbankingsupervisoryagenciesevaluateabank’srecordof openingandclosing branches,particularlybrancheslocatedinLMIgeographiesorprimarilyservingLMIindividuals,aspartof theCRAexaminationprocess.59 D.FairLendingCompliance TheBoardhasconsideredtherecordsof CITBankandOneWestBankincomplyingwith fairlendingandotherconsumerprotectionlaws.60Aspartof itsevaluation,theBoard reviewedCITBank’sandOneWestBank’srecordsof performanceunderfairlendinglaws, thecommentsreceivedontheproposal,CITGroup’sresponses,andothersupervisory information. FairLendingAllegationsandResponse.Asnoted,commentersallegedthatOneWestBank madeadisproportionatelylownumberof homemortgageloanstoAsianandAfrican AmericanborrowersintheLosAngeles,California,area,basedon2012HMDAdata.A commenterallegedthatin2012and2013,OneWestBankmadeadisproportionatelylow dollaramountof itsSBAloansinCaliforniatoAfricanAmerican-ownedbusinesses.It wasalsoallegedthatin2012,OneWestBankdidnotoriginateanysinglefamilymortgage purchaseloansorhomeimprovementloanstoAfricanAmericanborrowersintheLos Angelesarea. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.61 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. Inresponsetotheseconcerns,OneWestBankarguedthatOneWestBank,particularlyin 2012,engagedinlimitednewloanoriginations.Inparticular,thebankmadeonly81singlefamilymortgagepurchaseoriginationsnationwidein2012.OneWestBankalsocontended that2013HMDAdataonsingle-familymortgageloanrefinancingintheLosAngeles assessmentareademonstratethat,inthatperiod,thebankhadan87.3-percentapproval rateforAfrican-Americanapplicants,whichexceededitsapprovalrateforwhiteapplicants.62In2013,78percentof OneWestBank’ssmallbusinessloansweremadeinmajor- 59 See,e.g.,12CFR228.24(d)(2).Inaddition,theBoardnotesthattheOCC,astheprimaryfederalsupervisorof thecombinedbank,willcontinuetoreviewthebank’sbranchclosingrecordinthecourseofconductingCRA performanceevaluations. 60 AnumberofcommentersallegedthatOneWestBankacceleratedforeclosureproceedingsorotherwiseretaliatedagainstcommenterswhoopposedtheproposal.OneWestBankhasrepresentedthatithasnotretaliated againstanycommentersandhasnotchangeditsprocessesforservicingmortgageloans.Regardingeachalleged caseofretaliation,thebankhasprovidetheOCCwithconfidentialinformationtoshowthattherewerelegitimatereasonsforitsactions.TheOCChasreviewedandassessedtheadequacyofthebank’sresponsesanddid notconcludethattheseallegationsjustifieddenialofthebankmergerinvolvedinthisproposal. 61 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 62 AsnotedintheOneWestBankEvaluation,OneWestBankhelda4.72-percentmarketsharebytotaldollarsof depositsintheLosAngelesAAbutonlyhelda0.23percentmarketshareofHMDAloans.Examinersfound

LegalDevelopments:ThirdQuarter,2015 261 ity-minoritycensustracts.Inaddition,Asian-ownedbanksandotherlendersattractasignificantportionof theapplicationsfromAsianborrowersinCaliforniaand,asaresult,the lendingpatternstoAsianborrowersinCaliforniamayreflectacompetitivemortgagelendingmarketratherthandiscriminatorylendingpractices.63 CITGroup’sandOneWestBank’sFairLendingProgram.CITGroupandOneWestBank havebothinstitutedpoliciesandprocedurestohelpensurecompliancewithallfairlending andotherconsumerprotectionlawsandregulations.CITGrouphasstatedthat,onconsummation,CITGroup’sexistingrisk-managementframeworkwouldbeimplementedat thecombinedorganizationandOneWestBank’sexistingfairlendingprogramwouldbe implementedatthecombinedbank,supplementedappropriatelytoreflecttheorganizations’newbusinessprofile. OneWestBankprovidesfairlendingtrainingandeducationforallemployees.Thetraining includesprogramsonthebank’spoliciesandproceduresaswellasapplicablefairlending laws. Thetwoorganizations’legalandcompliancerisk-managementprogramsincludeafair lendingriskassessmentthatisupdatedannuallyormorefrequently,basedonmaterial changestothebank’sstrategy,operations,products,orservices.OneWestBank’sassessmentincludesanevaluationof theriskof OneWestBank’slendingactivities,alongwithan assessmentof thequalityof thecontrolsandtheresultingresidualrisk.Throughtherisk assessment,OneWestBankidentifiesareasof higherfairlendingriskandconductstargetedcompliancereviewsof theseareas. OneWestBank’sFairandResponsibleLendingDepartmentconductsanannualcomparativefilereview.Inthisreview,theDepartmentevaluatesloanfilesformortgageapplicants inprotectedclassesagainstloanfilesforsimilarlysituatedapplicantswhoarenotinaprotectedclasstodetectpossibledisparatetreatmentwithrespecttocreditdecisionsandpricing.CITGrouprepresentsthatOneWestBank’scomparativefilereviewshavenotidentifiedconcernsrelatedtodiscriminationagainstapplicantsinprotectedclasses. OneWestBankmaintainsasecondaryreviewprocessforalldeniedmortgageloanapplicationstoensurethatallqualifiedapplicantsareapproved.Thissecondreviewisconducted toensurethatthebank’sfairlendingstandardsareappliedfairlyanduniformlytoall applicants,thatallpossibleavenuesof approvalhavebeenexploredpriortoformaldenial, andthattheapplicantwasnotdeniedbasedonanyprohibitedbasis. E.MortgageLoanServicing,Modification,andForeclosurePractices Asnoted,alargenumberof commentersexpressedconcernsaboutOneWestBank’smortgageservicing,loanmodification,andforeclosureprocessingactivities,withsomemaking assertionsaboutindividualwrongfultreatmentandsuggestinganoverallpracticeof wrongfulconductsuchasfailuretomaintainforeclosedpropertyinminorityneighborhoods.64TheissuesraisedbythecommentersrelatingtoOneWestBank’smortgageservicing,loanmodification,andforeclosureprocessingactivitiesareof concerntotheBoard.In evaluatingtheissuesraisedbythecommenters,theviewsof thebank’sprimaryregulators thisdisparitytobereasonablyexplainedontwobases.First,theLosAngelesAAsawhighcompetitionin mortgagelending,asseveralmajorbankswerethedominanthomemortgagelendersinthearea.Second,the bank’sbusinessfocuswasonimprovingtheperformanceofexistingloansthroughmodificationprograms, suchasHAMP,ratherthanonloanorigination. 63 SeeUmpquaHoldingsCorporation,FRBOrderNo.2014-2at23n.46(April1,2014). 64 Inparticular,somecommentersallegedthatOneWestBank’sforeclosurepracticesdisproportionatelyaffected minorityindividuals,seniorcitizens,andwomen.

262 FederalReserveBulletin|January2016 areparticularlyimportantconsiderationstotheBoardbecauseof theprimaryregulator’s proximityto,andaccesstoinformationregarding,theinstitution. TheBoardhasconsultedOneWestBank’sprimaryfederalbankingregulator,theOCC. IssuesraisedbythecommentersrelatingtoOneWestBank’smortgageservicing,loan modification,andforeclosureprocessingactivitieswereaddressedaspartof areviewof the bank’scompliancewithaConsentOrderissuedbytheOCCagainstOneWestBankrelatingtomortgageservicingandforeclosurepractices.Specifically,theOCCreviewedthe mortgageservicingandtheinitiationandhandlingof foreclosureproceedingsbyOneWest Bankaspartof theagency’sassessmentof thebank’scompliancewiththeConsentOrder, includingthebank’simplementationof appropriatepoliciesandprocedures.Underthe ConsentOrder,OneWestBankwasrequired,amongotherthings,tohaveanindependent consultantreviewandidentifyborrowersfinanciallyharmedbythebank’sdeficient practicesinmortgageservicingandforeclosureprocessing,andtoprovideremediationto harmedborrowers. Toaccomplishthis,OneWestBankwasrequiredtoretainanindependentconsultantto conductcomprehensivereviewsof thebank’sforeclosureactivitytoidentifywhetherborrowerswhosemortgageswereservicedbythebankandwhosehomeswereintheforeclosureprocessduring2009or2010(“in-scopeborrowers”)sufferedfinancialinjurybecause of servicererrors,omissions,orotherdeficiencies.65ThereviewforOneWestBankencompassedanin-scopepopulationof morethan192,000borrowerloanfiles.66Oncethe reviewsof borrowers’foreclosureactionshadbeencompleted,theindependentconsultant determinedthenumberof injuredborrowerswhowereeligibleforcompensation,andOne- WestBankmadepaymentstoinjuredborrowers.67Asof June30,2015,OneWestBank borrowershavereceivedpaymentstotalingapproximately$12.25million,whichrepresent approximately96percentof thebank’stotalexpectedremediationof approximately $12.8million. Inaddition,toaddressshortcomingswithitsmortgageservicingandforeclosureprocessing activities,OneWestBankwasrequired,amongotherthings,toimplement(i)acceptable actionplanstoensureeffectivemortgageservicing,foreclosure,andlossmitigationactivities;(ii)asatisfactorycomplianceprogramtoensurethatmortgageservicingandforeclosureoperationscomplywithallapplicablelegalrequirements;(iii)third-partyvendorqualitycontrolpoliciesandprocedurestoensureadequateoversightof anythird-partyservice providersthatperformforeclosureorrelatedfunctions;68and(iv)aplantoensurethe 65 UndertheIndependentForeclosureReview,beforeproceedingwiththefilereviews,thebankingorganizations submittedproposalsoutliningtheindependentconsultantstheywishedtoengage,whichweresubjecttononobjectiondeterminationsbytheregulators.Theindependentconsultants’engagementlettersweresubjectto extensivereviewandrevisionpriortoacceptancebytheagencies.Theservicers,includingOneWestBank,also wererequiredtocontactallin-scopeborrowersandprovidethemwiththeopportunitytorequestareviewof theirforeclosureactionbyanindependentconsultanttodeterminewhethertheborrowersufferedfinancial injurybecauseoferrorsbytheirservicerandpotentiallyreceiveremediation. 66 Thein-scopepopulationincludedresidentialforeclosureactionsorproceedings(includingforeclosuresthat wereinprocessorcompleted)forloansservicedbyOneWestBankthathadbeenpendingatanytimefrom January1,2009,toDecember31,2010,aswellasresidentialforeclosuresalesthatoccurredduringthistime period. 67 Theappropriateamountofcompensationtobeprovidedtoborrowerswasbasedonfinancialremediation guidanceissuedbytheregulatorsforgeneralcategoriesofharmandwasnotintendedtoreplacethetypeof specificfindingofactualharmorlossesthatmightbedeterminedbyacourt.SeePressRelease,BoardofGovernorsoftheFederalReserveSystem,AgenciesReleaseFinancialRemediationGuidance,ExtendDeadlinefor RequestingaFreeIndependentForeclosureReviewtoSeptember30,2012,(June21,2012),availableat www.federalreserve.gov/newsevents/press/bcreg/20120621a.htm. 68 Aspartofthecomplianceplan,OneWestBankwasrequiredtoimplementacceptablepoliciesandprocedures foroutsourcingforeclosureorrelatedfunctionssuchaspropertymanagementofrealestateacquiredthrough orinlieuofforeclosure,toensurethatthebank’smortgageservicingandforeclosureactivitiesareconductedin asafeandsoundmanner.

LegalDevelopments:ThirdQuarter,2015 263 timelydeliveryof accurateinformationtoborrowersinforeclosure,lossmitigation,and loanmodificationactivities. TheOCChasconductedtargetedexaminationsof OneWestBank’seffortstosatisfythe termsof theConsentOrder,includingeffortstodevelopacomplianceprogramforthe bank’sservicingandforeclosureoperationsandtoimplementeffectivepolicyandproceduralchangestoachievecompliancewiththeprovisionsof theConsentOrder;commitmentof resourcestoaddressandcorrectidentifiedservicingdeficiencies;andcompletion of theIndependentForeclosureReview.Basedontheseexaminationsandothersupervisoryinformation,theOCCdeterminedthatOneWestBankhadsatisfiedallof therequirementsrelatedtoitsmortgageservicingandforeclosureprocessingactivitiesandhada programandassociatedpoliciesandproceduresthataresatisfactoryfromasupervisory perspective.Consequently,theOCCliftedtheConsentOrder69effectiveJuly14,2015.70In addition,theOCChasapprovedthemergerof OneWestBankandCITBankonJuly21, 2015. F.AdditionalInformationonConvenienceandNeedstobeServedbytheCombined Organization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.71CITGrouprepresentsthattheproposalwouldprovidecustomersof thecombinedorganizationaccesstoanexpandedsuiteof productsandservicesthatarenotcurrentlyavailablefromeitherorganizationonastandalonebasis.Forexample,CITGroup representsthatIMBHoldco’sexistingcustomerswouldhaveaccesstoCITGroup’swider suiteof businessfinancingproducts,suchassmall-ticketleasing,commerciallending,and factoringproducts.Inaddition,CITGrouprepresentsthatCITGroup’sexistingcustomerswouldhaveaccesstoOneWestBank’sdepositandcashmanagementservices,andCIT Group’ssmallerbusinesscustomerswouldhaveaccesstoadditionalproductsandservices 69 IMBHoldcoissubjecttoaConsentOrderoverseenbytheBoardthatrequiresenhancedoversightofmortgage servicingandforeclosureprocessing.TheBoardismonitoringthesustainabilityoftheremediationimplementedbyIMBHoldcotocomplywiththeConsentOrder.CITGroup,asIMBHoldco’ssuccessor,would becomesubjecttotheConsentOrderuponconsummationoftheproposedtransactionandhasstatedthatit wouldcomplywiththerequirementsoftheConsentOrder. 70 AnumberofcommentersurgedCITGrouptocommittotheBoardtoimproveitsmortgageservicingand foreclosurepractices. CommentersalsonotedseveralotherjudicialproceedingstowhichOneWestBankisapartythatallegewrongfulconductbyOneWestBankrelatingtomortgageforeclosureandservicing,includingdualtracking.Inaddition,somecommentersnotedalawsuitfiledagainstOneWestBankundertheFalseClaimsAct,31U.S.C. §3729etseq.,UnitedStatesexrel.Fisherv.OneWestBank,FSB,No.1:12-cv-09352-CM(S.D.N.Y.2015),allegingthatOneWestBankmadefalsecertificationsregardingconsumerdisclosuresinconnectionwiththeHAMP loanmodificationprogram.Thecasewasvoluntarilydismissedwithoutprejudicebytherelator. 71 Asnotedabove,anumberofcommentersallegedthattheproposalwouldnotprovideaclearorsignificant publicbenefit.Manyofthesecommenterssuggestedthattheinvolvedinstitutions’receiptofpublicassistance—i.e.,loss-shareagreementswiththeFDICinthecaseofOneWestBankandadefaultbyCITGroupon fundsreceivedundertheTroubledAssetReliefProgramCapitalPurchaseProgram(“TARPCPP”)—indicate thattheproposalshouldresultahigherthatusualshowingofpublicbenefits.Inaddition,anumberofcommenterscriticizedCITGroup’splanstouseOneWestBank’staxattributestoreduceCITGroup’staxable income.CommentersalsoallegedthatthetransferofOneWestBank’sloss-shareagreementsfromIMBHoldco toCITGroupservesnopublicpurpose. TheFDIC’sadministrationofitsauthoritiesasreceiveroffaileddepositoryinstitutions,includingitsdecisions toenterintoloss-shareagreementswithpurchasinginstitutionsandanytransferoftheseagreementsinsubsequentmergertransactions,isasubjectsolelywithinthepurviewoftheFDIC.Similarly,thedecisiontoprovide assistancetoabankingorganizationthroughtheTARPCPP,thepermissibleuseoftaxattributestoreduce taxableincome,andaBankruptcyCourt’sdecisiontoconfirmaplanofreorganizationthateliminatestheobligationtorepaytheTARPCPPassistance,aresolelywithinthepurviewoftheDepartmentoftheTreasuryand therelevantBankruptcyCourt,respectively.TheBoardbelievesthatthesemattersarenotwithintheBoard’s limitedjurisdictiontoadjudicateanddonotrelatetofactorsthattheBoardmayconsiderwhenreviewing anapplicationundertheBHCAct.SeeWesternBancshares.

264 FederalReserveBulletin|January2016 fromOneWestBank’slendingplatform.Further,CITGroupstatedthatthecombined organizationwouldbestrengthenedbythecomplementaryaspectsof thetwoentities’businesses—namely,CITGroup’snationwidesmallandmiddle-marketcommerciallending andleasingplatformandOneWestBank’sregionalcommercialandconsumerbranch bankingplatform—resultinginastrongerandmorestablefranchise. G.ConclusiononConvenienceandNeedsConsiderations TheBoardrecognizesthatthisproposalrepresentsasizeableexpansionbyCITGroup. Accordingly,animportantcomponentof theBoard’sreviewof theproposalhasbeenits considerationof theeffectsof theproposalontheconvenienceandneedsof allcommunitiesservedbyCITGroup,IMBHoldco,andOneWestBank. Inconductingitsreview,theBoardhasweighedtheconcernsexpressedbythecommenters inlightof allthefactsof record,includingtheoverallCRArecordsof CITBankandOne- WestBank,andtheBoard’sconsultationswithOneWestBank’ssupervisors,theOCCand CFPB.Asignificantnumberof commentershaveexpressedsupportfortheproposalbased ontherecordsof CITBankandOneWestBankinhelpingtoservethebankingneedsof theirentirecommunities,includingLMIareas.Othercommentershaveexpressedconcerns aboutspecificaspectsof CITBank’sandOneWestBank’srecordsof performanceunder theCRAintheircurrentserviceareasandhaveexpressedreservationsaboutwhetherthe combinedorganizationwouldberesponsivetothebankingandcreditneedsof allof its communities,especiallyinsouthernCalifornia.Commentersalsohaveexpressedconcerns aboutOneWestBank’scompliancewiththelawanditstreatmentof borrowersinitsmortgageservicingandforeclosureactivities.TheBoardhasconsideredtheseconcernsand weighedthemagainsttheoverallCRArecordsof CITBankandOneWestBank;theinstitutions’recordsof compliancewithfairlendingandotherconsumerprotectionlaws;consultationswiththeCFPBandOCC;confidentialsupervisoryinformation;information providedbyCITGroup,includingitsresponsestocomments;andthepubliccommentson theproposal. Basedonthatreview,theBoardbelievesthattheproposedacquisitionof OneWestBank byCITGroupwouldresultinpublicbenefitsandthattheconvenienceandneedsfactoris consistentwithapproval.TheBoardexpectstheCITGrouptoengageinactivitiesthat helptomeetthecreditneedsof thecommunitiesCITGroupservesatalevelcommensuratewiththeexpandedsizeandscopeof thecombinedorganization,consistentwith safeandsoundlendingpractices.TheBoardalsoexpectsCITGrouptosupportthecombinedbankindevelopingacomprehensivebusinessplanandprovidingamoredetailed CRAplanrequiredbytheOCCinconnectionwithitsapprovalof themergerbetween OneWestBankandCITBank.TheBoard,alongwithotherfederalsupervisors,willmonitorthesedevelopmentsthroughtheexaminationprocess. FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”72 Asdiscussedabove,anumberof commentersexpressedconcernsregardingtheeffectof theproposalonfinancialstability.Thesecommentersgenerallyassertedthattheproposal 72 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7).

LegalDevelopments:ThirdQuarter,2015 265 wouldresultinatoo-big-to-failinstitutiongiventhatthecombinedorganizationwould havemorethan$50billioninassets.CommentersalsoallegedthatCITGroupismaterially interconnectedwiththeeconomyandwithothercompaniesthatareimportanttothestabilityof thefinancialsystem.73 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.74These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.75 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Boththeacquirerandthetargetarepredominately engagedinretailcommercialbankingactivities.76Thecombinedorganizationwouldhave minimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complex interrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirmin theeventof financialdistress.77Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldposesignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. RequestforAdditionalPublicMeetings SeveralcommentersrequestedthattheBoardholdpublicmeetingsontheproposalincities otherthanLosAngeles.Section3(b)of theBHCActdoesnotrequirethattheBoardhold apublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthe 73 Commentersalsoraisedconcernsabouttheamountofassetswithoutobservablemarketpricesatthecombinedorganization. 74 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system(“USFS”). 75 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 76 Asnoted,CITGroupisprimarilyacommerciallender,andOneWestBankisprimarilyaretailbankengagedin residentialmortgageactivities. 77 CITGroupdoesnotcurrentlyengage,andasaresultofthistransactionwouldnotengage,inbusinessactivitiesorparticipateinmarketstoadegreethatwouldposesignificantrisktootherinstitutionsintheeventof financialdistressofthecombinedentity.Inaddition,thecombinedentity’ssharesofUSFSintrafinancial systemassetsandliabilitiesareeachlessthan1percent.Moreover,theBoardhasconsideredtheamountof assetsatthecombinedorganizationthatwouldnothaveobservablemarketpricesandbelievesthattheseasset levelswouldnotmeaningfullycontributetothecomplexityoftheUSFSormakethecombinedorganization materiallyvulnerabletofinancialmarketdistress.

266 FederalReserveBulletin|January2016 banktobeacquiredmakeatimelywrittenrecommendationof denialof theapplication.78 TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingif appropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhen writtencommentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsidered therequestsinlightof allthefactsof record.IntheBoard’sview,thecommentershave hadampleopportunitytoprovidetestimonyandsubmitcommentsontheproposal.As notedabove,theBoardandtheOCCheldapublicmeetingontheapplication,at which111personsgavetestimony.Personswhocouldnotattendinpersonwerepermitted tohavetheirwrittencommentspresentedbyotherparticipantsatthemeeting.CommenterssubmittednumerouswrittencommentsthattheBoardhasconsideredinactingonthe proposal.Therequestsdonotidentifydisputedissuesof factmaterialtotheBoard’sdecisionthatwouldbeclarifiedbyafurtherpublicmeeting.Inaddition,therequestsdonot demonstratewhywrittencommentsdonotpresentthecommenters’viewsadequatelyor whyafurthermeetingotherwisewouldbenecessaryorappropriate.Forthesereasons,and basedonallthefactsof record,theBoardhasdeterminedthatpublicmeetingsincities otherthanLosAngelesarenotrequiredorwarrantedinthiscase.Accordingly,the requestsforfurtherpublicmeetingsontheproposalaredenied. Inaddition,severalcommentersrequestedafurtherextensionof thecommentperiodfor theproposal.TheBoard’sRulesof Procedurecontemplatethatthepubliccommentperiod willnotbeextendedabsentacleardemonstrationof hardshiporothermeritoriousreason forseekingadditionaltime.79Thecommenters’requestsforadditionaltimedonotidentify circumstancesthatwouldwarrantanextensionof thepubliccommentperiodforthisproposal.Accordingly,theBoardhasdeterminednottoextendfurtherthepubliccomment period.80 Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhascon- 78 12U.S.C.§1842(b);12CFR225.16(e). 79 12CFR262.25(b)(2). 80 AnumberofcommentersrequestedthattheBoarddelayactionontheproposaluntil(i)CITGroupcommits toacommunityreinvestmentplannegotiatedwithcommunitygroups,(ii)theFDICmakespublictheresultsof itsauditofOneWestBank’scompliancewiththebank’sloss-shareagreements,(iii)certaincommentersreceive responsesfromfederalandstateagenciesunderapplicablefreedomofinformationlaws,(iv)OneWestBank haltsforeclosinguponthepropertyofcertainreversemortgageloanborrowers,or(v)theBoardandtheOCC verifythatOneWestBankofferedloanmodificationstoallqualifiedborrowersbeforeforeclosingontheborrower’spropertyandcollectingloss-sharepaymentsfromtheFDIC. TheBoardbelievesthattherecordinthiscasedoesnotwarrantpostponementofitsconsiderationoftheproposal.Duringtheapplicationprocess,theBoardhasaccumulatedasignificantrecord,includingreportsof examination,supervisoryinformation,publicreportsandinformation,andsignificantpubliccomment.The BoardbelievesthisrecordissufficienttoallowittoassessthefactorsitisrequiredtoconsiderundertheBHC Act.TheBHCActandtheBoard’srulesestablishtimeperiodsforconsiderationandactiononproposalssuch asthecurrentproposal.Moreover,asdiscussedmorefullyabove,theCRArequirestheBoardtoconsiderthe existingrecordofperformanceofanorganizationanddoesnotrequirethattheorganizationenterintocontractsoragreementswithotherstoimplementitsCRAprograms.Forthereasonsdiscussedabove,theBoard believesthatcommentershavehadampleopportunitytosubmittheirviewsand,infact,theyhaveprovided amplewrittensubmissionsandoraltestimonythathavebeenconsideredbytheBoardinactingontheproposal.Basedonareviewofallthefactsofrecord,theBoardconcludesthatdelayingconsiderationoftheproposal,grantinganotherextensionofthecommentperiod,ordenyingtheproposalonthegroundsdiscussed above,includingforinformationalinsufficiency,isunwarranted. TheBoardreceivedmultiplecommentsallegingthattheBoard’sconsiderationoftheproposalisprecludedby theexistenceofalawsuitfiledagainstOneWestBankundertheFalseClaimsAct.UnitedStatesexrel.Beekmanv.IndyMacFederalBank,F.S.B.,No.9:12-cv-81138-JIC(S.D.Fla.2015).Thiscasehasbeendismissed withprejudiceforfailuretomeettheapplicablepleadingstandard.

LegalDevelopments:ThirdQuarter,2015 267 sideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyCITGroupwithallof theconditionsimposedinthisorder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof NewYork,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveJuly19,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard Banner Corporation Walla Walla, Washington Elements Merger Sub, LLC Walla Walla, Washington OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderN.2015–23(September3,2015) BannerCorporation(“Banner”)andElementsMergerSub,LLC(“MergerSub”),awholly ownedsubsidiaryof Banner,bothof WallaWalla,Washington(together,“Applicants”), haverequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct (“BHCAct”)1toacquireStarbuckBancshares,Inc.(“Starbuck”),Seattle,andtherebyindirectlyacquireitssubsidiary,AmericanWestBank,Spokane,bothof Washington.Under theproposal,StarbuckwouldbemergedintoMergerSubandAmericanWestBankwould bemergedintoBanner’swhollyownedsubsidiary,BannerBank,alsoof WallaWalla; MergerSubandBannerBankwouldbethesurvivingentities.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(80FederalRegister6517(2015)).3Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Banner,withconsolidatedassetsof approximately$5.2billion,isthe201stlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$4.3billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.BannercontrolsBannerBank,which 1 12U.S.C.§1842. 2 ThemergerofAmericanWestBankintoBannerBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)undertheBankMergerAct.12U.S.C.§1828(c). 3 12CFR262.3(b).

268 FederalReserveBulletin|January2016 operatesinWashington,Idaho,andOregon.4Banneristhe11thlargestdepositoryorganizationinWashington,controllingapproximately$2.9billionindeposits,the18thlargest insureddepositoryinstitutioninIdaho,controllingapproximately$234.5millionindeposits,andthe12thlargestinsureddepositoryinstitutioninOregon,controllingapproximately $849.0millionindeposits,whichrepresent2.3,1.1,and1.4percent,respectively,of the totaldepositsof insureddepositoryinstitutionsinthosestates.5 Starbuck,withconsolidatedassetsof approximately$4.6billion,isthe213thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$3.6billion inconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.StarbuckcontrolsAmericanWest Bank,whichoperatesinWashington,California,Idaho,Oregon,andUtah.Starbuckisthe 16thlargestdepositoryorganizationinWashington,controllingapproximately$1.2billion indeposits,the21stlargestinsureddepositoryinstitutioninIdaho,controllingapproximately$173.1millionindeposits,andthe15thlargestinsureddepositoryinstitutionin Oregon,controllingapproximately$388.2millionindeposits,whichrepresent0.9,0.8,and 0.6percent,respectively,of thetotaldepositsof insureddepositoryinstitutionsinthose states. Onconsummationof theproposal,Bannerwouldbecomethe124thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$9.8billion, whichrepresentlessthan1percentof thetotalamountof assetsof insureddepository institutionsintheUnitedStates.BannerwouldbecometheeighthlargestdepositoryorganizationinWashington,controllingapproximately$4.0billionindeposits,the15thlargest insureddepositoryinstitutioninIdaho,controllingapproximately$407.6millionindeposits,andthe10thlargestinsureddepositoryinstitutioninOregon,controllingapproximately $1.2billionindeposits,whichrepresent3.3,2.0,and2.0percent,respectively,of thetotal amountof depositsof insureddepositoryinstitutionsinthosestates. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.6Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.7Inaddition,theBoard maynotapproveaninterstateacquisitionif thebankholdingcompanycontrolsorwould controlmorethan10percentof thetotaldepositsof insureddepositoryinstitutionsinthe UnitedStates,or30percentormoreof thetotaldepositsof insureddepositoryinstitutions 4 BanneralsocontrolsIslandersBank,FridayHarbor,Washington,whichoperatesthreebranchesin Washington. 5 NationwidedataandrankingsareasofJune30,2015.StatedataandrankingsareasofJune30,2014,unless otherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,and savingsandloanassociations. 6 12U.S.C.§1842(d)(1)(A). 7 12U.S.C.§1842(d)(1)(B).Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersabanktobe locatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See12U.S.C. §1841(o)(4)-(7).Section3(d)oftheBHCActappliestotheacquisitionbyabankholdingcompanyofabank withthesamehomestateasthebankholdingcompanytotheextentthatthebankoperatesbranchesoutside itshomestate.

LegalDevelopments:ThirdQuarter,2015 269 inthetargetbank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.8 Forpurposesof theBHCAct,thehomestateof BannerisWashingtonandAmericanWest Bank’shomestateisWashington.9AmericanWestBankisalsolocatedinCalifornia,Idaho, Oregon,andUtah.Banneriswellcapitalizedandwellmanagedunderapplicablelawand hasasatisfactoryCommunityReinvestmentActrating.10CaliforniaandUtahdonothave minimumagerequirementsthatwouldapplytothistransaction,11andIdahoandOregon donothaveminimumagerequirements.12 Onconsummationof theproposedtransactions,Bannerwouldcontrollessthan1percent of thetotalamountof depositsininsureddepositoryinstitutionsintheUnitedStates.In addition,thecombinedorganizationwouldcontrolapproximately3.3percentof thetotal amountof depositsof insureddepositoryinstitutionsinAmericanWestBank’shomestate, Washington.BannerandAmericanWestBankalsohaveoverlappingbankingoperationsin IdahoandOregon,andthecombinedorganizationwouldcontrolapproximately2.0percentof thetotalamountof depositsof insureddepositoryinstitutionsineachof those states.13Accordingly,inlightof allthefactsof record,theBoardisnotprohibitedfrom approvingtheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.14 BannerBankandAmericanWestBankcompetedirectlyintheIdaho-Washingtonbanking marketof Lewiston,theOregonbankingmarketof Roseburg,theWashington-Idaho bankingmarketof Spokane,theWashington-Oregonbankingmarketof WallaWalla,and theWashingtonbankingmarketsof Richland-Kennewick-Pasco,Seattle,Sunnyside,and Yakima. 8 12U.S.C.§1842(d)(2)(A),(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch. 9 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 10 12U.S.C.§§2901-2908. 11 Californiaimposesminimumagerequirementsonlyontheacquisitionofabankthatisorganizedunderthe lawsofCaliforniaorthatmaintainsitsmainofficeinCalifornia.Cal.Fin.Code§§147(a),1685.TheBoard consultedwiththeUtahDepartmentofFinancialInstitutions,whichadvisedthattheUtahminimumage requirementswouldnotapplytotheacquisitionofadepositoryinstitutionwhosehomestateisnotUtahbut thathasbranchesinUtah.UtahCode§§7-1-103(14),-703(7). 12 IdahoCode§26-1605;andOr.Rev.Stat.§713.270. 13 NeitherIdahonorOregonimposeadepositcaporconcentrationlimit. 14 12U.S.C.§1842(c)(1).

270 FederalReserveBulletin|January2016 A.CompetitiveEffectsintheBankingMarkets TheBoardhasreviewedthecompetitiveeffectsof theproposalinthebankingmarketsin whichBannerBankandAmericanWestBankcompete.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets;therelative sharesof thetotaldepositsininsureddepositoryinstitutionsinthemarkets(“market deposits”)thatwouldbecontrolledbyBannerBankandAmericanWestBank;15theconcentrationlevelsof marketdepositsandtheincreaseintheselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16othercharacteristicsof themarkets;and,asdiscussedbelow,commitmentsmadebyBannertodivestoneAmericanWestBankbranchintheWallaWallabankingmarket. BankingMarketsWithinEstablishedGuidelines.Consummationof theproposalwouldbe consistentwithBoardprecedentandwithinthethresholdsintheDOJBankMerger GuidelinesintheLewiston,Spokane,Roseburg,Richland-Kennewick-Pasco,Seattle,and Yakimabankingmarkets.17Onconsummationof theproposal,theLewiston,Spokane, Richland-Kennewick-Pasco,Seattle,andYakimabankingmarketswouldremainmoderatelyconcentrated,andthechangesinmarketconcentrationswouldbewellwithintheDOJ BankMergerGuidelinesandBoardprecedent.TheRoseburgbankingmarketwould remainhighlyconcentrated,asmeasuredbytheHHI,andthechangeintheHHIinthe marketwouldbesmall.Ineachof thesebankingmarkets,numerouscompetitorswould remain. BankingMarketsWarrantingSpecialScrutiny.Thestructuraleffectsthatconsummationof theproposalwouldhaveintheSunnysideandWallaWallabankingmarkets18warranta detailedreviewbecausetheconcentrationlevelsonconsummationwouldexceedthethresholdlevelsintheDOJBankMergerGuidelineswhenusinginitialcompetitivescreening data. SunnysideBankingMarket.Usingtheinitialcompetitivescreeningdata,Banneristhe fourthlargestdepositoryorganizationintheSunnysidebankingmarket,controlling approximately$56.5millionindeposits,whichrepresent11.4percentof marketdeposits. 15 Depositandmarketsharedataarebasedondatareportedbyinsureddepositoryinstitutionsinthesummaryof depositsdataasofJune30,2014,updatedtoreflectchangesinownershipduetosubsequentmergersand basedoncalculationsinwhichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitors ofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCity Corporation,70FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsin themarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserve Bulletin52(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. 17 Thesesixbankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedinthe Appendix. 18 TheSunnysidebankingmarketisdefinedasthesoutheasterncornerofYakimaCountyandsouthwesternBentonCounty,includingGrandview,Granger,Mabton,Outlook,Prosser,andSunnyside,allofWashington.The WallaWallabankingmarketisdefinedastheWallaWallametropolitanareainWallaWallaCountyandthe southernportionofColumbiaCounty,includingCollegePlace,Dayton,Dixie,Garrett,Waitsburg,Walla Walla,andWallaWallaEast,allofWashington,andthenortheasterncornerofUmatillaCounty,including Milton-Freewater,bothofOregon.

LegalDevelopments:ThirdQuarter,2015 271 Starbuckisthesecondlargestdepositoryorganizationinthemarket,controllingapproximately$87.0millionindeposits,whichrepresent17.5percentof marketdeposits.Onconsummation,thecombinedentitywouldbethesecondlargestdepositoryorganizationinthe Sunnysidebankingmarket,controllingapproximately$143.5millionindeposits,which wouldrepresentapproximately28.9percentof marketdeposits.TheHHIinthismarket wouldincreaseby399points,from1804to2203. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheSunnysidebankingmarket.19FactorsindicatethattheincreaseinconcentrationintheSunnysidebankingmarket,asmeasuredbytheaboveHHIandmarket share,overstatesthepotentialcompetitiveeffectsof theproposalinthemarket.Onethrift institutioninthemarkethasacommercialandindustrialloanportfoliosimilartothoseof commercialbanksintheSunnysidebankingmarket,20asmeasuredintermsof theratiosof thosetypesof loanstototalloansandassets.21TheBoardhasconcludedthatdeposits controlledbythisinstitutionshouldbeweightedat100percentinthemarket-share calculations. Inaddition,twocommunitycreditunionsexertacompetitiveinfluenceintheSunnyside bankingmarket.Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmostallof the residentsintherelevantbankingmarket.22TheBoardfindsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunionsata50-percentweightinestimatingmarketinfluence.Thisweightingtakesintoaccountthelimitedlendingdonebythesecredit unionstosmallbusinessesrelativetocommercialbanks’lendinglevels. Withthedepositsof thethriftweightedat100percentandthetwocreditunionsat50percent,theSunnysidebankingmarketappearstobeonlymoderatelyconcentrated,both beforeandafterthetransaction.Uponconsummationof themerger,Bannerwouldcontrol approximately25.2percentof marketdeposits,theHHIwouldincreaseby302pointstoa levelof 1743,alevelwhichwouldbewithintheDOJBankMergerGuidelines,and10 depositoryorganizationswouldcontinuetooperateintheSunnysidebankingmarket, includingoneinsureddepositoryinstitutionwithamarketshareof morethan25percent. 19 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreaseandtheresultinglevelofconcentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 20 Thestandardtreatmentofthriftsinthecompetitiveanalysisistogivetheirdeposits50-percentweightingto 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. 21 Thisthriftinstitutionhasaratioofcommercialandindustrialloanstoassetsofmorethan5percent,whichis comparableto,orgreaterthan,theratioforsomecommercialbanksinthemarketandgreaterthantheratio forsomethriftinstitutionsthattheBoardhaspreviouslyfoundtobefullcompetitorsofcommercialbanks.Id. 22 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.See,e.g.,MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012–12(November14, 2012);OldNationalBancorp,FRBOrderNo.2012–9(August30,2012);UnitedBankshares,Inc.,(orderdated June30,2011),97FederalReserveBulletin19(2ndQuar.2011);ThePNCFinancialServicesGroup,Inc.,94 FederalReserveBulletinC38(2008);ThePNCFinancialServicesGroup,Inc.,94FederalReserveBulletinC65 (2007);RegionsFinancialCorporations,supra:PassumpsicBancorp,92FederalReserveBulletinC175(2006); WachoviaCorporation,92FederalReserveBulletinC183(2006).

272 FederalReserveBulletin|January2016 WallaWallaBankingMarket.Usingtheinitialcompetitivescreeningdata,Banneristhe secondlargestdepositoryorganizationintheWallaWallabankingmarket,controlling approximately$382.5millionindeposits,whichrepresent31.1percentof marketdeposits. Starbuckisthethirdlargestdepositoryorganizationinthemarket,controllingapproximately$111.2millionindeposits,whichrepresent9.1percentof marketdeposits.Onconsummation,thecombinedentitywouldbethelargestdepositoryorganizationintheWalla Wallabankingmarket,controllingapproximately$493.7millionindeposits,whichwould representapproximately40.2percentof marketdeposits.TheHHIinthismarketwould increaseby563points,from2401to2964.Tomitigatethepotentiallyadversecompetitive effectsof theproposalintheWallaWallabankingmarket,Bannerhascommittedtodivest onebranch,accountingforatotalof approximately$27.4millionindeposits,toacompetitivelysuitableinstitution.23 TheBoardhasalsoconsideredwhetherotherfactorseithermitigatethecompetitiveeffects of theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffect oncompetitioninthemarket.IntheWallaWallabankingmarket,thecompetitiveeffects aremitigatedbyseveralfactors.Twocommunitycreditunionsexertacompetitiveinfluence inthebankingmarket.Eachinstitutionoffersawiderangeof consumerbankingproducts, operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsintherelevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunionsata50-percentweightinestimatingmarketinfluence. Afteraccountingforthebranchdivestitureandweightingthedepositsof thetwocredit unionsat50percent,Bannerwouldcontrolapproximately34.6percentof marketdeposits andtheHHIwouldincreaseby327pointstoalevelof 2367.Inaddition,10othercompetitivelyactiveinsureddepositoryorganizationswouldremain,eightof whichhavemore thanonebranchintheWallaWallamarket. Moreover,recententryandexpansionaryactivitysuggeststhatthemarketisattractiveto potentialcompetitors.TwodepositoryorganizationshaveenteredtheWallaWallabanking marketdenovosince2012,oneof whichisintheprocessof openingasecondbranchin themarket,andanotherexistingcompetitoropenedanewbranchin2010. B.Viewsof OtherAgenciesandConclusiononCompetitiveConsideration TheDOJconductedareviewof thepotentialcompetitiveeffectsof themergerandhas advisedtheBoardthatconsummationwouldnotlikelyhaveasignificantlyadverseeffect oncompetitioninanyrelevantbankingmarket,includingSunnysideandWallaWalla.In addition,theappropriatebankingagencieshavebeenaffordedanopportunitytocomment andhavenotobjectedtotheproposal. Basedonallthefactsof record,includingtheproposeddivestiturecommitments,the Boardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverse effectoncompetitionorontheconcentrationof resourcesintheeightbankingmarketsin 23 Asaconditionofconsummationoftheproposedmerger,Bannerhascommittedthatitwouldexecute,before consummationoftheproposedmerger,asalesagreementwithacompetitivelysuitablebankingorganization. Banneralsohascommittedtocompletethedivestiturewithin180daysafterconsummationoftheproposed merger.Inaddition,Bannerhascommittedthat,iftheproposeddivestitureisnotcompletedwithinthe180dayperiod,Bannerwouldtransfertheunsoldbranchtoanindependenttrustee,whowouldbeinstructedtosell thebranchtoanalternatepurchaserorpurchasersinaccordancewiththetermsofthisorderandwithout regardtoprice.BoththetrusteeandanyalternatepurchasermustbedeemedacceptabletotheBoard.See,e.g., BankAmericaCorporation,78FederalReserveBulletin338(1992);andUnitedNewMexicoFinancialCorporation,77FederalReserveBulletin484(1991).

LegalDevelopments:ThirdQuarter,2015 273 whichBannerBankandAmericanWestBankcompetedirectly,orinanyotherrelevant bankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsare consistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandfutureprospectsof theinstitutionsinvolved.Initsevaluation of thefinancialfactors,theBoardreviewsthefinancialconditionof theorganizations involvedonbothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapital adequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity, andearningsprospects,andtheimpactof theproposedfundingof thetransaction.The Boardalsoconsiderstheabilityof thecombinedorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. BannerandBannerBankarebothwellcapitalizedandwouldremainsoonconsummation of theproposedacquisition.Theproposedtransactioninvolvestheacquisitionandmerger of abankholdingcompanyanditssubsidiarybankandisstructuredasacashandshare exchange.24Theassetquality,earnings,andliquidityof BannerBankandAmericanWest Bankareconsistentwithapproval,andBannerappearstohaveadequateresourcesto absorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwithapproval.Basedonits reviewof therecord,theBoardfindsthatBannerhassufficientfinancialresourcestoeffect theproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Banner,Starbuck,andtheirinsureddepositoryinstitutionsubsidiaries,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the Boardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsandtheirrecordsof compliancewithapplicableconsumerprotection,banking,andanti-money-launderinglaws. Banner,Starbuck,andtheirinsureddepositoryinstitutionsubsidiariesareeachconsidered tobewellmanaged.Banner’sexistingrisk-managementprogramanditsdirectorateand seniormanagementareconsideredtobesatisfactory.Theseniorexecutiveofficersof BannerandStarbuckhavesubstantialknowledgeof andexperienceinthebankingsector. TheBoardalsohasconsideredBanner’splansforimplementingtheproposal.Bannerhasa demonstratedrecordof successfullyintegratingorganizationsintoitsoperationsandriskmanagementsystemsfollowingacquisitions.Bannerwouldimplementitsexistingstructure of centralizedrisk-managementatthecombinedorganization,whichisconsideredacceptablefromasupervisoryperspective.Inaddition,Banner’sandStarbuck’smanagementhas 24 Theaggregateconsiderationtobepaidinconnectionwiththeproposalwouldbeafixedamountofcashand anaggregatenumberofsharesof(i)Bannercommonstockand(ii)anewclassofBannernon-votingcommon stockthatwouldbeauthorizedpriortothecompletionoftheacquisition.Bannerhassufficientresourcesto fundtheproposedtransaction.

274 FederalReserveBulletin|January2016 theexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafe andsoundmanner,andBannerplanstointegrateStarbuck’sexistingmanagementandpersonnelinamannerthataugmentsBanner’smanagement.25 Basedonallthefactsof record,includingBanner’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof BannerandStarbuckincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevant depositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).26Inaddition, theBoardconsidersthebanks’overallcompliancerecord,theresultsof recentfairlending examinations,andothersupervisoryassessments;thesupervisoryviewsof examiners;and othersupervisoryinformation.TheBoardalsomayconsidertheapplicantorganization’s businessmodel,marketingandoutreachplans,plansfollowingconsummation,andany otherinformationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,27andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods,inevaluatingbankexpansionaryproposals.28Inaddition,fairlendinglaws requirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardless of theirrace,ethnicity,orcertainothercharacteristics. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof BannerBankandAmericanWestBank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof otheragencies,confidentialsupervisoryinformation,andinformationprovidedbyBanner. A.Recordsof PerformanceundertheCRA TheBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.29TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepository 25 Onconsummation,Bannerintendstoretaincertainmembersofmanagementandmostoftheemployeesof Starbuck,includingtwocurrentexecutiveofficersofStarbuck,whowouldserveinaconsultingcapacityat Banner,andthecurrentchieffinancialofficerofStarbuck,whowouldserveasthechieffinancialofficerof BannerBankforthreeyearsaftertheacquisition. 26 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 27 12U.S.C.§2901(b). 28 12U.S.C.§2903. 29 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010).

LegalDevelopments:ThirdQuarter,2015 275 institutionprepareawrittenevaluationof theinstitution’srecordof meetingthecredit needsof itsentirecommunity,includingLMIneighborhoods.30Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sdatareportedundertheHomeMortgageDisclosureActof 1975,31inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollectedand reportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonthenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;thegeographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedon borrowercharacteristics,includingthenumberandamountof homemortgageloansto low-,moderate-,middle-,andupper-incomeindividuals;32theinstitution’scommunity developmentlending,includingthenumberandamountof communitydevelopmentloans, andtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexible lendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies.Consequently,theBoardconsiderstheoverallCRAratingandtheratingonthelendingtesttobe importantindicators,whentakenintoconsiderationwithotherfactors,indetermining whetheradepositoryinstitutionishelpingtomeetthecreditneedsof itscommunities. CRAPerformanceof BannerBank.BannerBankwasassignedanoverall“Satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,inMarch2013(“BannerBankEvaluation”).BannerBankreceived“HighSatisfactory”ratingsfortheLending Test,InvestmentTest,andServiceTest.33 ExaminersobservedthatBannerBank’soveralllevelof lendingreflectedgoodresponsivenesstoassessmentareacreditneeds.BannerBank’soveralldistributionof borrowers reflectedgoodpenetrationamongretailcustomersof differentincomelevelsandbusinesses andfarmsof differentrevenuesizes,anditsoverallgeographicdistributionof loans reflectedadequatepenetrationthroughouttheassessmentareas.Examinersnotedthat BannerBankexhibitedagoodrecordof servingthecreditneedsof themosteconomically 30 12U.S.C.§2906. 31 12U.S.C.§2801etseq. 32 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 33 TheBannerBankEvaluationwaspreparedusingtheinteragencyevaluationproceduresforLargeInstitutions. TheevaluationperiodfortheLendingTest,InvestmentTest,andServiceTestwasfromJanuary1,2010, throughDecember31,2012.TheBannerBankEvaluationincludedafull-scopereviewoftheSeattleMetropolitanDivision(“MD”),Washington,BoiseMetropolitanStatisticalArea(“MSA”),Idaho,andLewiston- ClarkstonMulti-StateMSA,Portland-Vancouver-BeavertonMulti-StateMSA,andOregonnon-MSA,allof Oregon,assessmentareasandalimited-scopereviewoftheSpokaneMSA,BellinghamMSA,Tri-CitiesMSA, WenatcheeNon-MSA,YakimaNon-MSA,andWashingtonNon-MSA,allofWashington,andIdahoNon- MSA,Idaho.

276 FederalReserveBulletin|January2016 disadvantagedgeographiesof itsassessmentareas,low-incomeindividuals,andverysmall businessesandsmallfarms,consistentwithsafeandsoundbankingpractices.Examiners alsonotedthatBannerBankhadarelativelyhighlevelof communitydevelopmentlending, whichwasfocusedonaffordablehousing,andthatitusedflexiblelendingpracticesinservingassessmentareacreditneeds. ExaminersfoundthatBannerBankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrants,particularlythosethatarenotroutinelyprovidedbyprivate investors.Examinersnotedthattotalinvestmentsdoubledinamountsincetheprevious evaluation.Examinersalsonotedthatthebankexhibitedgoodresponsivenesstoassessmentareacommunitydevelopmentneedsandusedinnovativeandcomplexinvestmentsto supportcommunitydevelopmentinitiatives. ExaminersconcludedthatBannerBankprovidedarelativelyhighlevelof community developmentservices.ExaminersnotedthatBannerBank’sdeliverysystemswereaccessible toallportionsof itsassessmentareasandthatitsrecordof openingandclosingbranches hadnotadverselyaffectedtheaccessibilityof itsdeliverysystems,particularlywithrespect tolow-andmoderate-incomegeographiesandindividuals. CRAPerformanceof AmericanWestBank.AmericanWestBankwasassignedanoverall “Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,inSeptember2012(“AmericanWestBankEvaluation”).AmericanWestBankreceived“HighSatisfactory”ratingsfortheLendingTestandInvestmentTestanda“LowSatisfactory”ratingfortheServiceTest.34 ExaminersobservedthatAmericanWestBank’soveralllevelof lendingreflectedgood responsivenesstoassessmentareacreditneeds.AmericanWestBankoriginatedasubstantialmajorityof loansinitsassessmentareasduringtheevaluationperiod.AmericanWest Bank’soveralldistributionof borrowersreflectedgoodpenetrationamongretailcustomers of differentincomelevelsandbusinessesandfarmsof differentrevenuesizes,anditsoverallgeographicdistributionof loansreflectedgoodpenetrationthroughouttheassessment areas.ExaminersnotedthatAmericanWestBankexhibitedagoodrecordof servingthe creditneedsof themosteconomicallydisadvantagedgeographiesof itsassessmentareas, low-incomeindividuals,andverysmallbusinessesandfarms,consistentwithsafeand soundbankingpractices.ExaminersalsonotedthatAmericanWestBankhadanadequate levelof communitydevelopmentlending. ExaminersfoundthatAmericanWestBankhadmadeasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrants.ExaminersnotedthatAmericanWestBank’s volumeof communitydevelopmentinvestmentsanddonationsshowedamarkedincrease fromthepreviousevaluation.Examinersalsonotedthatthebankexhibitedgoodresponsivenesstoassessmentareacommunitydevelopmentneeds. ExaminersconcludedthatAmericanWestBankprovidedanadequatelevelof community developmentservices.ExaminersnotedthatAmericanWestBank’sdeliverysystemswere 34 TheAmericanWestBankEvaluationwaspreparedusingtheinteragencyevaluationproceduresforLargeInstitutions.TheevaluationperiodfortheLendingTestwasfromJanuary1,2009,throughDecember31,2011, exceptforcommunitydevelopmentloans.TheServiceTestandthereviewofcommunitydevelopmentloans coveredtheperiodfromJanuary1,2009,throughJune30,2012.TheevaluationperiodfortheInvestmentTest wasfromDecember22,2008,throughJune30,2012.TheAmericanWestBankEvaluationincludedafullscopereviewoftheWashingtonNon-MSA,Washington,IdahoNon-MSA,Idaho,andUtahNon-MSA,Utah, assessmentareasandalimited-scopereviewoftheSpokaneMSA,YakimaMSA,andKennewickMSA,allof Washington,Coeurd’AleneMSAandLewistonMSA,bothofIdaho,andSaltLakeMSA,ProvoMSA,and St.GeorgeMSA,allofUtah.

LegalDevelopments:ThirdQuarter,2015 277 accessibletoallportionsof itsassessmentareasandthatAmericanWestBank’sopening andclosingof brancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystems. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Applicantsstatethatcurrentcustomersof BannerBankandAmericanWestBank wouldbeabletotakeadvantageof thecombinedorganization’sexpandedbranchnetwork andbroaderrangeof financialproducts.Inparticular,AmericanWestBankcustomers wouldbenefitfromaccesstoawiderrangeof homemortgageproductsandBanner’ssmall businessloanplatform.AmericanWestBankcustomerswouldalsobeabletouseBanner’s onlinebankingplatformandmobileandtextbankingservices.Applicantsalsostatethat largecommercialcustomerswouldbenefitfromanexpandedcapitalbaseandfunding capabilitiesfollowingthemerger.Applicantsrepresentthattheydonotexpecttheproposal toresultinanysignificantreductiontotheservicesorproductsofferedorincreasesinfees chargedtothecommunitiescurrentlyservedbyBannerBankandAmericanWestBank. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,consultationswithotheragencies,information providedbyApplicants,andconfidentialsupervisoryinformation.Basedonthatreview, theBoardconcludesthattheproposalwouldresultinpublicbenefitsandthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”35 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.36These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution 35 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 36 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

278 FederalReserveBulletin|January2016 thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.37 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Bannerwouldhave approximately$9.8billioninconsolidatedassetsandwouldnotbelikelytoposesystemic risks.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincrease ininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyApplicantswithalltheconditionsimposedinthisOrder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitments aredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof SanFrancisco,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveSeptember3,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 37 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:ThirdQuarter,2015 279 Appendix BannerBank/AmericanWestBankBankingMarketsConsistentwithBoardPrecedentandDOJBank MergerGuidelines Market Deposit RemainingNumber Bank Rank AmountofDeposits ResultingHHI ChangeinHHI Shares ofCompetitors (percent) Idaho-WashingtonBankingMarketofLewiston—DefinedastheLewistonmetropolitanareainNezPerceCounty,includingLewiston,bothof Idaho,andAsotinCounty,includingAsotin,Clarkston,ClarkstonHeights-Vineland,andWestClarkson-Highland,allofWashington BannerBank Pre-Consummation 2 141.2mil. 17.2 AmericanWestBank 10 12.4mil. 1.5 BannerBank Post-Consummation 2 153.6mil. 18.7 1603 52 10 OregonBankingMarketofRoseburg—DefinedasCentralDouglasCounty,includingCanyonville,Dillard,FairOaks,Glide,Green,MyrtleCreek, Oakland,Riddle,Roseburg,RoseburgNorth,Sutherlin,Tri-City,andWinston,allofOregon BannerBank Pre-Consummation 7 22.5mil. 1.5 AmericanWestBank 3 133.3mil. 8.6 BannerBank Post-Consummation 2 155.8mil. 10 4557 25 6 Washington-IdahoBankingMarketofSpokane—DefinedastheSpokanemetropolitanareainSpokaneCounty,includingAirwayHeights, Cheney,Dishman,FairchildAirForceBase,LibertyLake,Mead,MedicalLake,Opportunity,Spokane,SpokaneValley,andVeradale,allof Washington,andthecentralwesternportionofKootenaiCounty,includingCoeurD’Alene,Hayden,HaydenLake,PostFalls,andRathdrum,allof Idaho BannerBank Pre-Consummation 7 442.2mil. 5.2 AmericanWestBank 10 140.5mil. 1.6 1246 16 20 WashingtonBankingMarketofRichland-kennewick-Pasco—DefinedastheTri-CitiesareainsouthcentralWashingtoninBenton,Franklin, andWallaWallacounties,includingBentonCity,Burbank,Connell,Finley,Kennewick,Mesa,Pasco,Richland,Wallula,WestPasco,andWest Richland,allofWashington BannerBank Pre-Consummation 5 175.1mil. 7.8 AmericanWestBank 10 104.4mil. 4.7 BannerBank Post-Consummation 3 279.5mil. 12.5 1034 74 14 WashingtonBankingMarketofSeattle—SeattlemetropolitanareainKing,Pierce,andSnohomishcounties,thesoutheasternportionofIsland County,andBainbridgeIslandinKitsapCounty,includingAlder,Alderton,AlderwoodManor,Algona,AmesLake,Arlington,ArlingtonHeights, Artondale,Ashford,Auburn,BainbridgeIsland,Baring,Bellevue,BlackDiamond,BonneyLake,Bothell,BothellEast,BothellWest,BoulevardPark, Brier,BrownsPoint,Bryant,BrynMawr-Skyway,Buckley,BunkFoss,Burien,CamanoIsland,Canterwood,CanyonCreek,Carbonado,Carnation, Cavalero,ChainLake,ClearLake,Clinton,CloverCreek,ClydeHill,CottageLake,Covington,Darrington,DashPoint,DesMoines,Dupont,Duvall, Eastgate,EastHill-Meridian,Eastmont,EastRentonHighlands,Eatonville,Edgewood,Edmonds,Elbe,ElkPlain,Enumclaw,Esperence,Everett, Fairwood,FallCity,FederalWay,Fife,Fircrest,FobesHill,FortLewis,FoxIsland,Frederickson,Freeland,GigHarbor,GoldBar,Graham,Granite Falls,Hobart,HuntsPoint,Index,Inglewood-FinnHill,Issaquah,Kapowsin,Kenmore,Kent,Kingsgate,Kirkland,Klahanie,LaGrande,Lake Bosworth,LakeCassidy,LakeForestPark,LakeHolm,LakeKetchum,LakelandNorth,LakelandSouth,LakeMarcel-Stillwater,Lake Morton-Berrydale,LakeRoesiger,LakeStevens,LakeStickney,LakeTapps,Lakewood,Langley,LarchWay,Lochsloy,Lynnwood,Machias,Maple Heights-LakeDesire,MapleValley,Maplewood,MarthaLake,Marysville,MayCreek,McChordAirForceBase,McMillan,Meadowdale,Medina, MercerIsland,Midland,Midway,MillCreek,MillCreekEast,Milton,Mirrormont,Monroe,MonroeNorth,MountlakeTerrace,Mukilteo,Newcastle, NewportHills,NormandyPark,NorthBend,NorthFortLewis,NorthLynwood,NorthMarysville,NorthPuyallup,NorthSultan,NorthwestStanwood, Orting,Oso,Pacific,Parkland,PicnicPoint,PrairieHeights,PrairieRidge,Purdy,Puyallup,RaftIsland,Ravensdale,Redmond,Renton,Riverbend, Riverton,Rosedale,Ruston,Sammamish,Seatac,Seattle,ShadowLake,Shoreline,Silvana,SilverFirs,SiscoHeights,Snohomish,Snoqualmie, SouthHill,SouthPrairie,Spanaway,Stanwood,Startup,SteilacoomSummit,Sultan,SummitView,Sumner,SundayLake,SwedeHeaven,Tacoma, Tanner,ThreeLakes,Tukwila,Tulalip,UnionHill-NoveltyHill,UniversityPlace,Vashon,VashonIsland,Verlot,Waller,WarmBeach,Wauna,White Center,WildernessRim,Wilkeson,Wollochet,Woodinville,WoodsCreek,Woodway,andYarrowPoint,allofWashington BannerBank Pre-Consummation 14 846.8mil. 1.0 AmericanWestBank 23 281.6mil. 0.4 BannerBank Post-Consummation 11 1.1bil. 1.4 1274 1 53 WashingtonBankingMarketofYakima—DefinedastheYakimametropolitanareainYakimaCounty,includingAhtanum,Cowiche,Eschbach, Gleed,Naches,Selah,Summitview,TerraceHeights,Tieton,UnionGap,andYakima,allofWashington BannerBank Pre-Consummation 3 269.7mil. 13.7 AmericanWestBank 10 50.2mil. 2.6 BannerBank Post-Consummation 2 319.9mil. 16.3 1352 70 14 DataandrankingsareasofJune30,2014.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent.

280 FederalReserveBulletin|January2016 First Horizon National Corporation Memphis, Tennessee OrderApprovingtheFormationof aBankHoldingCompanyandtheAcquisitionof aBank HoldingCompany FRBOrderNo.2015–24(September17,2015) FirstHorizonNationalCorporation(“FirstHorizon”)anditssubsidiaryholdingcompany,FirstHorizonMergerSub,LLC,bothof Memphis,Tennessee(collectively,“Applicants”),haverequestedtheBoard’sapprovalundersection3of theBankHoldingCompanyAct(“BHCAct”)1toacquireTrustAtlanticFinancialCorporation(“TrustAtlantic”) andtherebyindirectlyacquireitssubsidiarybank,TrustAtlanticBank,bothof Raleigh, NorthCarolina.Followingtheproposedacquisition,TrustAtlanticBankwouldbemerged intoFirstHorizon’ssubsidiarybank,FirstTennesseeBank,N.A.(“FirstTennessee Bank”),Memphis,Tennessee.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister891(2015)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. FirstHorizon,withconsolidatedassetsof approximately$25.7billion,isthe61stlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$18.6billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.4FirstHorizoncontrols FirstTennesseeBank,whichoperatesinTennessee,Georgia,Mississippi,NorthCarolina, andSouthCarolina.FirstHorizonisthe59thlargestinsureddepositoryorganizationin NorthCarolina,controllingapproximately$179.2millionindeposits,whichrepresentless than1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.5 TrustAtlantic,withconsolidatedassetsof approximately$469.2million,isthe1,444thlargestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $388.6millionindeposits,whichrepresentlessthan1percentof nationwidedeposits.TrustAtlanticcontrolsTrustAtlanticBank,whichoperatesonlyinNorthCarolina.TrustAtlanticisthe41stlargestinsureddepositoryorganizationinNorthCarolina,controlling $392.4millionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,FirstHorizonwouldremainthe61stlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$26.2billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.FirstHorizonwouldcontroltotaldepositsof approximately$19.0billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InNorthCarolina,FirstHorizonwouldbecomethe 33rdlargestdepositoryorganization,controllingdepositsof approximately$571.6million, 1 12U.S.C.§1842. 2 ThemergerofTrustAtlanticBankintoFirstTennesseeBankissubjecttotheapprovaloftheOfficeofthe ComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct(“Bank MergerAct”).12U.S.C.§1828(c).TheOCCapprovedthebankmergeronSeptember16,2015. 3 12CFR262.3(b). 4 Assetandnationwidedeposit-rankingdataareasofMarch31,2015,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations.

LegalDevelopments:ThirdQuarter,2015 281 whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto whetherthetransactionisprohibitedunderstatelaw.6Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.7Inaddition,theBoardmaynotapprove aninterstateacquisitionif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates,or 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.8 Forpurposesof theBHCAct,FirstHorizon’shomestateisTennessee,andTrustAtlantic’s homestateisNorthCarolina.9FirstHorizoniswellcapitalizedandwellmanagedunder applicablelawandhasasatisfactoryCommunityReinvestmentActrating.10NorthCarolinahasnominimumagerequirement,11andTrustAtlanticBankhasbeeninexistencefor morethanfiveyears. Onconsummationof theproposedtransaction,FirstHorizonwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Inaddition,thecombinedorganizationwouldcontrollessthan1percent of thetotalamountof depositsof insureddepositoryinstitutionsinTrustAtlantic’shome stateof NorthCarolina,theonlystateinwhichFirstHorizonandTrustAtlantichaveoverlappingbankingoperations.12Accordingly,inlightof allthefactsof record,theBoard mayapprovetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby 6 12U.S.C.§1842(d)(1)(A). 7 12U.S.C.§1842(d)(1)(B). 8 12U.S.C.§1842(d)(2)(A)and(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischarteredorheadquarteredoroperatesabranch.See 12U.S.C.§1841(o)(4)–(7). 9 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 10 12U.S.C.§§2901–2908.Therearenostatecommunityreinvestmentlawsapplicabletothiscase. 11 SeeN.C.Gen.Stat.§53-224.19(permittinginterstatemergeracquisitionsbutnotimposinganage requirement). 12 NorthCarolinadoesnotimposealimitonthetotalamountofin-statedepositsthatasinglebankingorganizationmaycontrol.

282 FederalReserveBulletin|January2016 theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.13 FirstHorizonandTrustAtlantichavesubsidiarydepositoryinstitutionsthatcompete directlyinonlytheRaleigh,NorthCarolina,bankingmarket(the“Raleighbankingmarket”).14TheBoardhasconsideredthecompetitiveeffectsof theproposalinthismarketin lightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativeshareof totaldepositsin insureddepositoryinstitutionsinthemarket(“marketdeposits”)thatFirstHorizonwould control;15theconcentrationlevelof marketdepositsandtheincreaseinthatlevel,as measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16and othercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheRaleighbankingmarket.Onconsummationof theproposal,theRaleighbankingmarketwouldremainmoderatelyconcentrated,asmeasuredbytheHHI.TheHHIchangewouldbeminimal,andnumerouscompetitorswouldremaininthemarket.17 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentration of resourcesintheRaleighbankingmarketorinanyotherrelevantbankingmarket. Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. 13 12U.S.C.§1842(c)(1). 14 TheRaleighbankingmarketisdefinedastheRaleighRandMcNallyMarketingArea(“RMA”)andthenon- RMAportionsofFranklin,Harnett,Johnston,andWakeCounties,allinNorthCarolina. 15 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 16 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/department-justiceand-federal-trade-commission-issue-revised-horizontal-merger-guidelines. 17 FirstHorizonoperatesthe18thlargestdepositoryinstitutionintheRaleighbankingmarket,controlling approximately$122.8millionindeposits,whichrepresentlessthan1percentofmarketdeposits.TrustAtlantic operatesthe13thlargestdepositoryorganizationinthesamemarket,controllingdepositsofapproximately $344.1million,whichrepresent1.4percentofmarketdeposits.Onconsummationoftheproposedtransaction, FirstHorizonwouldbecomethe12thlargestdepositoryinstitutioninthemarket,controllingdepositsof approximately$466.9million,whichrepresent1.9percentofmarketdeposits.TheHHIfortheRaleighbankingmarketwouldincreasebyonepointto1439,and31othercompetitorswouldremaininthemarket.

LegalDevelopments:ThirdQuarter,2015 283 Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationonthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformationonthe financialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition, assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof the transaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtocompletefullytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespecially important.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. FirstHorizonandFirstTennesseeBankarebothwellcapitalizedandwouldremainsoon consummationof theproposal.Theproposedtransactioninvolvestheacquisitionand mergerof abankholdingcompany,anditisstructuredasacashandshareexchange,with asubsequentmergerof thesubsidiarydepositoryinstitutions.18Theassetquality,earnings, andliquidityof FirstTennesseeBankandTrustAtlanticBankareconsistentwithapproval, andFirstHorizonappearstohaveadequateresourcestoabsorbthecostsof theproposal andtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospects areconsideredconsistentwithapproval.Basedonitsreviewof therecord,theBoardfinds thatFirstHorizonhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FirstHorizon,TrustAtlantic,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyFirstHorizon,theBoard’ssupervisory experienceswithFirstHorizonandTrustAtlanticandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’recordsof compliancewith applicablebanking,consumerprotection,andanti-money-launderinglaws. FirstHorizon,TrustAtlantic,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.FirstHorizon’sexistingrisk-managementprogramandits directorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsand seniorexecutiveofficersof FirstHorizonhavesubstantialknowledgeof andexperiencein thebankingandfinancialservicessectors. TheBoardalsohasconsideredFirstHorizon’splansforimplementingtheproposal.First Horizonisdevotingsufficientfinancialandotherresourcestoaddressallaspectsof the post-acquisitionintegrationprocessforthisproposal.FirstHorizonwouldimplementits risk-managementpolicies,procedures,andcontrolsatthecombinedorganization,and theseareconsideredacceptablefromasupervisoryperspective.Inaddition,FirstHorizon’s managementhastheexperienceandresourcestoensurethatthecombinedorganization operatesinasafeandsoundmanner,andFirstHorizonplanstointegrateTrustAtlantic’s 18 Aspartoftheproposedtransaction,eachshareofTrustAtlanticcommonstockwouldbeconvertedintoa righttoreceivecashandFirstHorizoncommonstockbasedonafixedexchangeratio.FirstHorizonhasthe financialresourcestofundtheacquisition.

284 FederalReserveBulletin|January2016 existingmanagementandpersonnelinamannerthataugmentsFirstHorizon’s management. TheBoardconsideredacommentontheapplicationcriticizingthedepartureof fourcommerciallendersfromTrustAtlanticshortlyaftertheproposedacquisitionbyFirstHorizon wasmadepublic.Thecommenterexpressedconcernthatthedepartureof fourcommercial lendersfromTrustAtlanticwouldhaveanegativeimpactonFirstHorizon’sfutureprospects.FirstHorizonstatedthatitwasinformedof thedeparturesandanalyzedtheimpact of suchdeparturesonTrustAtlantic’soperations.FirstHorizonalsonotedthatTrustAtlantichastakenstepstohirenewcommerciallendersandthatFirstTennesseeandTrustAtlantictogetherhavedevelopedaplantoaddresstheemployeedepartures. Basedonallthefactsof record,includingFirstHorizon’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof FirstHorizonandTrustAtlanticincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevant depositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).19TheCRA requiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederalfinancial supervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicants withequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics. TheBoardalsoconsidersthesupervisoryassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant.22 19 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 20 12U.S.C.§2901(b). 21 12U.S.C.§2903. 22 TheBoardhasconsideredthatFirstHorizonwillpay$212.5millionrelatedtosettlingclaimsbroughtbythe DOJthatcertainmortgageloansoriginatedbyamortgagesubsidiarybetween2006and2008thatwereinsured bytheFederalHousingAdministrationdidnotmeettheagency’scertificationstandards.ThemortgagesubsidiaryhasbeensoldbyFirstHorizon.

LegalDevelopments:ThirdQuarter,2015 285 A.PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedthreecommentsontheproposalfromtwocommenters criticizingthefairlendingandCRAperformancerecordsof FirstTennesseeBankand TrustAtlanticBank.TheOCCreceivedandconsideredthesamecommentsinconnection withitsreviewof theunderlyingbankmergerapplication. Acommenterobjectstotheproposalonthebasisof FirstTennesseeBank’sCRAlending recordtoLMIborrowersthroughoutitsassessmentareas,asreflectedinthebank’smost recentCRAperformanceevaluationbytheOCC,asof January11,2010(“FirstTennessee BankEvaluation”),and,inparticular,intheMemphis,Tennessee-Mississippi-Arkansas MultistateMetropolitanStatisticalArea(“MemphisMSA”),theChattanooga,Tennessee- GeorgiaMultistateMetropolitanStatisticalArea(“ChattanoogaMSA”),andtheNashville MetropolitanStatisticalArea(“NashvilleMSA”).Thiscommenteralsoexpressesconcerns withFirstTennesseeBank’ssmallbusinesslendingintheChattanoogaMSA.Thecommenteralsoobjectstotheproposalonthebasisof TrustAtlanticBank’slendingrecordto LMIborrowersintheWakeCountyassessmentarea(“WakeCountyAA”)andthePitt Countyassessmentarea(“PittCountyAA”),asreflectedinTrustAtlanticBank’smost recentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation (“FDIC”),asof August22,2013(“TrustAtlanticBankEvaluation”).Inaddition,thecommenternotesthatFirstTennesseeBankreceivedanoverall“LowSatisfactory”ratingon theInvestmentTestintheFirstTennesseeBankEvaluation. Acommenteralsoobjectstotheproposalonthebasisof FirstTennesseeBank’slending recordtominorityborrowersintheMemphisMSAandtheRaleigh,NorthCarolina,MetropolitanStatisticalArea(“RaleighMSA”),asreflectedindatareportedundertheHome MortgageDisclosureAct(“HMDA”)23for2013.Anothercommenterexpressesconcerns withFirstTennesseeBank’srecordinlendingtominoritycommunitiesintheChattanooga MSA,theKnoxvilleMetropolitanStatisticalArea(“KnoxvilleMSA”),theMemphisMSA, andtheNashvilleMSA,asreflectedinHMDAdata.ThiscommenteralsoexpressesconcernwithFirstTennesseeBank’slackof collectionof HMDA-mandatedinformation regardingtheraceof potentialborrowersintheChattanooga,Knoxville,Memphis,and NashvilleMSAs. FirstTennesseeBank’sBusinessandResponsetoComments.FirstTennesseeBank’sbusinessmodelhassignificantlychangedsince2008.Priorto2008,FirstTennesseeBankoperatedasamultistatebankwithnationallendingoperationsoutsideof itscurrentretail bankingfootprintinGeorgia,Mississippi,NorthCarolina,andTennessee.Thebank’s nationallendingoperationsincludedfinancialcentersinTexasandVirginia,andan expandedpresenceinGeorgia,aswellasanextensivenetworkof mortgageproduction officesdoingbusinessunderthenameFirstHorizonHomeLoans. In2008,FirstTennesseeBankdivestedamajorityof itsbankbranchesandexitedthe nationallendingbusinessthroughthesaletoanunaffiliatedthirdpartyof theFirstHorizonHomeLoansbusiness,includingapproximately250mortgageproductionofficesand itsloanoriginationandservicingplatforms.TheseplatformspreviouslyhadallowedFirst TennesseeBanktooriginategovernment-guaranteedandconventionalhomepurchase loansthatrequireescrowcapabilities.Concurrentwiththesaleof FirstHorizonHome Loans,FirstTennesseeBankenteredintoanagreementwithathirdparty,PHHMortgage Corporation,topermitthebanktoprovidegovernment-guaranteedhomepurchasemortgageloanswithescrowcapabilitiesinitslocalcommunities.Thoseloanswerereflectedin 23 12U.S.C.§2801etseq.

286 FederalReserveBulletin|January2016 FirstTennesseeBank’sHMDAreportashomemortgageloansoriginatedbyFirstTennesseeBank.TheagreementwithPHHMortgageCorporationexpiredin2012andwasnot renewed.Subsequently,FirstTennesseeBankenteredintobrokerrelationshipswith QuickenLoans,underwhichthebank’sloanspecialistsassistmortgageapplicantswho wishtoobtainagovernment-guaranteedloansincompletingapplicationsforgovernmentguaranteedandconventionalhomepurchaseloansthatrequireescrowcapabilitiesand referthoseapplicationstoQuickenLoansforreviewandprocessing.FirstTennesseeBank doesnotreceivecreditundertheCRAforanyloansoriginatedbyQuickenLoanspursuant tothebrokerrelationship.FirstTennesseeBankrepresentsthat,pursuanttothisbroker relationship,itprovided7,922referralstoQuickenLoansfrom2012to2014,whicharenot reflectedinitsHMDAdata.FirstTennesseeBankrepresentsthatitisnegotiatingcorrespondentrelationshipswithQuickenLoansandtwootherthird-partylenderstobeableto closeloansforwhichitwouldreceiveCRAcredit.FirstTennesseeBankanticipatescompletingthosecontractnegotiationsbytheendof November. FirstTennesseeBankcurrentlyoffershomemortgageloans,aswellasrefinanceandhome improvementloans;government-guaranteedloans,however,areonlyofferedthroughthe brokerrelationshipwithQuickenLoans.FirstTennesseeBankdoesnotaccepthomeloan applicationsinpersonatitsbranchlocations;rather,suchapplicationsaretakenremotely atacentralizedlendingunitthatacceptsapplicationsbyphone. FirstHorizonarguesthatFirstTennesseeBank’sperformanceinhomepurchaselendingto LMIareasintheMemphisMSA,theChattanoogaMSA,andtheNashvilleMSAwas impactedbychangestothebank’sbusinessoperations,inparticulartheexpirationof its contractwithPHHMortgageCorporationin2012.Upontheterminationof thatcontract, FirstTennesseeBankwasnolongerabletoprovidegovernment-guaranteedhomepurchasemortgageloansinitslocalcommunities.FirstHorizonemphasizesthatexaminers foundthebank’soverallhomeloanoriginationstobesatisfactoryintheFirstTennessee BankEvaluation,notwithstandingthechangeinFirstTennesseeBank’sbusiness operationsandthatthenumberof homepurchaseloansoriginatedbyFirstTennessee Bankwaslow. FirstHorizonassertsthatthepercentagesof homeloansinFirstTennesseeBank’sassessmentareas,asreflectedintheFirstTennesseeBankEvaluation,werelowerduetothesignificantchangestothebank’sbusinessmodelthatoccurredin2008,asdescribedabove.In addition,FirstHorizonemphasizesthatthebank’soveralllevelof homeloanoriginations wasfoundtobesatisfactorybyexaminersintheFirstTennesseeBankEvaluation.First Horizonrepresentsthatitsaggregatelendingfigureswithinitsassessmentareaschanged significantlysubsequenttotheperiodreviewedintheFirstTennesseeBankEvaluation,as thebankhadsignificantlychangeditsbusinessmodelatthattime.Specifically,FirstHorizonnotesthatduringtheperiodfrom2010through2014,mostof FirstTennesseeBank’s homeloanswereoriginatedwithinthebank’sassessmentareas,including90percentof the loansoriginatedinitsassessmentareasin2014. Inresponsetoacommenter’sobservationthatexaminersfoundthebank’spercentageof loanstobusinesseswithrevenuesof $1millionorlesswaslowerthanthepercentageof smallbusinesseswithintheChattanoogaMSAintheFirstTennesseeBankEvaluation,FirstHorizonarguesthatthepercentageof FirstTennesseeBank’ssmallbusiness loansinbothlow-incomeandmoderate-incomegeographiessignificantlyexceededthepercentagesof businesseslocatedinthosesegmentsintheassessmentarea,andthatFirst TennesseeBank’smarketshareof smallloanstobusinessesinsuchcommunitiessignificantlyexceededitsoverallmarketshare.FirstHorizonfurtherassertsthatFirstTennessee Bankhasanumberof productsdesignedforsmallbusinessborrowers,includingsecured termloans,smallbusinesscreditcards,securedandunsecuredlinesof credit,andsmall

LegalDevelopments:ThirdQuarter,2015 287 businesscreditproductsthroughtheSmallBusinessAdministration’s504,7(a),and CAPLinesprogramsthatbenefitsmallfor-profitandnot-for-profitbusinesses.FirstHorizonassertsthat,tosupplementitseffortstoservetheneedsof smallbusinessborrowers, thebankhasamarketingalliancewithathird-partylenderthathelpshigher-risksmall businessborrowersobtaincreditproducts.Finally,FirstHorizonemphasizesthatexaminers’overallassessmentof FirstTennesseeBank’srecordof smallbusinesslendingwas “Satisfactory.” FirstHorizonarguesthatTrustAtlanticBank’sdistributionof homemortgageloans amongvariouscensustractsintheWakeCountyAAin2011and2012reflectedanoverall excellentpenetrationrateinlow-andmoderate-incomeareas.FirstHorizonfurtherasserts thatTrustAtlanticBank’sdistributionof homemortgageloansinmoderate-incomecensus tractsinthePittCountyAAreflectedexcellentpenetrationin2011and2012.Although TrustAtlanticBankdidnotoriginateanyhomemortgageloansinthelow-incomecensus tractsof thePittCountyAAin2011and2012,FirstHorizoncontendsthatonly 0.6percentof owner-occupiedhousinginthePittCountyAAislocatedinthelow-income tractsandthataggregatelendingconstitutedonly0.5percentinthosecensustracts. FirstHorizonasserts,inresponsetothecommentonFirstTennessee’sperformanceonthe InvestmentTestintheFirstTennesseeBankEvaluation,thatitsprivatecharitablefoundation,establishedin1993,hasdonatedsubstantialamountstomeetcommunityneeds, includinggrantsduring2014tolocalorganizationsintheMid-Atlanticregioninvolvedin affordablehousing,healthcare,andfinancialliteracy.FirstHorizonfurtherassertsthatit hasenhanceditsinvestmentactivitiesandthoseof FirstTennesseeBanksincetheFirst TennesseeBankEvaluation,includingbyprovidingfinancingtoaTreasury-certifiedCommunityDevelopmentFinancialInstitutionthatprovidesaffordablefinancingandrelated developmentservices,investingintheFederalHomeLoanBankof Tennessee(whichoverseesagrantprogramfornonprofitagenciestodevelopaffordablehousing)andestablishing theFirstTennesseeHousingCorporationtodevelopaffordablemultifamilyhousing.First HorizonalsostatesthatFirstTennesseeBankmadecontributionsduring2014tocommunityorganizationsthathaveadirectimpactonmeetingthelendingneedsof LMIpersonsintheRaleighandWinston-SalemcommunitiesinNorthCarolina. FirstHorizonassertsthatthebank’sabilitytocollectinformationontheethnicity,race, andsexof applicants,afocusof acomment,isimpactedbyitscurrentlendingstrategy,in whichittakesloanapplicationsonlythroughaprocessusingacentralizedcallcenter.First Horizonassertsthat,althoughthebankfollowsspecificprocessesthroughitsloanoriginationprocesstorequesttherequiredinformationontheethnicity,race,andsexof applicantsinitsloanapplicationprocess,itcannotrequireanapplicanttoprovidethe information. FirstHorizonstatesthatitsanalysisof applicationsbycensustractsindicatesaclosecorrelationbetweenitslendingactivitiesandtheownershipopportunitiesbasedonowner-occupiedhousingunitsandrentalhousinginsuchcensustracts,andthattheHMDAdata ratioscitedbythecommentersdonotaccuratelyreflectFirstTennesseeBank’scompliance withfairlendinglaws.Inthisrespect,FirstHorizonnotesthatthelackof informationon theethnicity,race,andsexof applicantsresultingfromitshomemortgageapplicationprocessesmakescomparisonsbetweenracialorethnicgroupsunreliable.FirstHorizonalso notesthatitsbusinessmodel,inwhichitdoesnotcurrentlyoffergovernment-guaranteed homepurchaseloans,resultsinsignificantlyfewerhomepurchaseloansascomparedto competitorsandinsignificantlyfewerhomepurchaseloansbyfirst-timehomebuyers, bothof whichfactorscontributetothedisparitiesnotedbycommenters.Inaddition,First Horizoncontendsthatithasacomprehensivefairlendingcomplianceprogramtoensure compliancewithfairlendinglaws.

288 FederalReserveBulletin|January2016 B.Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbycommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.24Inthiscase,theBoardconsideredthe supervisoryviewsof andinformationprovidedbytheOCC,theFDIC,andtheConsumer FinancialProtectionBureau(“CFPB”). TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.25Aninstitution’smostrecentCRA performanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimaryfederal supervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdatainadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulationstoassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable),inthe institution’sassessmentareas;thegeographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumber andamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;26theinstitution’scommunitydevelopmentlending,includingthenumberandamount of communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.27 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at11665 (2010). 25 12U.S.C.§2906. 26 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 27 Otherdatarelevanttoafairlendinganalysiscouldinclude,forexample,informationoncredithistoryproblems,debt-to-incomeratios,andloan-to-valueratios(thereasonsmostfrequentlycitedforacreditdenial orhighercreditcost).

LegalDevelopments:ThirdQuarter,2015 289 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof FirstTennesseeBank.FirstTennesseeBankwasassignedanoverall “Satisfactory”ratingintheFirstTennesseeBankEvaluation.FirstTennesseeBank receiveda“HighSatisfactory”ratingforboththeLendingTestandtheServiceTest,anda “LowSatisfactory”ratingfortheInvestmentTest.TheBoardhasconsultedwiththeOCC regardingtheFirstTennesseeBankEvaluation. ExaminersfoundFirstTennesseeBank’scommunitydevelopmentlendingtobeagood andpositivefactorinthoseassessmentareasinwhichthebankmaintainedanongoing presence.ExaminersalsonotedthatFirstTennesseeBankhadanadequatelevelof qualifiedinvestmentsbasedontheinvestmentopportunitiesanddollarvolumeof investments madeintheassessmentareasandprovidedagoodlevelof communitydevelopmentservicesinthoseassessmentareasinwhichFirstTennesseeBankmaintainedanongoing presence.28 Examinersfoundthatthebank’soveralllendingactivityreflectedgoodresponsivenessto thebank’sdepositmarketshareandassessmentareacreditneeds,withagooddistribution of homemortgageloansbyincomelevelorgeography,aswellasagooddistributionof loanstoborrowersof differentincomelevelsandbusinessesof differentsizes.29Examiners foundthat,althoughthebankcouldimprovethedistributionof homepurchaseloansin LMIareas,itsoverallgeographicdistributionof loansinthebank’sassessmentareaswas goodwhenthegeographicdistributionof loanstosmallbusinesses,homeimprovement loans,andhomerefinanceloanswereincluded.ExaminersfoundthatFirstTennessee Bank’sgeographicdistributionof smallbusinessloansinLMIareaswasexcellent,butthat thebankcouldimproveitsborrowerdistributionof suchloansintheChattanoogaMSA. Examinersnotedthatthebankoriginatedamajorityof itsloanswithinitsdesignated assessmentareasduringthereviewperiod. Examinersnotedthat,inassessmentareasinwhichFirstTennesseeBankmaintainedan ongoingpresence,itslevelof communitydevelopmentloanswasgoodandapositivefactor thatreflectedresponsivenesstovaryingneedsintheassessmentareas.Forexample,examinersnotedthatthebank’srecordof originatingcommunitydevelopmentloansinboththe ChattanoogaMSAandtheMemphisMSAduringtheevaluationperiodwasgoodandhad apositiveimpactonthebank’slendingtestandthattherecordreflectedavarietyof communitydevelopmentpurposes,includingaffordablehousing,communityservicestargeted toLMIindividuals,economicdevelopment,andrevitalizationandstabilizationof LMI areasof thebank’sassessmentareas. FirstTennesseeBank’scommunitydevelopmentlendingactivitiesincludedproviding financingtosupportconstructionof studenthousingatahistoricallyblackcollegeand university,financingforabaseballstadiuminaformerlyblightedcommunity,makinga loantoconstructaworkforcetrainingcenterforpeoplewithspecialneeds,andhelpingsev- 28 TheFirstTennesseeBankEvaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures.ExaminersreviewedHMDA-relatedmortgageloandataandCRA-reportablesmallbusinesslending activityreportedbyFirstTennesseeBankfromJanuary1,2004,toDecember31,2009,andreviewedcommunitydevelopmentloans,investments,services,andretailservicesfromJanuary1,2005,toDecember31,2009. TheOCCreviewedamajorityofthebank’sassessmentareasusinganevaluationperiodofapproximately 12to24months.ThisshorterevaluationperiodwasusedbecauseFirstTennesseeBankceaseditspresencein manyassessmentareaspriortotheendof2009. 29 Examinersplacedgreaterweightonthebank’sperformanceinthreeassessmentareas(theMemphisMSA,the ChattanoogaMSA,andthestateofTennessee),astheseareasrepresentedthebank’smostsignificantmarkets intermsofdepositconcentrations,lending,investments,andserviceactivity.

290 FederalReserveBulletin|January2016 eralsmallcommunitiesrecoverfromdisastersbyextendingloansforinfrastructureand essentialequipment.Inaddition,FirstTennesseeBankworkedwithlocalorganizationsto meetuniquelendingneeds,forexample,bypartneringwiththeBusinessExpansionFundingCorporation,acommunitydevelopmentcorporationinNorthCarolina,toextenda loanundertheSmallBusinessAdministration’sSection504loanprogramtoasmallbusinessinWakeCounty,NorthCarolina,thatwasanticipatedtocreatemanynewjobsinthe localcommunity. ExaminersfoundthatFirstTennesseeBankhadanadequatelevelof qualifiedcommunity developmentinvestmentsbasedontheinvestmentopportunitiesanddollarvolumeof investmentsmadeinFirstTennesseeBank’sassessmentareas.Duringtheevaluation period,FirstTennesseeBank’stotalinvestmentsconsistedprimarilyof LowIncomeHousingTaxCreditinvestments,andexaminersfoundthattheseinvestmentswereveryresponsivetoaffordablehousingneedsandrequiredconsiderablemanagementtimeandexpertise tomonitorthebank’sinvestmentportfolio.ExaminersnotedthatFirstTennesseeBank hadanadequatevolumeof communitydevelopmentinvestmentsintheMemphis MSAthataddressedtheneedforaffordablehousingandcommunityservicesforLMI individuals. ExaminersobservedthatFirstTennesseeBank’sbranchlocationswereaccessibleinthe assessmentareasinwhichthebankmaintainedanongoingpresence.Examinersnotedthat thebankprovidedagoodlevelof communitydevelopmentservicesintheMemphisMSA andChattanoogaMSA,withagooddistributionof bankbranchesinbothlow-andmoderate-incomegeographies.ExaminersalsonotedthatFirstTennesseeBankhadagood levelof communitydevelopmentservicesintheMemphisMSAandahighlevelof communitydevelopmentservicesintheChattanoogaMSA. FirstTennesseeBank’sEffortsSincetheFirstTennesseeBankEvaluation.FirstHorizon assertsthat,sincetheFirstTennesseeBankEvaluation,FirstTennesseeBankhasbeenan activepartnerinnumerouscommunitydevelopmentinitiativestomeettheneedsof its localcommunitiesintheareasof lending,investments,andservices.FirstTennesseeBank hasmadecommunitydevelopmentloansthatsupportaffordablehousing,economicdevelopment,stabilizationandrevitalization,andcommunityservices.Suchlendingactivities includedmakingcommunitydevelopmentloansforthepurposeof providingchildcare, education,andaccesstohealthandothersocialservicesforLMIindividualsandminority individualsinthecommunitiesitserves,aswellasfinancingsmallbusinessestopromote growthandeconomicdevelopmentinanumberof theLMIcommunitiesitserves.First Horizonassertsthatitestablishedatargetof originatingupto30percentof itsmortgage loanstoLMIborrowersorinLMIgeographies,withaheightenedfocusontheChattanooga,Memphis,Raleigh,andWakeCountyassessmentareas.Infurtheranceof thisgoal, FirstHorizonnotesthatithasbeenengagedindiscussionswiththird-partymortgagelenderstoestablishrelationshipsthatwouldpermitFirstTennesseeBanktooriginategovernment-guaranteedmortgageloansandconventionalhomemortgagepurchaseloansthat requireescrowcapabilities.FirstTennesseeBankalsohaspartneredwithOperationHope toprovidecreditcounseling,budgeting,andotherfinancialempowermenttrainingtoindividualswhoearnlessthan$50,000peryearandhascommittedtoestablishingatleastten locationsinwhichsuchserviceswillbeprovidedoverthenexttwoyears.FirstHorizonfurthercontendsthatitperiodicallyreviewsitsbranchstrategytoensurethatFirstTennessee Bank’sbranchdeliverysystemservesitscustomersthroughoutitslocalcommunities, includingLMIareas.Asdescribedabove,FirstTennesseeBankalsohascontinueddevelopingitssmallbusinessproductofferingsundertheSmallBusinessAdministration’s504, 7(a),andCAPLinesprograms,andthebankhasstatedthatitwillrecruitatargetedSmall BusinessAdministrationbusinessdevelopmentofficerbytheendof 2015tomarketits SmallBusinessAdministrationprograms.TheBankalsohascommittedtooriginating

LegalDevelopments:ThirdQuarter,2015 291 30percentof itsloanstosmallbusinessesinLMIgeographiesthroughoutallof itscurrent assessmentareas. FirstHorizonassertsthatFirstTennesseeBankhasmadecommunitydevelopmentinvestmentsforthepurposeof providingsafeandaffordablehousing,childcare,education,and accesstohealthandothersocialservicesforLMIindividualsandminorityindividualsin thecommunitiesitserves.FirstHorizonalsomaintainsthatFirstTennesseeBankcontributedtoprojectstorevitalizeandstabilizedistressedcommunitiesacrossitsassessment areas.FirstHorizonnotesthatitstotalqualifiedinvestmentsdeclinedin2013and2014due tothereductionintheavailabilityof LowIncomeHousingTaxCreditinvestmentsinthose yearsasaresultof theconditionof thehousingmarket.Inaddition,FirstHorizonrepresentsthatFirstTennesseeBankhascommittedtoinvestatleastonepercentof itsTier1 capitalonanannualbasistocommunitydevelopmentactivities. FirstHorizonrepresentsthatFirstTennesseeBank’scommunitydevelopmentservice activitieshaveincludedactingasthefinancialsponsorforanumberof activitiestopromotefinancialliteracy.Inaddition,FirstHorizonassertsthatFirstTennesseeBank employeeshaveprovidedthousandsof hoursof volunteerservicestosupportconsumers andcivicorganizations. CRAPerformanceof TrustAtlanticBank.TheTrustAtlanticBankEvaluationwasconductedbytheFDICusingtheIntermediateSmallBankCRAExaminationProcedures.30 TrustAtlanticBankwasassigneda“Satisfactory”ratingintheTrustAtlanticBankEvaluation,withratingsof “Satisfactory”fortheLendingTestand“Outstanding”fortheCommunityDevelopmentTest.31ExaminersnotedthatTrustAtlanticBankprovidedforthe creditneedsandeconomicdevelopmentof theassessmentareasinamannerconsistent withitssize,financialcapacity,location,andlocaleconomicconditions.32TheBoardhas consultedwiththeFDIC,theprimarysupervisorof TrustAtlanticBank,regardingthe TrustAtlanticBankEvaluation. Examinersnotedthatthebankoriginatedamajorityof itsloanswithinitsassessment area,demonstratingreasonableperformance.Examinersfoundthatthebank’sgeographic distributionof homemortgageloansreflectedanexcellentpenetrationrateinLMIareasin boththeWakeCountyAAandPittCountyAAandthatsmallbusinessloansreflecteda marginallyreasonabledispersionthroughouttheWakeCountyAAandanexcellentdispersionthroughoutthePittCountyAA.Examinersalsofoundthatthebank’sdistributionof loanstoborrowersreflectedanoverallreasonabledistributionamongindividualsof differentincomelevelsandbusinessesof differentsizes.Nevertheless,examinersconcludedthat thebankhadroomtoimproveitsperformanceinhomemortgagelendingtoLMIborrowersintheWakeCountyAAandPittCountyAA. 30 Thelendingtestapplicabletointermediatesmallbanksspecificallyevaluatestheinstitution’sloan-to-deposit ratioandotherlending-relatedactivities,suchasloanoriginationsforsaletothesecondarymarkets,communitydevelopmentloans,orqualifiedinvestments;thepercentageofloansandotherlending-relatedactivities locatedinthebank’sassessmentareas;thebank’srecordoflendingtoandengaginginotherlending-related activitiesforborrowersofdifferentincomelevelsandbusinessesandfarmsofdifferentsizes;thegeographic distributionofthebank’sloans;andthebank’srecordoftakingactioninresponsetowrittencomplaints aboutitsperformanceinhelpingtomeetcreditneedsinitsassessmentareas.See,e.g.,12CFR228.26(b). 31 Examinersreviewedthebank’scommercialandresidentiallendingactivityfromJune30,2012,toJune30, 2013.Theseproductswereselectedforanalysisbecausetheyrepresented52percentand29percent,respectively, ofthebank’sloanportfolio. 32 TheTrustAtlanticBankEvaluationreviewedthebank’stwoassessmentareas,includingincludeWakeCounty, whichispartofthethree-countyRaleigh-CaryMetropolitanStatisticalArea,andPittCounty,whichencompassestheentireGreenvilleMetropolitanStatisticalArea,bothinNorthCarolina.

292 FederalReserveBulletin|January2016 ExaminersnotedthatTrustAtlanticBank’scommunitydevelopmentperformancedemonstratedexcellentresponsivenesstothecommunity’sdevelopmentneedsinitsassessment areas.ExaminersalsofoundthatTrustAtlanticBankprovidedanadequatelevelof communitydevelopmentservicesthroughitsemployeeinvolvementincommunitydevelopment organizations. Viewsof OtherRegulatorsandOCCApprovalof theBankMerger.TheBoardhasconsultedwiththeOCC,theprimarysupervisorof FirstTennesseeBank,inconnectionwith theOCC’sreviewof theproposedmergerof FirstTennesseeBankandTrustAtlantic Bank,whichisasubstantivepartof theproposalbeforetheBoard.TheOCCreceived commentssubstantiallyidenticaltothecommentssubmittedtotheBoardandconducteda reviewof thesecommentsastheypertaintothetwobanks,takingintoconsiderationthe HMDAdatacitedbythecommenters;FirstTennesseeBank’sCRA,consumercompliance,andfairlendingrecords;thebank’smarketingoutreachtoAfricanAmericansand HispanicsandinLMIcommunities;andothercommunityoutreachefforts.TheOCC foundthatalthoughFirstTennesseeBank’sperformanceundertheCRAwassatisfactory, theFirstTennesseeBankEvaluationandpubliccommentontheproposalidentifiedareas forimprovementforthebankinNorthCarolina,specificallywithrespecttoFirstTennesseeBank’sprovisionof productsandservicestoLMIindividualsandinLMIgeographies, tominorityindividualswithinitsassessmentareas,andinFirstTennesseeBank’sInvestmentTestperformance. Afterafullreviewof theproposal,includingconsiderationof thepubliccomments,the OCCdeterminedthattheproposalmetthestandardsof theBankMergerActand approvedtheproposalapplyingthesamestandardsasmustbereviewedbytheBoard undertheBHCAct.AsaconditiontoapprovingtheBankMergerActapplication,the OCCrequiredFirstTennesseeBanktodevelopaCRAPlanwithin90daysof theOCC’s actiononthebankmergerthatcontainsmeasureableannualgoalsandtimetablesto achievethediscretegoalsdiscussedintheCRAPlan.Thisplanisdesignedtoensurethat FirstTennesseeBankaddressesweaknessesinitsperformanceandimplementsaprogram suitabletotheincreasedsizeandcomplexitythatresultsfromconsummationof this proposal. C.PublicBenefitsof theProposal Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.OnecommenterexpressedconcernthatFirstHorizonhasnotdemonstratedhow theproposalwouldresultinclearpublicbenefits. FirstHorizonrepresentedthattheproposalwouldimproveconvenienceforcustomersby providingthemwithabroaderrangeof financialproductsandservicesthroughan expandedbranchnetwork.FirstHorizonrepresentedthatcustomersof TrustAtlantic Bankwouldhaveaccesstoadditionaldepositproducts,includingwholesaleandretaillockboxandamoreadvancedremotedepositcaptureproduct;disbursementproductswith fraudprotection;purchaseandpayrollcards;electronicbillpay;moresophisticatedwire transferandACHsystems;mobilebanking;creditcardsanddebitcardsthatcanbereissuedwithinbranchoffices;financialplanningforindividualsandfamilies;investmentmanagement;afullservicetrustdepartment;andalargerlegallendinglimit.AccordingtoFirst Horizon,TrustAtlanticBank’scustomersalsowouldbenefitfromFirstTennesseeBank’s broaderexpertiseinspecializedsegmentsincludinglargercommercialsegmentsnotcurrentlyservedbyTrustAtlanticBankandindustrysegmentssuchashealthcare,transportation,consumerfinance,andasset-basedlending;governmentandmunicipalfinance;inter-

LegalDevelopments:ThirdQuarter,2015 293 estrateprotectionproducts;andancillaryservicesthatincludeafull-serviceinternational department. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA;theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws;consultationswiththeOCC,the FDIC,andtheCFPB;confidentialsupervisoryinformation;informationprovidedbyFirst Horizon;andthepubliccommentsontheproposal.Basedonthatreview,theBoardconcludesthattheproposalwouldresultinpublicbenefitsandthattheconvenienceandneeds factorisconsistentwithapproval. TheBoardexpectsFirstHorizontocontinuemakingprogresstoaddressweaknessesinthe CRAperformanceof itsbanksandtoimplementaprogramforlending,investments,and servicesthatiscommensuratewiththesize,complexity,andexpandinggeographyof the combinedorganization.ThisincludesexecutingCRAplansthataddressanyweaknessesin theperformanceof thebanksbeforeFirstHorizonseekstoengageinfurtherexpansionary activity.TheBoardwillmonitorprogressbyFirstHorizonaspartof thesupervisory process. 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,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.35 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,FirstHorizonwouldhaveapproximately $26.1billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,FirstHorizonwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypre- 33 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

294 FederalReserveBulletin|January2016 sumesthatamergerthatinvolvesanacquisitionof lessthan$2billioninassetswillnot posesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthe transactionwouldresultinasignificantincreaseininterconnectedness,complexity,crossborderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthis transaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.36Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicants withalltheconditionsimposedinthisOrder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,as such,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof St.Louis,actingpursuanttodelegated authority. Byorderof theBoardof Governors,effectiveSeptember17,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, PowellandBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 36 ThecommentersrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCAct doesnotrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately representtheirviews.TheBoardhasconsideredtherequestinlightofallthefactsofrecord.IntheBoard’s view,thecommentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submitted writtencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’requestsdonot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthecommenters’viewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthesereasons,and basedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedin thiscase.Accordingly,therequestsforapublichearingontheproposalaredenied.

LegalDevelopments:ThirdQuarter,2015 295 Empresas Juan Yarur SpA Santiago, Chile OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2015–25(September21,2015) EmpresasJuanYarurSpA(“EJY”)anditssubsidiary,BancodeCreditoeInversionesS.A. (“BCI”and,collectivelywithEJY,“Applicants”),bothof Santiago,Chile,foreignbanking organizationssubjecttotheprovisionsof theBankHoldingCompanyAct(“BHCAct”),1 haverequestedtheBoard’sapprovalundersection3(a)(1)of theBHCActtoacquireCM FloridaHoldings,Inc.(“CMFlorida”),CoralGables,Florida,andtherebyindirectlyto acquireitssubsidiarybank,CityNationalBankof Florida(“CityNational”),Miami, Florida. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(78FederalRegister42074(July15,2013)).Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. EJY,withtotalassetsof approximately$36.8billion,isthefourthlargestbankingorganizationinChile.2EJY,throughitssubsidiaries,includingBCI,engagesinbankingand insuranceservicesthroughoutChile.OutsideChile,BCIoperatesrepresentativeofficesin Peru,Brazil,Colombia,Mexico,andSpain.IntheUnitedStates,BCIoperatesabranchin Miami,Florida.EJYandBCIareeachqualifyingforeignbankingorganizationsandon consummationof theproposalwouldcontinuetomeettherequirementsforaqualifying foreignbankingorganizationunderRegulationK.3 CMFlorida,withconsolidatedassetsof approximately$5.6billion,isthe215thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$4.3billion indeposits.4CMFloridacontrolsCityNational,whichoperatesonlyinFlorida.City Nationalisthe18thlargestinsureddepositoryinstitutioninFlorida,controllingapproximately$4.3billionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.5 Onconsummationof theproposal,EJYthroughBCIwouldbecomethe180thlargest insureddepositoryorganizationintheUnitedStates,withconsolidatedassetsintheUnited Statesof approximately$7.5billion,whichrepresentslessthan1percentof thetotalassets of insureddepositoryorganizationsintheUnitedStates.EJYwouldcontrolapproximately $4.3billionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsintheUnitedStates.InFlorida,EJYwouldbecomethe18thlargest depositoryorganization,controllingapproximately$4.3billionindeposits,representing lessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. FactorsundertheBankHoldingCompanyAct TheBHCActsetsforththefactorsthattheBoardmustconsiderwhenreviewingtheformationof bankholdingcompaniesortheacquisitionof banks.Thesefactorsincludethe 1 12U.S.C.§1842. 2 ForeignassetandrankingdataareasofMarch31,2015. 3 12CFR211.23(a). 4 AssetandnationwidedepositdataareasofMarch31,2015,unlessotherwisenoted. 5 Statewidedeposit-rankingdataareasofJune30,2014.Inthiscontext,insureddepositoryinstitutionsinclude commercialbanks,savingsbanks,andsavingsandloanassociations.

296 FederalReserveBulletin|January2016 competitiveeffectsof theproposalintherelevantgeographicmarkets;thefinancialand managerialresourcesandfutureprospectsof thecompaniesandbanksinvolvedintheproposal;theavailabilityof informationtodetermineandenforcecompliancewiththeBHC Actandotherapplicablefederalbankinglaws;theconvenienceandneedsof thecommunitiestobeserved,includingtherecordsof performanceof theinsureddepositoryinstitutionsinvolvedinthetransactionundertheCommunityReinvestmentAct(“CRA”);6the effectsof theacquisitiononfinancialstability;and,inthecaseof anapplicationinvolving aforeignbank,whethertheforeignbank,includingitsparentholdingcompany,issubject tocomprehensivesupervisionandregulationonaconsolidatedbasisbyitshomecountry supervisor.7 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.8 ApplicantsandCMFloridadonotcompeteinanyrelevantbankingmarket.9Basedonall thefactsof record,theBoardconcludesthatconsummationof theproposalwouldnot haveasignificantlyadverseeffectoncompetitionorontheconcentrationof banking resourcesinanyrelevantbankingmarketandthatcompetitivefactorsareconsistentwith approvalof theproposal. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved,aswellastheeffectivenessof thesecompaniesincombattingmoney-launderingactivities.10TheBoardalsoconsiderswhetheranapplicanthasprovidedadequateassurancesthatitwillmakeavailableto theBoardsuchinformationonitsoperationsandactivitiesandthoseof itsaffiliatesthat theBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct. Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,including capitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthe financialconditionof thecombinedorganizationonaproformabasis,includingitscapital position,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorb thecostsof theproposalandtheproposedintegrationof theoperationsof theinstitutions. 6 U.S.C.§2901etseq. 7 U.S.C.§1842(c). 8 12U.S.C.§1842(c)(1). 9 BCI’sMiamibranchisnotinsuredbytheFederalDepositInsuranceCorporationandgenerallycannotaccept retaildeposits. 10 TheBoardhasanalyzedtheeffectivenessofApplicants’anti-money-launderingeffortsinconnectionwiththe Board’sassessmentofwhetherApplicantsaresubjecttocomprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthoritiesintheirhomecountry.

LegalDevelopments:ThirdQuarter,2015 297 Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. Thecapitallevelsof bothEJYandBCIexceedtheminimumlevelsthatwouldberequired undertheBaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthat wouldberequiredof aU.S.bankingorganization.11BCI’sreportedearningsperformance andassetqualityindicators,includingnonperformingloansandreservesforloanlosses,are consistentwithapproval.Theproposedtransactionisstructuredascashforpurchaseof shares.BCIwouldfundthetransactionwithexistingresources,includingpreviouslyissued subordinateddebtof $311.8million.12Applicantsappeartohaveadequateresourcesto absorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations. Inaddition,futureprospectsareconsideredconsistentwithapproval.Basedonitsreview of therecord,theBoardfindsthatApplicantshavesufficientfinancialresourcestoeffect theproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Applicants’U.S.operations,CMFlorida,andCityNational,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyApplicants,theBoard’ssupervisoryexperienceand thoseof theotherrelevantbanksupervisoryagencieswiththeorganizations,including throughconsultationsinconnectionwiththisproposal,andtheorganizations’recordsof compliancewithapplicablebankingandanti-money-launderinglaws.TheBoardalsohas consultedwiththeSuperintendenciadeBancoseInstitucionesFinancieras(“SBIF”),the agencywithprimaryresponsibilityforthesupervisionandregulationof Chileanbanking organizations,includingBCI. TheBoardhasreviewedtherestrictionsondisclosureintherelevantjurisdictionsinwhich theApplicantsoperateandhascommunicatedwithrelevantgovernmentauthoritiesconcerningaccesstoinformation.Inaddition,Applicantshavecommittedthattheywillmake availabletotheBoardsuchinformationontheiroperationsandtheoperationsof their affiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththe BHCAct,theInternationalBankingAct,andotherapplicablefederallaws. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellasaccesstoinformationbytheBoard,areconsistentwithapproval. SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplication,andasrequiredbysection3of theBHCAct,theBoardconsideredwhethertheApplicantsaresubjecttocomprehensivesupervisionorregulationon aconsolidatedbasisbyappropriateauthoritiesintheirhomecountry.13 11 TheBoardconsideredthetotalandtier1risk-basedcapitalratiosandtheratiooftier1capitaltototalconsolidatedassetsofEJYandBCI.Inaddition,EJYandBCIprovidedcommonequitytier1capitalratioscalculatedunderU.S.rulesaspartofthecapitalequivalencyassessment. 12 Atconsummation,BCIwouldbewellcapitalized.Inaddition,BCIwillincreaseitscapitalthroughanequity offeringofapproximately$360million.EJYwouldsubscribetoits55percent($198million)proratashareof theequityoffering,fundedthroughtheissuanceofapproximately$216millionindebttothirdparties.Upon completionofthecapitalraise,bothBCIandEJYwouldcontinuetohavecapitallevelsequivalenttothecapitallevelsthatwouldberequiredofaU.S.bankingorganization. 13 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR

298 FederalReserveBulletin|January2016 BancodeCreditoeInversiones.Asnoted,theSBIFistheprimarysupervisorof Chilean banks,includingBCI.TheBoardpreviouslyhasdetermined,inconnectionwithanapplicationtoestablishanagency,thatBCIissubjecttocomprehensivesupervisiononaconsolidatedbasisbytheSBIF.14TheSBIFobtainsinformationonBCI’soperationsthrough annualon-siteexaminationsanditsreviewof auditandfinancialreportssubmittedby BCI.BCI’sassetqualityandcapitalalsoarereviewedannually.Aspartof theexaminations,theSBIFreviewsBCI’sinternalcontrols,andBCIprovidesreportstotheSBIFon thescopeof itsinternalaudits.TheSBIFrequiresBCItomeetminimumcapitalratiosand prohibitsBCIfromextendingcredittoaffiliatesontermsmorefavorablethanthoseoffered tothirdparties.TheSBIFhastheauthoritytoimposesanctionsonBCIanditsdirectors, officers,andmanagersif necessarytoenforcecompliancewithitsregulations. EmpresasJuanYarur.InassessingwhetherEJYmaybeconsideredsubjecttoconsolidated supervision,theBoardhasconsideredanumberof factors.TheBoardhaslongheldthat “thelegalsystemsforsupervisionandregulationvaryfromcountrytocountry,andcomprehensivesupervisionorregulationonaconsolidatedbasiscanbeachievedindifferent ways.”15Inaddition,theBoardmakescase-by-case,institution-specificdeterminations underthecomprehensivesupervisionstandard.16Inconsideringpreviouscasesinwhicha foreignbankwasownedbyanonbankparentcompany,theBoardhasstatedthatthe systemof comprehensivesupervisionorregulationmayvary,dependingonthenatureof theacquiringcompanyandtheproposedinvestment.17Inlightof thisbackground,the Boardhastakenthefollowingfactsintoaccount: Priortothisproposal,EJYwaspartof acomplexstructureof family-affiliatednonbank companiesthatownedacontrollinginterestinBCI.Noneof thesecompanieswassubject toconsolidatedregulationorsupervisionbygovernmentalauthorities.Inordertoaddress theissuesraisedbythisorganizationalstructure,thecontrollingshareholderscommittedto asignificantrestructuringandsimplificationof theownershipof BCI.Underthisproposal,EJYwouldbecomethesoleparentcompanyof BCI.Noothercompanywouldown directlyorindirectlymorethan5percentof thevotingsharesof BCIorEJY.Upon completionof therestructuring,EJYwouldoperateasashellholdingcompany.BCI wouldcompriseapproximately98percentof theassetsof EJY.EJYwouldalsoownthree regulatedinsurancecompaniesinChile,constitutingtheremaining2percentof theassets of EJY. 225.13(a)(4).RegulationKprovidesthataforeignbankissubjecttoconsolidatedhomecountrysupervisionif theforeignbankissupervisedorregulatedinsuchamannerthatitshomecountrysupervisorreceivessufficient informationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoany affiliate)toassesstheforeignbank’soverallfinancialconditionandcompliancewithlawandregulation. 12CFR211.24(c)(1)(ii). Inassessingthisstandardundersection211.24ofRegulationK,theBoardconsiders,amongotherindiciaof comprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensurethatthe bankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformation ontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipsbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisdeterminative,andotherelementsmayinformtheBoard’s determination. 14 BancodeCreditoeInversionesS.A.,85FederalReserveBulletin446(1999).Inaddition,theBoardpreviously hasdeterminedthatthreeotherChileanbanksaresubjecttocomprehensivesupervisiononaconsolidated basisbytheSBIF.SeeCorpbanca,95FederalReserveBulletinB57(2008);BancodelEstadodeChile,91Federal ReserveBulletin442(2005);andBancodeChile,90FederalReserveBulletin550(2004). 15 SeeIndustrialandCommercialBankofChinaLimited(“ICBC–CICOrder”),FRBOrderNo.2012-4(May9, 2012)and57FederalRegister12992,12995(April15,1992). 16 SeeICBC–CICOrderand58FederalRegister6348,6349(January28,1993). 17 Id.;ChinaInvestmentCorporation,96FederalReserveBulletinB31,atB33(2010).

LegalDevelopments:ThirdQuarter,2015 299 EJYanditssubsidiariestogetherareafinancialgroupunderChileanlaw.Since2004,Chile hastakennumerousstepstoprovidegreatertransparencyforsuchgroupsbygivingfinancialregulatorstheabilitytoobtaininformationontheownersof regulatedfinancialinstitutions.InOctober2014,ChileadoptednewlegislationthatgivestheSBIFnewauthority withrespecttocontrollingshareholdersof Chileanbanks.18TheSBIFmayrequiresuch companiestomeetasolvencyratio.19TheSBIFmayalsoinspectthebooksandrecordsof anysuchcompanyinordertoassesstheeffectof theparentcompanyonthebank.20Chileanlawalsolimitstheabilityof Chileanbankstoengageintransactionswithaffiliates, includingparentcompanies.21 Chileanlawalsoprovidesthatregulatorsof financialinstitutionsmayshareinformation witheachother.TheSBIF,astheregulatorof banks,andtheSuperintendenciadeValores ySeguros(“SVS”),astheregulatorof securitiesandinsurancecompanies,regularlymeet aspartof theFinancialStabilityCouncilandmayshareinformationatanytime.EJYis alsoregisteredwiththeSVS.Asaregisteredcompany,EJYisrequiredtopublish annualauditedfinancialstatements.TheSBIFhasconfirmeditsabilityandwillingnessto shareinformationasnecessarywiththeBoardconcerningoperationsof BCIandEJY. TheBoardhastakenintoaccountthatEJYisnotanoperatingcompanyandthatEJY’s proposedinvestmentinCMFloridaandCityNationalwouldbeindirectandmade throughaforeignbankthatissubjecttoconsolidatedsupervisionbytheSBIF.Moreover, asnoted,BCIanditsregulatedinsuranceaffiliatescomprisevirtually100percentof the assetsof EJY.EJYalsohasmadeanumberof commitmentsinconnectionwiththisapplication.Itwouldremainanon-operatingcompanyandwouldnotacquirecontrolof any companyotherthanaregulatedfinancialservicescompanyinChilewithouttheBoard’s approval.EJYwouldmakeitsbooksandrecordsavailabletotheSBIFandtheBoard todeterminecompliancewiththesecommitments.TheSBIFhasconfirmedthatitiswillingandhastheauthoritytoaccessandmonitorthebooksandrecordsof EJYinorderto determineEJY’scontinuingcompliancewiththesecommitments.Inaddition,theSBIF maysharewiththeBoardallinformationgatheredthroughitsmonitoringof EJYandhas indicateditswillingnesstoassisttheBoardinobtaininganyadditionalinformationthe BoardmayrequirefromEJYanditsaffiliates.Thesecommitmentsandtheinvolvementof theSBIFinmonitoringthesecommitmentslimittheabilityof EJYtoundertakenew activities,tomakeunregulatedinvestments,ortoengageinoperationsoractivitiesoutside thescopeof appropriategovernmentaloversight.Moreover,CMFloridaandCity NationalwouldbeownedandoperatedbyBCI,whichisfullysubjecttosupervisionand regulationbytheSBIF. Basedonallthefactsof record,includingthestructureandlimitedactivitiesof EJY,the commitmentsmadebyBCIandEJY,andthecooperationofferedbytheSBIF,theBoard determinesthatEJYandBCIaresubjecttocomprehensivesupervisiononaconsolidated basisbytheirhomecountrysupervisorforpurposesof thisproposal. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe 18 LawNo.20.789,GazetteNo.9178-05(2014).ChileanGeneralBankingLaw(LeyGeneraldeBancos,“LGB”), Article16. 19 Article28,LGB. 20 Article16,LGB. 21 SeeArticles84–85,LGB.

300 FederalReserveBulletin|January2016 served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevant depositoryinstitutionsundertheCRA.Inaddition,theBoardconsidersthebanks’overall compliancerecords,theresultsof recentfairlendingexaminationsandothersupervisory assessments,thesupervisoryviewsof examiners,othersupervisoryinformation,andcommentsreceivedontheproposal.TheBoardmayalsoconsidertheinstitution’sbusiness model,itsmarketingandoutreachplans,theorganization’splansfollowingconsummation, andanyotherinformationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,22andrequirestheappropriatefederal financialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’srecord of meetingthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.23Inaddition,fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics. TheBoardreceivedacommentfromacommenterwhoobjectedtotheproposalprincipally onthebasisof CityNational’srecordof extendinghomemortgagecredit,includingrefinancingcredit,tominorityindividualsintheFortLauderdale,Miami,andOrlandoMetropolitanStatisticalAreasasreflectedindatareportedundertheHomeMortgageDisclosure Act(“HMDA”)24for2011. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.25 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof City National,26itsfairlendingandcompliancerecords,thesupervisoryviewsof theOfficeof theComptrollerof theCurrency(“OCC”),confidentialsupervisoryinformation,informationprovidedbyApplicants,andthepubliccommentreceivedontheproposal. CityNational’sBusinessandApplicants’ResponsetoComment.CityNationalengagesprimarilyincommerciallending,corporatecashmanagement,andprivatebanking.Asof September30,2014,commercialrealestateloansandcommercialandindustrialloans accountedforapproximately57percentof theloanportfolio.Residentialrealestatelending representedapproximately26.1percentof theloanportfolio.Applicantsarguedthatthe commenter’sassessmentof CityNational’slendingperformancedidnotaccuratelyreflect thebank’sperformancewhenreviewedinthecontextof abroaderrangeof data. 22 12U.S.C.§2901(b). 23 12U.S.C.§2903. 24 12U.S.C.§2801etseq. 25 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 26 BCI’sMiamibranchmaynottakeinsureddepositsandthereforeisnotsubjecttotheCRA.

LegalDevelopments:ThirdQuarter,2015 301 A.Recordof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationprovidedbytheappropriatefederalsupervisors.27 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.28Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdatainadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulationstoassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;thegeographicdistributionof suchloans—includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberand amountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamount of homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;29the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies.Consequently,theBoardconsiderstheoverallCRAratingand theratingonthelendingtesttobeimportantindicators,whentakenintoconsideration withotherfactors,indeterminingwhetheradepositoryinstitutionishelpingtomeetthe creditneedsof itscommunities. CRAPerformanceof CityNational.CityNationalwasassignedanoverall“Outstanding” ratingatitsmostrecentpubliclyavailableCRAexaminationasof May29,2012(“City NationalEvaluation”),30conductedbytheOCC,withratingsof “Outstanding”forthe Lending,Investment,andServicesTests. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 28 12U.S.C.§2906. 29 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 30 TheCityNationalEvaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTest,includingcommunitydevelopmentloans,wasJanuary1,2009,through December31,2011.FortheInvestmentandServiceTests,theevaluationperiodwasMay18,2009(thedateof thepreviousCRAexamination),throughMay29,2012.Examinersconductedafull-scopereviewofthe

302 FederalReserveBulletin|January2016 ExaminersfoundthatCityNationaldemonstratedgoodresponsivenesstoassessmentarea creditneedswithrespecttothebank’slendingactivity.ExaminersalsofoundthatCity Nationaloriginatedasubstantialmajorityof itsloanswithinitsassessmentareaandthat thebankhadanexcellentgeographicdistributionof itsloansthroughoutitsassessment area.Examinersfoundthatthebankhadanadequatedistributionof loansamongborrowersof differentincomelevelsandbusinessesof differentsizes.Homemortgagelending activitywasconsideredadequate.Examinersconsideredthebank’slendinginlightof its primarybusinessfocusandnotedthat,historically,thebankhasnotbeenatraditional retail-focusedinstitutionanddoesnotactivelymarketavarietyof homemortgageproducts,unlikeotherinstitutionsinitsassessmentarea.Smallbusinesslendingactivitywas consideredgoodandexaminersfoundthebanktohaveanexcellentlevelof community developmentloans. ExaminersfoundCityNationaltohaveanexcellentlevelof qualifiedcommunitydevelopmentinvestmentsinthebank’sMiami-FortLauderdale-PalmBeachassessmentarea. Examinersnotedthatthebankmadeasignificantinvestmentinaqualifiedinvestment fundbackedbymultiplemortgagesonpropertiesthatprovideaffordablerentalhousingto LMIresidents.Inaddition,examinersnotedthatthebank’scommunitydevelopment investmentshelpaddresstheneedforemploymentforLMIpersonsintheassessmentarea. InevaluatingtheServiceTest,examinersnotedthatCityNational’sretaildeliverysystems wereexcellentandreadilyaccessibletoallgeographiesandtoindividualsof different incomelevels.ExaminersfoundthatCityNationalprovidedarelativelyhighlevelof communitydevelopmentservicesthatwereresponsivetoassessmentareaneeds,particularly thoserelatedtofinancialliteracyandaffordablehousing. CityNational’sEffortssincetheCityNationalEvaluation.SincetheCityNationalEvaluation,CityNationalhasimplementedseveralprogramsforlendingtounderservedcommunitiesandindividualsinitsassessmentarea.Forexample,CityNationalhasengagedina partnershipwithNeighborhoodHousingServicesof SouthFlorida(“NHSSF”).31Inaddition,CityNationalrecentlyapprovedtheestablishmentof adownpaymentassistanceprogramthatwillprovidequalifiedapplicantswiththelesserof 2percentorupto$2,000for adownpayment.CityNationalalsocreatedaprograminwhichqualifiedborrowerscan refinancetheirexistingmortgagetotakeadvantageof lowerinterestrates.Theprogram allowsforLMIfamiliestorefinancewithoutanycosts,asCityNationalwillbeassuming thecostsof thenewloanaspartof theprogram. Viewsof OtherRegulators.TheBoardhasconsideredtherecordof CityNationalincomplyingwithfairlendingandotherconsumerprotectionlaws.Inparticular,theBoardhas reviewedtheresultsof consumercomplianceexaminationsof CityNationalconductedby theOCC.TheexaminationreportsdiscussCityNational’srecordof compliancewithfair lendingandotherconsumerprotectionlawsandregulationsandthebank’spoliciesand procedurestohelpensurecompliancewithfairlendingandotherconsumerprotectionlaws andregulations. Miami-Ft.Lauderdale-PalmBeach,Floridaassessmentarea,whichaccountedfor92percentofthebank’s depositsinthemarket.Thebankhasreceivedanoverall“Outstanding”CRAratingfromtheOCCateachof itsevaluationssince2003. 31 Asaresult,17seniorofficersfromCityNationalcommittedover100hoursofservicetocoordinate,structure, develop,andimplementtheNHSSFCitySmartAffordableHousingProgram.ThisprogramprovidesNHSSF withongoingexpertisefromCityNationalandaccesstocreditforLMIhomepurchasers.

LegalDevelopments:ThirdQuarter,2015 303 B.PublicBenefitsof theProposal Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Inthisregard,ApplicantshavestatedthattheyintendtomaintainCityNational’s existingfairlendingpoliciesandproceduresfollowingconsummationof thetransaction. Applicantshaveindicatedtheywillserveasasourceof strengthtoCityNationalfollowing theproposedacquisitionandwillprovideadditionalresourcestoCityNationaltoallowthe institutiontocontinuetoservetheneedsof itslocalcommunities.ApplicantsalsorepresentthatBCIintendstoleverageitsexperienceandcapabilitiestoworkwithexistingmanagementtoexplorethepossibilityof expandingtheproductsandservicesthatCity Nationalofferstoitscustomers. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordof therelevant depositoryinstitutioninvolvedundertheCRA,theinstitution’srecordof compliancewith fairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation, informationprovidedbyApplicants,andthepubliccommentontheproposal.Basedon thatreview,theBoardconcludesthattheproposalwouldresultinpublicbenefitsandthat theconvenienceandneedsfactorisconsistentwithapproval. 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,availabilityof substituteprovidersforanycriticalproductsandservicesofferedbythe resultingfirm,interconnectednessof theresultingfirmwiththebankingorfinancial system,extenttowhichtheresultingfirmcontributestothecomplexityof thefinancial system,andextentof thecross-borderactivitiesof theresultingfirm.33Thesecategories arenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inaddition tothesequantitativemeasures,theBoardconsidersqualitativefactors,suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcanbe resolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.34 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Applicantswouldhaveassetsof approximately $42.4billion,mostof whichwouldbeoutsidetheUnitedStates.Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizational 32 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 33 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 34 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

304 FederalReserveBulletin|January2016 structure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof BCIorCityNationalintheeventof financialdistress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthe marketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financial distress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.Basedontheseandalltheotherfactsof record,theBoarddeterminesthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardherebyapprovestheproposed transaction.35Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordin lightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicable statutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswith allthecommitmentsmadetoandreliedonbytheBoardinconnectionwiththeapplication andonreceiptof allotherregulatoryapprovals.Forpurposesof thisaction,theconditions andcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedings underapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardortheFederalReserveBankof Atlanta, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveSeptember21,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 35 AcommenterrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHCActdoes notrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication.12CFR 225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities. Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.IntheBoard’s view,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitteda writtencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthesereasons, andbasedonallthefactsofrecord,theBoardconcludesthatapublichearingisnotrequiredorwarrantedin thiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

LegalDevelopments:ThirdQuarter,2015 305 Order Issued Under Section 4 of the Bank Holding Company Act M&T Bank Corporation Buffalo, New York Manufacturers and Traders Trust Company Buffalo, New York OrderApprovingtheAcquisitionof aSavingsandLoanHoldingCompany,Mergerof DepositoryInstitutions,andEstablishmentof Branches FRBOrderNo.2015–27(September30,2015) M&TBankCorporation,Buffalo,NewYork,anditssubsidiary,WilmingtonTrustCorporation,Wilmington,Delaware(collectively,“M&T”),bothfinancialholdingcompanies withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),have requestedtheBoard’sapprovalundersections4(c)(8)and(j)of theBHCActandsection225.24of theBoard’sRegulationY1toacquireHudsonCityBancorp,Inc.(“Hudson City”),anditswhollyownedsubsidiary,HudsonCitySavingsBank(“HCB”),bothof Paramus,NewJersey.HCBisasavingsassociationforpurposesof theBHCAct. Inaddition,M&T’ssubsidiarystatememberbank,ManufacturersandTradersTrustCompany(“M&TBank”),Buffalo,NewYork,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)2tomergewithHCB, withM&TBankasthesurvivingentity.M&TBankalsohasappliedundersection9of the FederalReserveAct(“FRA”)toestablishandoperatebranchesatthelocationsof HCB’s mainofficeandbranches.3 Noticeof theproposals,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(77FederalRegister60119(October2,2012)).4AsrequiredbytheBank MergerAct,areportonthecompetitiveeffectsof thebankmergerwasrequestedfromthe UnitedStatesAttorneyGeneral.Thetimeforsubmittingcommentshasexpired,andthe Boardhasconsideredtheproposalsandallcommentsreceivedinlightof thefactorsset forthinsection4of theBHCAct,theBankMergerAct,andtheFRA. M&T,withconsolidatedassetsof approximately$97.1billion,isthe31stlargestinsured depositoryorganizationintheUnitedStates,controllingdepositsof approximately $72.6billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.5M&Tcontrolstwoinsureddepositoryinstitutions,M&TBankandWilmingtonTrust,NationalAssociation(“WTNA”),Wilmington, Delaware,whichtogetherhaveretailbankingoperationsineightstatesandtheDistrictof Columbia.6M&TBankistheeighthlargestinsureddepositoryinstitutioninNewYork, controllingdepositsof approximately$36.0billion,whichrepresent2.8percentof thetotal depositsof insureddepositoryinstitutionsinthatstate.7M&TBankisthe118thlargest insureddepositoryinstitutioninNewJersey,controllingdepositsof approximately 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 2 12U.S.C.§1828(c). 3 12U.S.C.§321.Theselocationsarelistedintheappendix. 4 12CFR262.3(b). 5 Assetandnationwidedeposit-rankingdataareasofJune30,2015,unlessotherwisenoted.Insureddepository institutionsincludeinsuredcommercialbanks,savingsandloanassociations,andsavingsbanks. 6 M&T’ssubsidiarybankshaveretailbankingoperationsinDelaware,Florida,Maryland,NewJersey,New York,Pennsylvania,Virginia,WestVirginia,andtheDistrictofColumbia. 7 StatedepositdataareasofJune30,2014.

306 FederalReserveBulletin|January2016 $103.7million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. HudsonCity,withconsolidatedassetsof approximately$35.4billion,isthe49thlargest insureddepositoryorganizationintheUnitedStates,controllingdepositsof approximately $18.2billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.HudsonCitycontrolsHCB,whichoperatesin Connecticut,NewJersey,andNewYork.HCBisthefifthlargestinsureddepositoryinstitutioninNewJerseywithapproximately$16.5billionindeposits,whichrepresent 5.8percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.Inaddition, HCBisthe35thlargestinsureddepositoryinstitutioninNewYorkwithapproximately $3.1billionindeposits,andthe16thlargestinsureddepositoryinstitutioninConnecticut withapproximately$1.0billionindeposits,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsineachof thosestates. Onconsummationof theproposals,M&Twouldbecomethe25thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$132.5billion. M&Twouldhaveconsolidateddepositsof approximately$90.8billion,representingless than1percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates. M&TwouldremaintheeighthlargestdepositoryorganizationinNewYork,controlling depositsof approximately$39.1billion,representing3.0percentof thetotaldepositsof insureddepositoryinstitutionsinthestate.Inaddition,M&TwouldbecomethefifthlargestdepositoryorganizationinNewJersey,controllingdepositsof approximately$16.6billion,representing5.8percentof thetotaldepositsof insureddepositoryinstitutionsinthe state. TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.8TheBoardrequiresthatsavingsassociationsacquiredbybankholding companiesconformtheirdirectandindirectactivitiestothosepermissibleforbankholding companiesundersection4of theBHCAct.M&Thascommittedthatalltheactivitiesof HudsonCityanditssubsidiarieswillconformtothosepermissibleundersection4of theBHCActandRegulationYorbedivested. InterstateandDepositCapAnalyses TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”)9 amendedsection4of theBHCAct10andtheBankMergerAct11toprovidethat,ingeneral,theBoardmaynotapproveanapplicationbyabankholdingcompanytoacquirean insureddepositoryinstitution,oranapplicationbyoneinsureddepositoryinstitutionto acquireanotherinsureddepositoryinstitution,if thehomestateof thetargetinsured depositoryinstitutionisastateotherthanthehomestateof theapplicantandtheapplicantcontrolsorwouldcontroluponconsummationof theproposedtransactionmorethan 10percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.Forpurposesof theBHCActandtheBankMergerAct,thehomestateof M&T andM&TBankisNewYorkandthehomestateof HCBisNewJersey.12Consummation 8 12CFR225.28(b)(4)(ii). 9 Pub.L.No.111-203,124Stat.1376(2010). 10 Dodd-FrankAct§623(b),124Stat.at1634–35,codifiedat12U.S.C.§1843(i)(8). 11 Dodd-FrankAct§623(a),124Stat.at1634,codifiedat12U.S.C.§1828(c)(13). 12 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany,

LegalDevelopments:ThirdQuarter,2015 307 of theproposalswouldresultinM&Tcontrollinglessthan1percentof thedepositsof U.S.insureddepositoryinstitutions.Theproposedacquisitionof HCBwouldnotbeprohibitedbythelawof anystateinwhichHCBislocated.13Accordingly,inlightof allthe factsof record,theBoardisnotrequiredtodenytheproposalsundersection4(i)of the BHCActortheinterstatemergerprovisionsof theBankMergerAct. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.14TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.15Inaddition,theBoardconsidersthecompetitiveeffectsof aproposaltoacquireasavingsassociationunderthebalancingtestof section4(j)of theBHCAct.16 M&TandHudsonCityhavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe MetroNewYorkCityandPhiladelphiabankingmarkets.17TheBoardhasreviewedthe competitiveeffectsof theproposalsinthosebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthebankingmarkets,therelativesharesof thetotaldepositsininsureddepositoryinstitutionsinthemarkets(“marketdeposits”)thatM&Twouldcontrol,18theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”),19andothercharacteristicsof themarkets. whicheverislater.12U.S.C.§1841(o)(4)(C).Astatebank’shomestateisthestatebywhichthebankischartered.12U.S.C.§1828(c)(13)(C)(ii)(II).Afederalsavingsassociation’shomestateisthestateinwhichthehome officeofthesavingsassociationislocated.12U.S.C.§§1828(c)(13)(C)(ii)(III)and1841(o)(4)(E). 13 ThemergerofHCBintoM&TBankissubjecttotheapprovaloftheNewYorkDepartmentofFinancialServices(“NYDFS”).SeeN.Y.BankingLaw§600.M&TBankhasfiledtherelevantapplicationswiththe NYDFS. 14 12U.S.C.§1828(c)(5). 15 12U.S.C.§1828(c)(5)(B). 16 12U.S.C.§1843(j)(2)(A). 17 TheMetroNewYorkCitybankingmarketincludesBronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam,Queens,Richmond,Rockland,Suffolk,Sullivan,Ulster,andWestchestercountiesandportionsof ColumbiaandGreenecounties,allinNewYork;Bergen,Essex,Hudson,Hunterdon,Middlesex,Monmouth, Morris,Ocean,Passaic,Somerset,Sussex,andUnioncountiesandportionsofBurlington,Mercer,andWarrencounties,allinNewJersey;PikeCountyandportionsofMonroeandWaynecounties,allinPennsylvania; andFairfieldCountyandportionsofLitchfieldandNewHavencounties,allinConnecticut. ThePhiladelphiabankingmarketincludesBucks,Chester,Delaware,Montgomery,andPhiladelphiacounties, allinPennsylvania;andCamden,Cumberland,Gloucester,andSalemcountiesandportionsofBurlingtonand Mercercounties,allinNewJersey. 18 DepositandmarketsharefiguresarefromthesummaryofdepositsdatareportedbyinsureddepositoryinstitutionsasofJune30,2014,andarebasedoncalculationsinwhichthedepositsofthriftinstitutionsare included.TheBoardhaspreviouslyindicatedthatthriftinstitutionshavebecome,orhavethepotentialto become,significantcompetitorsofcommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserve Bulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743(1984).Thus,theBoardregularly hasincludedthriftdepositsinthemarketsharecalculationona50-percentweightedbasis.See,e.g.,First Hawaiian,Inc.,77FederalReserveBulletin53(1991). 19 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan

308 FederalReserveBulletin|January2016 Consummationof theproposalswouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesforthesemarkets.Onconsummationof the proposals,boththeMetroNewYorkCityandPhiladelphiabankingmarketswould becomelessconcentrated,asmeasuredbytheHHI,becauseof theproposedconversionof HCBfromasavingsassociationtoafull-servicebank,andnumerouscompetitorswould remain.20 TheDOJhasconductedareviewof thepotentialcompetitiveeffectsof theproposalsand hasadvisedtheBoardthatconsummationof theproposalswouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposals. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposals wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthebankingmarketsinwhichM&TandHudsonCitycompetedirectlyorin anyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inadditiontoassessingthecompetitiveeffectsof aproposal,ineverycaseundertheBank MergerActtheBoardmusttakeintoconsiderationthefinancialandmanagerialresources andfutureprospectsof theexistingandproposedinstitutions,theconvenienceandneeds of thecommunitiestobeserved,recordsof compliancewithanti-money-launderinglaws, andtherisktothestabilityof theUnitedStatesbankingorfinancialsystem.TheBoard alsoconsidersthesefactorsinweighingthepossibleadverseeffectsof thetransaction againstitspublicbenefits,asrequiredbysection4(j)of theBHCAct.21 Considerationof FinancialFactors.Initsevaluationof thefinancialfactors,theBoard reviewsinformationregardingthefinancialconditionof theorganizationsinvolvedon 200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontalMerger Guidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at-938.html. 20 TheHHIwoulddecreaseineachmarketasfollows:15pointsto1355inMetroNewYorkCityand5pointsto 995inPhiladelphia.Thedecreasesresultfromapre-mergerweightingofHCB’smarketdepositsat50percent andapost-mergerweightingat100percent.SeeNorwestCorporation,78FederalReserveBulletin452(1992); FirstBanks,Inc.,76FederalReserveBulletin669(1990)(depositsofthriftsareincludedinpre-mergermarket sharecalculationsona50-percentweightedbasisbutincludedat100percentinthecalculationofproforma marketsharebecausethedepositswouldbeacquiredbyacommercialbankingorganization).Theresultingpro formashareofM&T’smarketdepositswouldbe1.8percentinMetroNewYorkCityand1.6percentinPhiladelphia.ThecombinedorganizationwouldcompeteintheMetroNewYorkCityandPhiladelphiabanking marketswith236and102otherbankingorganizations,respectively. 21 Section4(j)(2)(A)oftheBHCActrequirestheBoardtoconsiderwhethertheproposedacquisitionofHudson City“canreasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationofresources, decreasedorunfaircompetition,conflictsofinterests,unsoundbankingpractices,orrisktothestabilityofthe UnitedStatesbankingorfinancialsystem.”12U.S.C.§1843(j)(2)(A).Aspartofitsevaluationofthesefactors, theBoardreviewsthefinancialandmanagerialresourcesofthecompaniesinvolved,theeffectoftheproposal oncompetitionintherelevantmarkets,therisktothestabilityoftheUnitedStatesbankingorfinancial system,recordsofcompliancewithanti-money-launderinglaws,andthepublicbenefitsoftheproposal. 12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrderNo.2012-2(February14,2012)(“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008);Wachovia Corporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83FederalReserveBulletin 602(1997).Inactingonanoticetoacquireasavingsassociation,theBoardreviewstherecordsofperformance oftherelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).12U.S.C. §2901etseq.

LegalDevelopments:ThirdQuarter,2015 309 bothparent-onlyandconsolidatedbases,aswellasinformationaboutthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbanking operations.Inthisevaluation,theBoardconsidersavarietyof information,includingpublicandsupervisoryinformationregardingcapitaladequacy,assetquality,andearnings performance,aswellaspubliccommentsontheproposal.22TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalsinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. M&Tanditssubsidiarydepositoryinstitutionsarewellcapitalizedandwouldremainsoon consummationof theproposedtransactions.Theproposalisamergerstructuredasacash andshareexchange.23Theassetquality,earnings,andliquidityof M&Tareconsistentwith approval.M&Tappearstohaveadequateresourcestoabsorbthecostsof theproposals andtocompletetheintegrationof theinstitutions’operations. Considerationof ManagerialFactors.Initsevaluationof themanagerialfactors,theBoard considersthemanagerialresourcesof theorganizationsinvolvedandof theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecordsof M&T,Hudson City,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementprograms,andoperations.Inaddition,theBoardhasconsideredinformationprovidedbyM&T,thesupervisoryexperiencesthattheBoardandother relevantbanksupervisoryagencieshavehadwiththeorganizations,andtheorganizations’ recordsof compliancewithapplicablebanking,consumer,andantimoney-laundering laws,aswellasinformationprovidedbycommenters. Abank’srisk-managementprogramcomprises,amongotherfunctions,systemsandproceduresforensuringregulatorycompliance,whichincludesBankSecrecyAct/anti-moneylaundering(“BSA/AML”)compliance.24AsM&Thasacknowledged,followingthesubmissionof M&T’sapplicationtoacquireHudsonCity,examinationsconductedbythe FederalReserveBankof NewYork(“ReserveBank”)revealedsignificantweaknessesin M&T’srisk-managementprogram.25Inparticular,examinersidentifiedweaknessesin M&T’soverallBSA/AMLcompliancemanagementprogram.Theweaknessesincludeda lackof robustandcomprehensivesystemsforcollecting,processing,andupdatinginformationneededtomakemoney-launderingriskdeterminationsforeverycustomerand account.TherewerealsoweaknessesinM&T’sprocessesandpoliciesforidentifyingand reportingsuspectedstructuringactivitiesandothersuspiciousactivities.26 22 12U.S.C.§§1828(c)(5)and(11).Acommenterallegesthattheacquisitionis“toolarge”forM&T.Another commenterexpressedconcernsregardingtheimpactofHurricaneSandyonpropertiessecuringmortgage loansextendedbyHudsonCity. 23 Atclosing,40percentofthemergerconsiderationwouldbepaidincash.Theremainingmergerconsideration wouldbeastockexchangeinwhicheachshareofHudsonCitycommonstockwouldbeconvertedintoaright toreceivesharesofM&Tcommonstock,basedonanexchangeratio.M&Twouldfundthecashportionof thetransactionwithcashonhand.M&Thasthefinancialresourcestoeffectthetransaction. 24 FederalFinancialInstitutionsExaminationCouncil,FFIECBSA/AMLExaminationManual28(2014),availableatwww.ffiec.gov/bsa_aml_infobase/documents/BSA_AML_Man_2014_v2.pdf. 25 SeeRobertG.Wilmers,M&TBank2013AnnualReportMessagetoShareholders,M&TBank(March7,2014) (“2013Report”),newsroom.mtb.com/document-archive/annual-report-letters/2013-annual-report-message-toshareholders.htm. 26 SeeWrittenAgreementamongM&TBankCorporation,ManufacturersandTradersTrustCompany,andFederalReserveBankofNewYork,DocketNos.13-013-WA/RBHCand13-013-WA/RB-SM(June17,2013), availableatwww.federalreserve.gov/newsevents/press/enforcement/enf20130617a1.pdf.

310 FederalReserveBulletin|January2016 Alsoduringthependencyof M&T’sapplication,supervisoryassessmentsidentifiedweaknessesinM&T’sconsumercomplianceprogram.Inlate2014,theConsumerFinancialProtectionBureau(“CFPB”),whichalsohassupervisoryresponsibilityoverM&TBank, issuedanenforcementactionagainstM&TBankfordeceptivepracticesrelatingtoadvertising,marketing,andpromotionof acheckingproduct.27Examinationsconductedbythe ReserveBankrevealedweaknessesinM&T’sconsumercomplianceriskassessment,complaintmanagement,andcompliancemonitoringandtesting. TheidentifiedweaknessesinM&T’sBSA/AMLandconsumercomplianceprogramsraised concernsaboutwhetherthecompany’smanagerialresourcesandthemanagerialresources of theproposedcombinedorganizationwereconsistentwithapproval.BeforetheBoard completeditsevaluation,M&Trequestedastayof theBoard’sconsiderationof theproposalstoaffordM&Tanopportunitytoaddresstheidentifiedweaknesses.Basedonthe specificfactsandcircumstancesof thiscase,particularlythattheweaknessesfirstsurfaced afterconsiderationof M&T’sproposalswaswellinprogress,theBoardsuspendedconsiderationof theproposals.28Thereafter,M&Tdedicatedsignificantfinancialandmanagerialresourcestoaddressingtheidentifiedweaknesses.29Theremedialactionstakenby M&Trequiredasignificantperiodof time,30andM&TandHudsonCityextendedthe termof theirmergeragreementmultipletimes.31 M&ThastakensignificantstepstoremediatetheidentifiedBSA/AMLandconsumercomplianceweaknessesandtoimplementcomprehensiveprogramsrelatedtocombatting money-launderingandcomplyingwithconsumerprotectionlawsandregulations.M&T alsohasprovidedtheBoardwithnumeroussubmissionsrelatingtotheseefforts,andthe Boardhasconsideredsupervisoryreviewsrelatedtotheseefforts. M&ThasmadesignificantchangestoitsBSA/AMLcomplianceprogramasrequiredin M&T’sWrittenAgreementwiththeReserveBank.Inparticular,M&Thasinstituted importantenhancementstokeysystemsandprocessesinitsBSA/AMLcomplianceprogram,including,forexample,processesforcollectinginformationtodeterminetheextent towhichacustomerpresentsamoney-launderingrisktothebankandforescalating accountstoseniormanagementthatarefoundtohaverepeatedlyengagedinsuspicious activity.Inaddition,M&Thasconductedinternaltestingof,andhashadindependent third-partyreviewtoconfirm,theefficacyof thechangesthecompanyhasinstitutedtoits BSA/AMLcomplianceprogram. 27 SeeConsentOrderbetweenManufacturersandTradersTrustCompanyandConsumerFinancialProtection Bureau,FileNo.2014-CFPB-0016(October9,2014),availableatfiles.consumerfinance.gov/f/201410_cfpb- _consent-order_m-t.pdf. 28 TheBoardexpectsthatabankingorganizationwillresolveallmaterialweaknessesidentifiedbyexaminers beforeapplyingtoengageinexpansionaryactivity.See,e.g.,SRLetters14-2and13-7.Asnoted,M&T’sissues largelyaroseduringprocessingofthisapplication,andtheBoardtookthehighlyunusualstepofpermitting thecasetopendwhileM&Taddresseditsweaknesses.TheBoarddoesnotexpecttotakesuchactioninfuture cases.Rather,inthefuture,ifissuesariseduringprocessingofanapplication,theBoardexpectsthatabanking organizationwillwithdrawitsapplicationpendingresolutionofanysupervisoryconcerns. 29 See2013Report. 30 SeeRobertG.Wilmers,M&TBank2014AnnualReportMessagetoShareholders,M&TBank(March5,2015), newsroom.mtb.com/document-archive/annual-report-letters/2014-annual-report-message-to-shareholders.htm. 31 SeePressRelease,M&TBankCorporation(April12,2013),availableatnewsroom.mtb.com/press-releases/ mampt-and-hudson-city-make-announcement-relating-to-the-proposed-merger-of-the-two-companies.htm; PressRelease,M&TBankCorporation(December17,2013),availableatnewsroom.mtb.com/press-releases/ mt-and-hudson-city-announce-extension-of-the-merger-agreement.htm;PressRelease,M&TBankCorporation(December9,2014),availableatnewsroom.mtb.com/press-releases/hudson-city-bancorp-inc-and-mt-bankcorporation-announce-further-extension-of-time-to-complete-proposed-merger-to-april-30-2015.htm;Press Release,M&TBankCorporation(April17,2015),availableatnewsroom.mtb.com/press-releases/hudson-citybancorp-inc-and-mt-bank-corporation-announce-further-extension-of-time-to-complete-proposed-mergerto-october-31-2015.htm.

LegalDevelopments:ThirdQuarter,2015 311 Similarly,M&Thasmadesignificantchangestoitsconsumercomplianceprogramto addresspreviouslyidentifiedweaknessesintheprogram.ThechangesM&Thasimplementedinclude,forexample,theestablishmentof aprocessformanagingconsumercomplaintsandaprocessforratingtherisksof noncompliancerelatingtolaws.Wheretherisk of noncomplianceisdeemedtobemoderateorhigh,M&Thasestablishedaschedulefor testingcompliancemorefrequentlythanpeerinstitutions. TheBoardhasconsideredtheresultsof severalreviewsconductedbyReserveBankexaminersof theactionsM&ThastakentoaddresstheweaknessesinitsBSA/AMLandconsumercomplianceprograms.TheBoardhasalsoconsultedwith,andconsideredtheviews of,theCFPB. InadditiontoconsideringthestepsM&Thastakentoaddresstheweaknessesnotedabove, theBoardhasconsideredM&T’splansforoperatingthecombinedorganization.M&T wouldbringsignificantfinancialandotherresourcestoaddressthepost-acquisitionintegrationprocessfortheseproposals.M&T’smanagementhastheexperienceandresources toensurethatthecombinedorganizationoperatesinasafeandsoundmanner.M&Thas establishedaplantointegrateexistingmanagementandpersonnelof theHudsonCity organizationinamannerthataugmentsthecombinedorganization’smanagementteam.32 Basedonallthefactsof record,includingthestepsM&ThasimplementedtoaddressidentifiedissuesrelatedtoBSA/AMLandconsumercompliance,M&T’ssupervisoryrecord, managerialandoperationalresources,andplansforoperatingthecombinedinstitution afterconsummation,andsubjecttotheconditionsnotedinthisOrder,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerialresourcesandfuture prospectsof theorganizationsinvolved,aswellastherecordsof effectivenessof theorganizationsincombattingmoney-launderingactivities,areconsistentwithapproval. Thistransactionwouldsignificantlyincreasethescopeof M&T’soperationsby,among otherthings,expandingitsgeographicfootprintandsignificantlyincreasingitsassetsize. TheBoardexpectsM&Ttoensurethatitsriskmanagementframeworkandmethodologies,aswellasitscompliancefunctions,arefullyimplemented,functioningeffectively,and commensuratewithitssizeandcomplexity,andthatallriskswithintheorganizationare proactivelyidentifiedandpromptlyaddressed.TheBoardalsoexpectsthatM&Twillnot engageinanyexpansionaryactivities,exceptforestablishingbranchesinhistoricallyunderservedcommunities,untilsupervisorsaresatisfiedthattheintegrationwithHudsonCity hasbeensatisfactorilycompletedandexaminershaveconfirmedthatallrisk-management andcompliancesystemsatM&Tarefullyimplemented,functioningeffectively,adequate forproactivelyidentifyingandpromptlyaddressingallriskswithinthecombinedorganization,andreflectiveof itsgreatersizeandcomplexity.TheBoardwillmonitorM&T’s effortsinthisregardthroughthesupervisoryprocess. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.33TheBoardalso considersthisfactorinweighingthepossibleadverseeffectsagainstthepublicbenefitsof thetransaction,asrequiredbysection4(j)of theBHCAct.Initsevaluationof theeffects 32 Atclosing,M&TandM&TBankwouldaugmenttheirseniormanagementteamswithmanagersofHudson CityandHCB.Inaddition,theCEOofHudsonCitywouldbeappointedtotheboardsofM&TandM&T Bank,andallcurrentmembersoftheHudsonCityboardofdirectorswouldbeappointedtoanewlycreated regionaladvisoryboardthatwouldadviseM&TBankontheactivitiesinHudsonCity’sformermarketarea. 33 12U.S.C.§1828(c)(5).

312 FederalReserveBulletin|January2016 of theproposalontheconvenienceandneedsof thecommunitiestobeserved,theBoard considerswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutionsundertheCRA.34TheCRArequiresthefederalfinancialsupervisoryagenciesto encourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,35andrequires theappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’s recordof helpingtomeetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods.36 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloanapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics. TheBoardalsoconsidersthesupervisoryassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicants,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe applicantinstitution’sbusinessmodel,marketingandoutreachplans,plansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. A.PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfrom27commentersinsupportof theproposals. ThesecommentersdescribedfavorableexperienceswithM&Tandcommendedthecompanyanditsmanagementforthebank’scommunityoutreacheffortsandsupportforvariouscommunitydevelopmentprogramsandinitiatives,suchasfinancialliteracycounseling, homebuyerworkshops,andhousingrehabilitation.Commentersalsopraisedthelevelof M&TBank’sCRA-eligiblegrants,statingthatthelevelisthehighestamongcommercial banksinNewYork,NewYork,asapercentageof deposits.Thesecommenterscontend thattheproposalswouldbenefitconsumersandthecommunitiesservedbythecombined organization. TheBoardreceived11commentsfromfourcommentersobjectingtotheproposalsprincipallyonthebasisof HCB’sCRAperformancerecordandM&TBank’sandHCB’s recordsof extendinghomemortgagecredittominorityindividuals.37CommenterscriticizedHCB’sCRAperformancerecordandallegethatM&Thadnotsufficientlyexplained howitwouldimproveHCB’sCRAperformancefollowingconsummationof theproposals. AcommenterallegesthatHCBexhibitedpoorCRAperformanceinNewJersey,witha lowerlevelof lendingtoLMIborrowerscomparedtootherlendersinthebank’sassessmentareasandbranchlocationsconcentratedinmiddle-andupper-incomeneighborhoods.Thiscommenteralsoallegesthat,inNewJersey,threeof HCB’sfourbranchesin 34 12U.S.C.§2901etseq. 35 12U.S.C.§2901(b). 36 12U.S.C.§2903. 37 CommentersalsourgedM&Ttoprovidecertainproductsandservicesatthecombinedorganization,including freeorlow-costcheckingaccounts;feeandservicechargewaiversforLMIcustomers,seniorcitizens,andcustomerswithdisabilities;andlendingprogramsforfirst-timehomebuyersandsmallbusinesses.Onecommenter allegesthatM&TrefusedtoprovideloansforthepurchaseofcondominiumunitsinaconvertedWashington, D.C.,apartmentbuilding,duringtheperiodfollowingM&T’s2009acquisitionofProvidentBankshares. AlthoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsofcommunitiesbymaking certainproductsorservicesavailableoncertaintermsoratcertainrates,theCRAdoesnotrequireaninstitutiontoprovideanyspecifictypesofproductsorservicesnordoesitprescribethecoststobechargedforthem.

LegalDevelopments:ThirdQuarter,2015 313 LMIneighborhoodsdidnotoperateonSaturday,unlikeHCB’sbranchesinmiddle-and upper-incomeneighborhoods,mostof whichoperateonSaturday.38Inaddition,acommenterallegesthatHCBdidnotestablishadequaterelationshipswithcommunitygroups inNewJersey. CommentersalsocriticizedM&TBank’sandHCB’srecordof mortgagelendingtominorityindividuals,basedondatareportedfor2011and2013undertheHomeMortgageDisclosureActof 1975(“HMDA”).39ThesecommentersallegethatM&TBankandHCB madedisproportionatelyfewerconventionalresidentialmortgageloanstoAfricanAmericanandHispanicborrowersthantowhiteborrowers,andthattheinstitutionsdeniedmore applicationsforconventionalhomepurchaseloansbyAfricanAmericanandHispanicborrowerscomparedtowhiteborrowers.40AcommenteralsocontendedthatM&TBank mademorehigher-pricedHMDA-reportableloanstoAfricanAmericanborrowersthanto whiteborrowers,41anddenieddisproportionatelymoreHMDA-reportableloanstoAfrican Americanborrowersthantowhiteborrowers.42 M&TBank’sandHCB’sBusinessesandM&T’sResponsestoComments.M&TBank’s lendingactivitiesarefocusedonconsumersresidinginDelaware,Maryland,NewYork, Pennsylvania,Virginia,andtheDistrictof Columbia,andonsmall-andmedium-sizebusinessesbasedinthoseareas.Commercialandindustrialloansandloanssecuredbyone-tofourfamilyresidentialpropertiesmakeupapproximately24and21percent,respectively,of thebank’stotalloanportfolio.43Asof June30,2012,M&TBankhad764domesticbankingoffices. HCBisacommunity-andconsumer-orientedretailsavingsassociationofferingtraditional retaildepositandloanproducts,suchasconformingone-to-fourfamilyresidentialmortgages,timedeposits,checkingaccounts,andsavingsaccounts.HCBoperatesatotalof 135branchesthroughouttheNewYork,NewYork,andPhiladelphia,Pennsylvania,metropolitanareas. M&Targuesthatfocusingsolelyondenialdisparitiesonconventionalhomepurchase mortgageloansreportedunderHMDAdoesnotaccuratelyportrayM&TBank’sand HCB’shomemortgagelendingrecord.Inthisregard,M&TcontendsthatM&TBankisa 38 M&Trepresentsthatin2012,HCBextendedbranchhoursinitsbranchesinHudsonandEssexcounties,allin NewJersey,byopeningtwobranchesonSaturdaysandextendinglobbyhoursatathirdbranch. 39 12U.S.C.§2801etseq.Onecommenteralsoallegesthata“mysteryshopper”programconductedbythecommentershowedthatM&TBankengagedindisparatetreatmentofAfricanAmericanandHispanicborrowers comparedtowhiteborrowersinhomeequityconversionmortgageloan(“reversemortgageloan”)originations. ThecommenterfiledacomplaintconcerningtheseallegationsagainstM&TwiththeDepartmentofHousing andUrbanDevelopment,whichdismissedthecomplaintafterreview. Acommenterarguesthattheproposalshouldnotbeapprovedbecauseacourtcomplaintwasfiledagainst M&TBankbyacommunitygroupallegingthatM&Tdiscriminatedagainstminoritywomenapplicantsby steeringthemtowardscertainloanproductsandneighborhoods.FairHousingJusticeCenter,Inc.v.M&TBank Corporation,No.1:15cv-00779-KBF(S.D.N.Y.2015).Thepartiesagreedtosettlethematter,andthecasewas dismissedwithprejudiceandwithoutanyadmissionofwrongdoing. 40 WithrespecttoM&TBank,theseallegationsrelatedtotheNassau–Suffolk,NewYork,MetropolitanDivision (“LongIslandMD”);theBaltimore–Towson,Maryland,MetropolitanStatisticalArea(“MSA”);andtheNew York,NewYork;Philadelphia,Pennsylvania;andWashington,D.C.,areas.WithrespecttoHCB,theseallegationsrelatedtotheLongIslandMD;theNewYork,NewYork,area;theBridgeport–Stamford– Norwalk,Connecticut,MSA(“BridgeportMSA”);theNewark–Union,NewJersey–Pennsylvania,MetropolitanDivision;andtheNewYork–WhitePlains–Wayne,NewYork–NewJersey,MetropolitanDivision. 41 Forexample,commentersallegethatin2013,5.41percentofM&T’sloanstoAfricanAmericanborrowers wereabovetheratespread,comparedto2.99percentofitsloanstowhiteborrowers. 42 CommentersallegethatM&Tdenied26.26percentofapplicationsfromAfricanAmericanborrowers,comparedto13.3percentofapplicationsfromwhiteborrowers. 43 ManufacturersandTradersTrustCompany,ConsolidatedReportofConditionandIncome,at19–20(dataas ofJune30,2015).

314 FederalReserveBulletin|January2016 significantoriginatorof government-sponsoredmortgageloansandoffersitsownportfolioof affordablemortgages,whicharedesignedtoenhancetheopportunitiesforborrowers acrossallsocioeconomicstratatoqualifyforhomepurchaseloans.44M&Targuesthat theseloansprovidemoreflexiblefeaturesthanconventionalhomepurchasemortgage loans,includingbelow-marketrates,lesscashrequiredout-of-pocketfromborrowers, lendercreditsthatcanbeusedforclosing-costassistance,andreduceddownpaymentand reserverequirements.Moreover,M&TcontendsthatM&TBankhasnumerouslending programswithfeaturesthatdonotqualifyasconventionalhomepurchaseloansandthat theseprogramsgenerallyofferloanswithhigherrisklevelsandloan-to-valueratios,lower downpaymentrequirements,andrequiresmallercashoutlayswhencomparedtoconventionalhomemortgageloans.45 WithrespecttoHCB,M&Trepresentsthatallloansoriginatedbythebank,regardlessof theborrower’sraceorethnicity,aresubjecttothesamecreditunderwritingandpricing standardsusedindustry-wide,includingloan-to-valueratiosanddebttoincomeratios. Moreover,M&Targuesthatamoreaccuratepictureof HCB’smortgagelendingactivities emergeswhenconsideringloantypesotherthantheconventionalhomepurchaseloanson whichcommentersfocused,suchasrefinanceloansandhome-improvementloans.46 M&Tfurthercontendsthattheapparentdenialdisparitiesintheareasidentifiedbythe commentersforbothM&TBankandHCBareduetothecreditworthinessof theapplicantsandarenottheresultof discriminationonaprohibitedbasis.Inthisregard,M&T arguestherewerenondiscriminatoryreasonsfordenialthatincludeinadequatecollateral, insufficientincomefortheamountof credit,excessiveobligationinrelationtoincome, insufficientfundstoclose,lackof documentationorincompletecreditapplication,or inabilitytoobtainmortgageinsurance. B.Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationaswellasinformationandviewsprovidedbytheappropriatefederalsupervisors.47 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.48Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheappli- 44 M&TBankisanactiveproviderofloansbackedbytheFederalHousingAdministration(“FHA”),United StatesDepartmentofAgriculture(“USDA”),andDepartmentofVeteransAffairs(“VA”),aswellasstatesponsoredprograms.Forexample,during2010through2012,M&TBankfunded28,961federallybackedloans worthapproximately$5.3billionand958loansbackedbytheStateofNewYorkMortgageAgencyworth approximately$127.6million. 45 Forexample,M&TBank’sproprietaryversionsofthestandardFHA,VA,andUSDAmortgageproductsprovideLMIborrowersandthosepurchasinginLMIcensustractswithdiscountedratesandlendercreditsthat canbeusedforclosing-costassistance. 46 Forexample,M&Targuesthat,althoughHCBoriginatedonly10conventionalhomepurchaseloanstoAfricanAmericanborrowersintheNewYork,NewYork,areain2011,HCBapproved24of25home-purchase loanapplicationsbymixed-raceapplicantsand44of56ofsuchloanapplicationsbyHispanicapplicantsinthe sameareain2011.Inaddition,HCBapproved50percentofapplicationsbyAfricanAmericanborrowersand approximately65to70percentofapplicationsbyHispanicborrowersforrefinanceandhomeimprovement loansduring2011intheNewYork,NewYorkarea. 47 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 48 12U.S.C.§2906.

LegalDevelopments:ThirdQuarter,2015 315 cationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdata,inadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulations,toassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;thegeographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberand amountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamount of homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;49the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies.TheBoardconsiderstheoverallCRAratingandtheratingon thelendingtesttobeimportantindicators,whentakenintoconsiderationwithotherfactors,indeterminingwhetheradepositoryinstitutionishelpingtomeetthecreditneedsof itscommunities. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.50 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof M&TBankandHCB,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theOfficeof theComptrollerof theCurrency (“OCC”)andtheCFPB,confidentialsupervisoryinformation,informationprovidedby M&T,andthepubliccommentsreceivedontheproposal. CRAPerformanceof M&TBank.M&TBank,theleadbanksubsidiaryforM&T,was assignedanoverall“Outstanding”ratingatitsmostrecentCRAperformanceevaluation bytheReserveBank,asof July9,2012(“M&TBankEvaluation”).51M&TBankreceived 49 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 50 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 51 TheM&TBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.TheevaluationperiodfortheLendingTest,theInvestmentTest,andtheServiceTestwasfromJanuary1,2010,through

316 FederalReserveBulletin|January2016 a“HighSatisfactory”ratingontheLendingTestand“Outstanding”ratingsonboththe InvestmentTestandtheServiceTest. InassigningM&TBanka“HighSatisfactory”ratingfortheLendingTest,examiners foundthatM&TBankdemonstratedgoodresponsivenesstotheretailcreditneedsof its assessmentareas.Thebankoriginatedamajorityof itsloanswithinitsassessmentareas andhadgoodoveralldistributionof loansamongborrowersof differentincomelevelsand businessesof differentsizes.52Examinersnotedthatthebank’soverallgeographicdistributionof HMDA-relatedandsmallbusinessloansreflectedgoodpenetrationinLMI geographies.53ExaminersalsonotedthatM&TBankwasaleaderincommunitydevelopmentlendingandusedvariousinnovativeandflexibleproductstoenhancethelevelof lendingtoLMIgeographiesandborrowers.Inaddition,examinersdeterminedthatM&T’s communitydevelopmentlending,whichhadincreasedmarkedlysincethepreviousCRA publicevaluation,wasresponsivetocommunityneedsandservedavarietyof purposes, includingfinancingof affordablehousing,promotingeconomicdevelopment,revitalizing communitieslocatedinLMItractsandempowermentzones,andprovidingservicestobenefitLMIindividuals. InevaluatingtheInvestmentTest,examinersassignedM&TBankan“Outstanding”rating basedongoodtoexcellentperformanceinthebank’skeyassessmentareas—i.e.,those withhighconcentrationsof depositsandlending.54ExaminersfoundthatM&TBank demonstratedgoodresponsivenesstocommunitycreditneedsandmadeuseof complex investmentstosupportcommunitydevelopmentinitiatives.Examinersnotedthatmore than80percentof thebank’squalifyinginvestmentssupportedthedevelopmentof affordablehousing. FortheServiceTest,examinersfoundM&TBank’sperformancetobeexcellent.55Examinersobservedthatthebank’sbrancheswerereadilyaccessibletoallportionsof itsassessmentareasandthatthebank’srecordof openingandclosingbrancheshadnotadversely affectedtheoverallaccessibilityof itsdeliverysystems.ExaminersfoundthatM&TBank wasaleaderinprovidingcommunitydevelopmentservices,whichincludedsponsorship andparticipationinasignificantnumberof seminarsandpresentationsrelatingtoaffordablemortgages,smallbusinessassistance,andotherbankingeducationofferedthroughout itsassessmentareas. CRAPerformanceof WTNA.WTNAwasassignedanoverall“Satisfactory”ratingatits mostrecentCRAperformanceevaluationbytheOCC,asof May6,2013(“WTNAEvalu- June30,2012.ExaminersconsideredHMDA-relatedandCRA-reportablesmallbusinessloansoriginated betweenJanuary1,2010,andDecember31,2011.Examinersalsoconsideredmultifamilyloansoriginatedby M&TRealEstateTrustandM&TRealtyCorporation,bothsubsidiariesofM&TBank. 52 Examinersnotedgoodloandistributionamongborrowersofdifferentincomelevelsandbusinessesofdifferent sizesinMaryland;NewYork;Pennsylvania;andtheCumberland,Maryland–WestVirginia,MSA(“CumberlandMSA”).ExaminersnotedadequateloandistributioninDelaware;Florida;Virginia;theNewYork– NorthernNewJersey–LongIsland,NewYork–NewJersey–Pennsylvania,MSA(“NewYorkCityMSA”);the Philadelphia–Camden–Wilmington,Pennsylvania–NewJersey–Delaware–Maryland,MSA(“Philadelphia MSA”);andtheWashington–Arlington–Alexandria,D.C.–Virginia–Maryland–WestVirginia,MSA(“WashingtonMSA”). 53 ExaminersnotedexcellentgeographicdistributionintheWashingtonMSAandgooddistributioninMaryland, NewYork,Pennsylvania,Virginia,andtheNewYorkCityMSA.ExaminersnotedadequategeographicdistributioninDelaware,Florida,andtheCumberlandandPhiladelphiaMSAs. 54 ExaminersnotedexcellentinvestmentperformanceinMaryland,NewYork,andtheWashingtonMSA;good investmentperformanceinDelaware,Pennsylvania,andtheCumberland,NewYorkCity,andPhiladelphia MSAs;andadequateinvestmentperformanceinFloridaandVirginia. 55 ExaminersnotedexcellentserviceperformanceinMaryland,NewYork,Pennsylvania,andtheWashington MSA;goodserviceperformanceinVirginiaandtheCumberlandandNewYorkCityMSAs;andadequateserviceperformanceinDelaware,Florida,andthePhiladelphiaMSA.

LegalDevelopments:ThirdQuarter,2015 317 ation”).56Examinersnotedthatthebankdemonstratedanadequatelevelof community developmentlending,qualifiedinvestmentactivity,andcommunitydevelopmentservices. Examinersalsonotedthatthebankdemonstratedoccasionaluseof innovativeorcomplex qualifiedinvestments,communitydevelopmentloans,orcommunitydevelopmentservices, andthatthebankdemonstratedexcellentresponsivenesstocreditandcommunitydevelopmentneedsinitsassessmentareas. M&T’sEffortssincetheM&TBankEvaluation.M&Trepresentsthat,sincetheM&TBank Evaluation,ithascontinuedtobuilduponitscommitmenttoprovidefinancialservicesto LMIindividuals,withinLMIgeographies,tosmallbusinesses,andtounderservedcommunities.Forinstance,M&TBankhasmadecommunitydevelopmentloansinDelaware, Maryland,NewJersey,NewYork,andtheDistrictof Columbiatoincreaseaffordable housing,revitalizeLMIgeographies,increaseeducationalservicestochildrenof LMI households,anddevelopmedicalfacilities.ThebankalsohascommittedtoCRAqualified investmentsandprovidedcommunitydevelopmentgrantsinDelaware,NewYork,and Pennsylvania.Inaddition,thebankhasofferedasuiteof productsandservicestoaddress thecreditneedsof LMIborrowers,includingmortgageloanproductsandunsecured installmentloanproducts. Asnotedabove,earlierinthependencyof M&T’sapplication,supervisoryassessmentsby theReserveBankdisclosedweaknessesinM&T’sconsumercomplianceprogram.Since thattime,M&ThasundertakeneffortstoaddresstheseweaknessesandprovidedtheBoard withsubstantialinformationrelatingtotheseefforts.M&Thasmadesignificantprogress towardimplementingaprogramacceptabletotheBoardandcommensuratewiththe expandedscaleandscopeof thecombinedorganization.Inparticular,M&Thasimplementedacomplianceprogramthatincludesappropriateriskassessments,testing,and monitoringtoensurecompliancewithallconsumerprotectionlawsandregulations.Under thisprogram,M&Tconductscompliancetestingmorefrequentlythanpeerinstitutions.In addition,M&Thasenhanceditsprocessesforevaluatinglegalandregulatorychanges applicabletotheorganizationandforhandlingconsumercomplaints. ReserveBankexaminershaveconductedmultipleon-sitereviewstoevaluateM&T’sefforts toimplementanenhancedconsumercomplianceprogram.Thesereviewsindicatethat M&Thasmadechangesandenhancementstoitsconsumercompliancesystemsandprocessesandhastakenstepstoaddressweaknessesthatwereidentifiedintheexamination process.Examinersnotedthatthereareadditionalenhancementsthatcanbemadetosome processesandsystemstofurtherimprovetheprogramandmakeitmoreeffective.The BoardhasconsideredinformationprovidedbyM&Tandexaminers’viewsregardingthe improvementsmadebyM&Ttoitsconsumercomplianceprogram.TheBoardexpectsthat M&Twillswiftlyandfullyimplementtheadditionalimprovementstoenhancefurtherthe effectivenessof itsconsumercomplianceprogram. CRAPerformanceof HCB.HCBwasassignedanoverall“Satisfactory”ratingatitsmost recentCRAperformanceevaluationbytheOfficeof ThriftSupervision,57asof March14, 56 WTNAisalimitedpurposebankforpurposesoftheCRAandwasevaluatedunderthecommunitydevelopmenttest.ExaminersreviewedcommunitydevelopmentactivitiesfromMay18,2009,throughMay5,2013.In assessingWTNA,OCCexaminersreviewedWTNA’squalifiedcommunitydevelopmentinvestments,loans, andservicesandalsoconsideredthequalifiedcommunitydevelopmentactivitiesofM&TBank.See12CFR 25.25(d). 57 ThesupervisionoffederallycharteredsavingsassociationswastransferredtotheOCCeffectiveJuly21,2011. SeeDodd-FrankAct§312,Pub.L.No.111-203,124Stat.1376,1521–23(2010),codifiedat12U.S.C.§5412.

318 FederalReserveBulletin|January2016 2011(“HCBEvaluation”).58HCBreceiveda“LowSatisfactory”ratingfortheLending Test,a“HighSatisfactory”ratingontheInvestmentTest,anda“NeedstoImprove”rating ontheServiceTest.59 InevaluatingtheLendingTest,examinersnotedthatHCBwasamongthemarketleaders inHMDAmortgagelendingbasedonitsvolumeof lendingfrom2008through2010. Throughloanoriginationsandpurchases,HCB’slendingtoLMIgeographieswasconsistentwithlendingbytheaggregateof lendersinHCB’sassessmentareas.Thebankalso deployedtwoinnovativeandflexibleloanproductswithreducedinterestratestomeetcommunitycreditneeds.TheexaminersassignedHCBa“LowSatisfactory”ratingbecause,in examiners’view,thelevelof communitydevelopmentlendingwaslowcomparedtothe resourcesavailabletothebank,andexaminerssuggestedthatHCBcouldimproveitsmarketshareof communitydevelopmentlending. ExaminersassignedHCBa“HighSatisfactory”ratingontheInvestmentTestbasedonits levelof qualifiedcommunitydevelopmentinvestments.From2008through2010,thebank madesignificantinvestmentsinsecuritiesbackedbymortgageloansmadetoLMIborrowers,withthemajorityof suchloanshavingbeenoriginatedinHCB’sassessmentareas. Theseinvestmentsrepresentedasignificantincreasefromthepriorevaluationperiod.HCB alsodoubleditsinvestmentinanonprofitcommunitydevelopmentfinancialinstitution thatprovidesinnovativefinancingandtechnicalassistancetofosterthecreationof quality homes,educationfacilities,andemploymentopportunitiesinunderservedcommunitiesin NewJersey.ExaminersnotedthatHCBmadequalifiedcommunitydevelopmentdonations duringtheevaluationperiod,includingcontributionstoHCB’saffiliatedcharitablefoundation. InevaluatingtheServiceTest,examinersnotedthatthebankwasinvolvedinavarietyof communitydevelopmentserviceactivities,includingservicetoorganizationsthatprovide affordablehousingandtransitionalhousingtodisadvantagedyouth.Thebankalsosponsored,andprovidedemployeesfor,foreclosureworkshopsandseminars.Examinersalso observedthatHCBprovidesawiderangeof traditionalthriftdepositandloanproducts throughasubstantialnetwork,withmostbranchesopenonSaturdaysandhavingATMs, drive-upwindows,walk-upwindows,oracombinationthereof,forcustomerconvenience. ExaminersalsonotedthatHCB’sbranchlocationsdidnotinconvenienceLMIpopulations inthebank’scombinedassessmentarea.However,examinersassignedthebankaService Testratingof “NeedstoImprove,”citingtheneedtoimprovethepercentageof thebank’s branchlocationsinLMIgeographiesandtheneedforgreaterinvolvementbythebank’s officersincommunitydevelopmentactivities. HCB’sMortgageLendingPracticesandM&T’sPlansfortheCombinedOrganization.On September24,2015,theDOJ,theCFPB,andHCBannouncedaproposedConsentOrder toresolvetheagencies’claimsthatHCBhasengagedinredliningof majorityBlackand HispanicneighborhoodsinHCB’sthreeprimaryassessmentareas60andtherebydeniedan equalopportunityto,anddiscouragedtheresidentsof theseneighborhoodsto,obtain 58 TheHCBEvaluationwasconductedusingLargeSavingsAssociationCRAExaminationProcedures.ExaminersanalyzedHMDA-reportablemortgageloansoriginatedandpurchasedfromJanuary1,2008,through December31,2010,formostfactorsundertheLendingTest.Examinersconsideredcommunitydevelopment loansoriginatedfromApril2,2008,throughMarch14,2011. 59 TheHCBEvaluationincludedafull-scopereviewofthreeassessmentareas:theNewYork–Newark– Bridgeport,NewYork–NewJersey–Connecticut–Pennsylvania,CombinedStatisticalArea;theBurlington County,NewJersey,assessmentarea;andtheSuffolkCounty,NewYork,assessmentarea.Alimited-scope reviewwasperformedintheCamdenCounty,NewJersey,assessmentareaandtheGloucesterCounty,New Jersey,assessmentarea. 60 TheseareasaretheNewYorkCity,Bridgeport,andPhiladelphiaMSAs.

LegalDevelopments:ThirdQuarter,2015 319 mortgageloansonaccountof theracialcompositionof thoseneighborhoods.61HCB agreedtoaprogramtoensurethatitprovidescreditonanequalandnondiscriminatory basisthroughoutitsassessmentareas,includingby,amongotherthings,takingallreasonable,practicableactions,consistentwithsafeandsoundoperation,toincreaselending, opentwonewbranches,providesubsidizedloanofferings,andexpandoutreachandeducationeffortsintheidentifiedminorityneighborhoodsandcensustracts.HCBalsoagreedto ensurethatitmakescreditavailableinminorityneighborhoodsandcensustractsinthe threeassessmentareasonnolessfavorableabasisthanitdoesinnonminorityneighborhoodsandcensustracts,andnottootherwiseengageindiscriminationprohibitedbythe EqualCreditOpportunityAct62ortheFairHousingAct.63 M&ThasagreedtoaddresstheweaknessesatHCBandcontendsthatM&T’srecordof providingbankingservicesintheareasservedbyHCBdemonstratesM&T’sabilityto implementtheseimprovementseffectively.M&TnotesthatM&TBankalreadyoperatesin theassessmentareasidentifiedintheHCBConsentOrderandhascontinuouslyreceived thehighestavailableCRAratingsince1989.M&TBankwillexpandtheCRAactivitiesof thecombinedbanktobecommensuratewithitsexpandedsizeandgeographicscope.For example,followingconsummation,theCRAlending,investment,andserviceprogramsof M&TBankwouldbeappliedtotheoperationsandactivitiesof HCBinthecommunitiesit serves. Theintegrationof HCBintoM&TBankwillexpandtheCRAassessmentareasforthe combinedbank.Forexample,inNewYork,althoughHCBcurrentlyoperatesprimarilyin StatenIslandandWestchesterCounty,thecombinedbankwouldserveallfiveboroughsof NewYorkCity.Asaresult,thecombinedbankwouldserveabroaderandmorediversified geographicareathaneitherM&TBankorHCBonastandalonebasis.Uponconsummationof theproposalandthemergerof HCBintoM&TBank,M&Twillassumetheobligationsof HCB,includingHCB’sobligationsundertheConsentOrdertoopentwonew branchesinmajority-minoritycensustractswithinHCB’scurrentassessmentareas. Moreover,M&ThasstatedthatitwillexpandtheproductsandservicesthatHCBoffersin HCB’scurrentassessmentareastoincludetheproductsandservicesprovidedbyM&T Bank,anditwillimplementtheCRAprogramdevelopedbyM&TBankattheofficesof HCB.64Inparticular,M&Tplansforthecombinedbanktocontinuetoofferinnovative andflexibleloanproductsthroughoutitsassessmentareas.Forexample,M&Twouldoffer itsversionof theFHACommunityMortgagethroughouttheexpandedgeographicarea servedbythecombinedbank.Similarly,thecombinedbankwillcontinuetoofferM&T Bank’ssuiteof government-backedmortgageproducts,suchasFHAloansandloans backedbytheStateof NewYorkMortgageAgency.Theseproductsincludefeaturessuch asbelow-marketrates,lesscashrequiredout-of-pocketfromborrowers,lendercreditsthat canbeusedforclosing-costassistance,andreduceddownpaymentandreserve requirements. ThecombinedorganizationisexpectedtocontinueM&TBank’scurrentapproachtopromotingtheseaffordablemortgageproducts.M&TnotesthatM&TBankfocusesits 61 PressRelease,ConsumerFinancialProtectionBureau(September24,2015),availableat www.consumerfinance.gov/newsroom/cfpb-and-doj-order-hudson-city-savings-bank-to-pay-27-million-toincrease-mortgage-credit-access-in-communities-illegally-redlined/;PressRelease,DepartmentofJustice(September24,2015),availableatwww.justice.gov/opa/pr/justice-department-and-consumer-financial-protectionbureau-reach-settlement-hudson-city. 62 15U.S.C.§1691etseq. 63 42U.S.C.§3601etseq. 64 ThesecommunitiesincludecommunitiesinNewJersey,whereaccordingtoonecommenter,HCBgenerallyhas apoorCRAperformancerecord.

320 FederalReserveBulletin|January2016 advertisingforsuchaffordablemortgageloanproductsinnewspapersthataretargetedto reachminorityand/orLMIresidentsandincommunity-basednewslettersthatservethose residents.M&TBankalsopromotesitsaffordablemortgageproductsthroughreferrals, loanofficerinteractionswithcustomers,andparticipationwithnonprofithousingcounselorsandcommunityreinvestmentorganizations.M&Tstatesthatithasfoundthatparticipationwithsuchorganizationsincommunityevents,suchashousingfairs,seminars,and similarevents,isaneffectivemeanstopromotethefeaturesandbenefitsof itsaffordable mortgageloanproducts. M&TalsoplanstocontinuetoprovidecommunitysponsorshipsthatbenefitLMIand minorityneighborhoods.M&T’sexistingcommunitysponsorshipsinclude,forexample, financialsupportfororganizationsliketheWestminsterCommunityCharterSchool, anelementaryschoolthatservesLMIandminorityneighborhoodsinBuffalo,NewYork. Followingconsummationof theproposal,theBoardexpectsthatM&Twillcooperatefully withtheDOJandtheCFPBandthatM&Twillensurethatthecombinedorganization commitstheappropriateresourcestointegratetheoperationsof HCBintothoseof M&T Bankandfulfillalloutstandingobligationsof HCBunderapplicablelawandtheConsent Order. C.PublicBenefitsof theProposals Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Commentersallegethattheseproposalswouldnotprovideaclearorsignificant publicbenefit.65 Inthisregard,M&Trepresentsthattheproposalswouldprovideexistingcustomersof HCBwithaccesstoanexpandedbranchandATMnetworkandwouldofferadditional productsandservicestoHCB’scustomersthatarenotcurrentlyofferedbyHCB,including productsandservicestobenefitLMIindividualsandcommunitiesinHCB’sNewJersey andConnecticutmarkets.66Forexample,HCBcustomerswouldhaveaccesstoM&T’s deposit,lending,investment,wealthadvisory,andinstitutionalclientservices,aswellasa suiteof commercialloananddepositproducts.HCB’sretailcustomerswouldbenefitfrom M&TBank’sofferingof consumerloansandmortgages,includingvariousconventional mortgageproducts;FHAandVAmortgages,includingrenovationloansundersection203(k)of theNationalHousingAct;67andavarietyof CRAproductsfocusedontheneedsof LMI borrowers. 65 Inaddition,acommenterexpressedconcernsthatM&TBankwouldclosebranchesinNewYorkandthereby decreaseaccesstobankingservicesinLMIneighborhoods.M&Tdoesnotcurrentlyhaveanyplanstoclose anyHCBorM&TBankbranchesuponanacquisitionofHCBandisstillevaluatingpotentialbranchconsolidationopportunities.M&TBankhasidentifiedthreepotentialconsolidationopportunitieswhereM&TBank branchesareincloseproximitytoHCBbranchesandwherethecharacteristicsoftherespectivebranches—i.e., thefloorplans,customerservicingelements(e.g.,drive-up,tellerlines),branchcondition,andlocation—might supportaconsolidationdecision. Inthisregard,M&TBank’sbranchclosingrecordwillcontinuetobereviewedbyReserveBankexaminersin thecourseofconductingCRAperformanceevaluations.Moreover,federallawrequiresaninsureddepository institutiontoprovidenoticetothepublicandtotheappropriatefederalbankingagencybeforeclosinga branch.Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJoint PolicyStatementRegardingBranchClosings(64FederalRegister34844(June29,1999)),requiresthatabank providethepublicwithatleast30days’notice,andtheappropriatefederalbankingagencywithatleast90 days’notice,beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsand othersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings. 66 CommentersexpressedconcernsthatM&Twouldnotintroducenewproductsandservicestothecustomersof HudsonCity,especiallytoitsLMIcustomers. 67 12U.S.C.§1709(k).

LegalDevelopments:ThirdQuarter,2015 321 Inaddition,followingthemergerof HCBwithM&TBank,theCRAprogramsof M&T Bankwouldbeappliedtotheoperationsandactivitiesof HCB.M&TnotesthatM&T Bank’sCRAprogramhasbeenappliedtotheoperationsandactivitiesof otherbanksthat havebeenmergedintoM&TBank,andM&TBankhasmaintainedan“Outstanding” CRAperformancerecordineachCRApublicevaluationfollowingtheseactions.Inlight of thisrecord,M&TarguesthattheproposalswouldproduceCRAbenefitsthrough increasedCRAactivitiesandimprovedCRAperformanceinthecommunitiesHCBserves. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingrecordsof therelevantdepositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,consultationswiththeOCCandtheCFPB,confidentialsupervisoryinformation,informationprovidedbyM&T,andthepubliccommentson theproposals.Basedonthatreview,theBoardconcludesthattheproposalswouldresultin publicbenefitsthatwouldoutweighthepotentialadverseeffectsandthattheconvenience andneedsfactorisconsistentwithapproval. TheseproposalsrepresentasignificantexpansionbyM&T.Asnotedabove,theBoard expectsM&TtocompleteitseffortstoimplementeffectiveconsumercomplianceandmanagementprogramsacrosstheentireenterpriseandexpectsthatM&Twillimplementa consumercomplianceprogramthatiscommensuratewiththesizeandcomplexityof the combinedorganization. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringaproposalundersection4(j)of theBHCAct,and asafactorthatmustbeconsideredundertheBankMergerAct.68 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.69These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.70 68 Dodd-FrankAct§§604(e)(1)and(f),Pub.L.No.111-203,124Stat.1376,1601–02(2010),amending12U.S.C. §§1843(j)(2)(A)and1828(c)(5). 69 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 70 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrder.

322 FederalReserveBulletin|January2016 Inthiscase,theBoardhasconsideredinformationrelevanttotheriskstothestabilityof theU.S.bankingorfinancialsystem,includingpubliccommentsontheproposals.71Both theacquirerandthetargetarepredominantlyengagedinretailfinancialactivities.72The proformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibit anorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthat wouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,the organizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirms orthemarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. AdditionalPublicBenefitsof theProposals Asnoted,inconnectionwithanoticeundersection4(c)(8)of theBHCAct,section4(j)of theBHCActrequirestheBoardto“considerwhetherperformanceof theactivitybya bankholdingcompanyorasubsidiaryof suchcompanycanreasonablybeexpectedto producebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgains inefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”73Asnoted, commentersassertedthattheproposedtransactionswouldnotprovideaclearorsignificantpublicbenefit.Asdiscussedabove,theBoardhasconsideredthattheproposedtransactionswouldprovidegreaterservices,productofferings,andgeographicscopetocustomersof HudsonCity.Inaddition,theacquisitionswouldensurecontinuityandstrengthof servicetocustomersof HudsonCity. TheBoardconcludesthattheconductof theproposednonbankingactivitieswithinthe frameworkof RegulationY,Boardprecedent,andthisOrderisnotlikelytoresultinsignificantadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.Onthebasisof theentirerecord,includingconditionsnotedinthisOrder,andforthereasonsdiscussedabove,theBoardbelievesthatthe balanceof benefitsandpotentialadverseeffectsrelatedtocompetition,financialand managerialresources,convenienceandneeds,financialstability,andotherfactorsweighin favorof approvalof theseproposals.Accordingly,theBoarddeterminesthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwith approval. 71 AcommentergenerallyallegesthatM&Tseekstobecome“toobigtofail.” 72 M&Tacceptsretaildepositsandengagesinmortgagelending,mortgageandcreditcardservicing,commercial realestatefinancing,smallbusinesslending,creditcardandotherconsumerlending,wealthmanagement,institutionalclientservices,andsecuritiesbrokerageservices.HudsonCityofferssavingsaccounts,certificatesof deposit,andresidentialmortgageloans.Ineachofitsactivities,M&Thas,andasaresultoftheproposals wouldcontinuetohave,asmallshareonanationwidebasis,andnumerouscompetitorswouldremain. 73 12U.S.C.§1843(j)(2)(A).

LegalDevelopments:ThirdQuarter,2015 323 Establishmentof Branches Asnoted,M&TBankhasappliedundersection9of theFRAtoestablishbranchesatthe currentlocationsof HCB.74TheBoardhasassessedthefactorsitisrequiredtoconsider whenreviewinganapplicationunderthatsection.75ForthereasonsdiscussedinthisOrder, theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalsshouldbe,andherebyare,approved.76Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof theseproposalsisspecificallyconditionedoncompliancebyM&Twithallcommitments madeinconnectionwiththeseproposalsandtheconditionssetforthinthisOrder.The commitmentsandconditionsaredeemedtobeconditionsimposedinwritingbytheBoard inconnectionswithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposedtransactionsmaynotbeconsummatedbeforethe15thcalendardayafterthe effectivedateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodis extendedforgoodcausebytheBoardorReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveSeptember30,2015. 74 Undersection9oftheFRA,statememberbanksmayestablishandoperatebranchesonthesametermsand conditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,statememberbanksmay establishbranchesatlocationsacquiredthroughacquisitionifthebranchesarelocatedinstatesinwhichthe statememberbankhadapresencepriortotheacquisition.Seesections5455(c)(2)and(e)oftheRevisedStatutesoftheUnitedStates,12U.S.C.§36(c)(2)and(e).Inaddition,section341oftheDodd-FrankActprovides authorityforsavingsassociationsthatbecomebankstocontinuetooperatebranchesthattheyoperatedimmediatelybeforebecomingbanks.Dodd-FrankAct§341,Pub.L.No.111-203,124Stat.1376,1540–41(2010), codifiedat12U.S.C.§5451. 75 12U.S.C.§§321and322;12CFR208.6.Specifically,theBoardhasconsideredM&TBank’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsofthecommunitiestobeserved,and CRAperformance.Inaddition,uponconsummationoftheproposals,M&TBank’sinvestmentsinbankpremiseswouldremainwithinthelegalrequirementsunder12CFR208.21. 76 SeveralcommentersrequestedthattheBoardholdpublichearingsormeetingsontheproposals.TheBoard’s regulationsprovideforaformalpublichearingorinformalpublicmeetingonanoticefiledundersection4of theBHCActiftherearedisputedissuesofmaterialfactthatcannotberesolvedinsomeothermanner. 12CFR225.25(a)(2).Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriate toallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnot adequatelyrepresenttheirviews.TheBoardhasconsideredthecommenters’requestsinlightofallthefactsof record.IntheBoard’sview,commentershavehadampleopportunitytosubmitcommentsontheproposals and,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposals.Thecommenters’requestsdonotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbe clarifiedbyapublichearingormeeting.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthecommenters’viewsadequatelyorwhyameetingotherwisewouldbenecessaryor appropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublic hearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestsforapublichearingormeetingon theproposalsaredenied. Inaddition,acommenterrequestedafurtherextensionofthecommentperiodfortheproposals.TheBoard’s RulesofProcedurecontemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.12CFR262.25(b)(2).Thecommenter’srequestsforadditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionofthepublic commentperiodfortheseproposals.Accordingly,theBoardhasdeterminednottoextendfurtherthepublic commentperiod.

324 FederalReserveBulletin|January2016 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix ConnecticutBranchestoBeEstablished 1. 100EastPutnamAvenue,CosCob,Connecticut 2. 599NewfieldAvenue,Stamford,Connecticut 3. 2ProspectStreet,Ridgefield,Connecticut 4. 837PostRoad,Fairfield,Connecticut 5. 146GreenwoodAvenue,Bethel,Connecticut 6. 247FederalRoad,Brookfield,Connecticut 7. 525MainStreet,Monroe,Connecticut 8. 547BostonPostRoad,Darien,Connecticut 9. 596WestportAvenue,Norwalk,Connecticut NewJerseyBranchestoBeEstablished 10. West80CenturyRoad,Paramus,NewJersey 11. 532OceanAvenue,JerseyCity,NewJersey 12. 2530KennedyBoulevard,JerseyCity,NewJersey 13. 7533BergenlineAvenue,NorthBergen,NewJersey 14. 7EastProspectStreet,Waldwick,NewJersey 15. 249KinderkamackRoad,Oradell,NewJersey 16. 495ManilaAvenue,JerseyCity,NewJersey 17. 790QueenAnneRoad,Teaneck,NewJersey 18. 897ProspectStreet,GlenRock,NewJersey 19. 684AndersonAvenue,CliffsidePark,NewJersey 20. 304EssexStreet,Lodi,NewJersey 21. 330KinderkamackRoad,Emerson,NewJersey 22. 731BrickBoulevard,Brick,NewJersey 23. 887AllwoodRoad,Clifton,NewJersey 24. 119CentralAvenue,Westfield,NewJersey 25. 80UnionAvenue#86,Cresskill,NewJersey 26. 62-64MainStreet,Millburn,NewJersey 27. 767BloomfieldAvenue,WestCaldwell,NewJersey 28. 114-116KingsHighwayEast,Haddonfield,NewJersey 29. 365TuckerAvenue,Union,NewJersey 30. 167EastKennedyBoulevard#169,Lakewood,NewJersey 31. 2335ChurchRoad,CherryHill,NewJersey 32. 379RamapoValleyRoad,Oakland,NewJersey 33. 57WestMainStreet,Ramsey,NewJersey 34. 94NorthMapleAvenue,Ridgewood,NewJersey 35. 1070MainStreet,RiverEdge,NewJersey 36. 1002MantuaPike,WoodburyHeights,NewJersey 37. 303MainStreetandCenterAvenue,FortLee,NewJersey 38. 351WestMainStreet,Freehold,NewJersey 39. OnePaddockPlaza,WestLongBranch,NewJersey 40. 587SummitAvenue,JerseyCity,NewJersey 41. 715RiverRoad,NewMilford,NewJersey 42. 341SpringfieldAvenue,Summit,NewJersey 43. 1406Route130,Cinnaminson,NewJersey

LegalDevelopments:ThirdQuarter,2015 325 44. 632WestwoodAvenue,RiverVale,NewJersey 45. 128CenterGroveRoad,Randolph,NewJersey 46. 45OutwaterLane,Garfield,NewJersey 47. 10WestMainStreet,Denville,NewJersey 48. 355ApplegarthRoad,Monroe,NewJersey 49. 216PassaicAvenue,Kearny,NewJersey 50. 782LaceyRoad,ForkedRiver,NewJersey 51. 35aMarshallHillRoad,WestMilford,NewJersey 52. 157SeventhAvenue,Newark,NewJersey 53. 72MtVernonPlace,Newark,NewJersey 54. 187EagleRockAvenue,Roseland,NewJersey 55. 641ShunpikeRoad,Chatham,NewJersey 56. 18JamesStreet,FlorhamPark,NewJersey 57. 977ValleyRoad,Gillette,NewJersey 58. 90BarclayCenter,Route70,CherryHill,NewJersey 59. 55BrickBoulevard,Brick,NewJersey 60. 2100Route70,Manchester,NewJersey 61. 209Route206South,Chester,NewJersey 62. 75Route35,Middleton,NewJersey 63. 232SouthLivingstonAvenue,Livingston,NewJersey 64. 313HenryStreet,Orange,NewJersey 65. 150NewarkPomptonTurnpike,Pequannock,NewJersey 66. 200GrandAvenue,Hackettstown,NewJersey 67. 261GodwinAvenue,Wyckoff,NewJersey 68. 340MainStreet,Madison,NewJersey 69. 577LakehurstRoad,TomsRiver,NewJersey 70. 288MainStreet,Orange,NewJersey 71. 1965StateRoute57,Hackettstown,NewJersey 72. 50EastPalisadeAvenue,Englewood,NewJersey 73. 60ParkPlace,Newark,NewJersey 74. 1328RiverAvenue,Lakewood,NewJersey 75. 217BerdanAvenue,Wayne,NewJersey 76. 335AtlanticCityBoulevard,Bayville,NewJersey 77. 240BaldwinRoad,Parsippany,NewJersey 78. 1000Route70,Lakewood,NewJersey 79. 277EisenhowerParkway,Livingston,NewJersey 80. 408EastMadisonAvenue,Dumont,NewJersey 81. 89InterstateShoppingCenter,Ramsey,NewJersey 82. 455CountyRoad,Marlboro,NewJersey 83. 1018WashingtonStreet,Hoboken,NewJersey 84. 115FranklinTurnpike,Mahwah,NewJersey 85. 580NorthMainSt.,Barnegat,NewJersey 86. 601Route72East,Manahawkin,NewJersey 87. 45SouthNewYorkRoad,Galloway,NewJersey 88. 435LewandowskiStreet,Lyndhurst,NewJersey 89. 108LaceyRoad,Whiting,NewJersey 90. 85GodwinAvenue,MidlandPark,NewJersey 91. 547Broadway,Bayonne,NewJersey 92. 3495U.S.Highway1,Suite2,Princeton,NewJersey 93. 370Route130,EastWindsor,NewJersey 94. 2407StateRoute71,SpringLake,NewJersey 95. 523ShoppesBoulevard,NorthBrunswick,NewJersey 96. 1168Highway34,Aberdeen,NewJersey 97. 416SouthMainStreet,ForkedRiver,NewJersey

326 FederalReserveBulletin|January2016 98. 1620Route23North,Wayne,NewJersey 99. 210EnterpriseDrive,Rockaway,NewJersey 100. 51Route22East,GreenBrook,NewJersey 101. 3562Route27,Princeton,NewJersey 102. 3897Route9,OldBridge,NewJersey 103. 166StateRoute31,Flemington,NewJersey 104. 779FranklinAvenue,FranklinLakes,NewJersey 105. 3TreeFarmRoad,Pennington,NewJersey 106. 889FischerBoulevard,TomsRiver,NewJersey NewYorkBranchestoBeEstablished 107. 53345MainRoad,Southold,NewYork 108. 18EastMontaukHighway,HamptonBays,NewYork 109. 1591RichmondRoad,StatenIsland,NewYork 110. 2220ForestAvenue,StatenIsland,NewYork 111. 25HillStreet,Southampton,NewYork 112. 1430OldCountryRoad,Riverhead,NewYork 113. 2212HylanBoulevard,StatenIsland,NewYork 114. 133MainStreet,WesthamptonBeach,NewYork 115. 320MamaroneckAvenue,WhitePlains,NewYork 116. 389HalsteadAvenue,Harrison,NewYork 117. 115SouthRidgeStreet,PortChester,NewYork 118. 228SouthMainStreet,NewCity,NewYork 119. 1019ParkStreet,Peekskill,NewYork 120. 1961CommerceStreet,YorktownHeights,NewYork 121. 3031EastMainStreet,MoheganLake,NewYork 122. 88FourthStreet,NewRochelle,NewYork 123. 302SomersCommons,BaldwinPlace,NewYork 124. 4106HylanBoulevard,StatenIsland,NewYork 125. 248MainStreet,CenterMoriches,NewYork 126. 301Route25a,MillerPlace,NewYork 127. 2040BostonPostRoad,Larchmont,NewYork 128. 74825MainRoad,Greenport,NewYork 129. 126NorthMainStreet,EastHampton,NewYork 130. 300MamaroneckAvenue,Mamaroneck,NewYork 131. 190GleneidaAvenue,Carmel,NewYork 132. 2935VeteransRoadWest,SuiteF,StatenIsland,NewYork 133. 903MontaukHighway,Bayport,NewYork 134. 1320StonyBrookRoad,Suite140,StonyBrook,NewYork 135. 2102MontaukHighway,Bridgehampton,NewYork Order Issued Under Sections 3 and 4 of the Bank Holding Company Act PacWest Bancorp Los Angeles, California OrderApprovingtheMergerof BankHoldingCompaniesandAcquisitionof Nonbanking Subsidiaries FRBOrderNo.2015–26(September21,2015) PacWestBancorp(“PacWest”),LosAngeles,California,hasrequestedtheBoard’s approvalundersection3of theBankHoldingCompanyActof 1956,asamended(“BHC

LegalDevelopments:ThirdQuarter,2015 327 Act”),1tomergewithSquare1Financial,Inc.,andtherebyacquireitssubsidiarybank, Square1Bank,bothof Durham,NorthCarolina.Immediatelyfollowingtheproposed merger,Square1BankwouldbemergedintoPacWest’ssubsidiarybank,PacificWestern Bank(“PWB”),LosAngeles,California.2PacWesthasalsorequestedtheBoard’sapproval undersections4(c)(8)and4(j)of theBHCActandsection225.24of theBoard’sRegulationYtoacquirenonbankingsubsidiariesof Square1Financialthatareengagedinfinancialandinvestmentadvisoryactivities.3 Noticeof theproposals,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedintheFederalRegister(80FederalRegister18404(April6,2015);80 FederalRegister22189(April21,2015)).4Thetimeforsubmittingcommentshasexpired, andtheBoardhasconsideredtheproposalsandallcommentsreceivedinlightof the factorssetforthintheBHCAct. PacWest,withconsolidatedassetsof approximately$16.7billion,isthe84thlargestdepositoryorganizationintheUnitedStates.5PacWestcontrolsPWB,whichoperatesbranches onlyinCalifornia.PWBisthe14thlargestinsureddepositoryinstitutioninCalifornia,controllingapproximately$12.0billionindeposits,whichrepresent1.1percentof thetotal depositsof insureddepositoryinstitutionsinCalifornia.6 Square1Financial,withconsolidatedassetsof approximately$3.9billion,isthe265th largestdepositoryorganizationintheUnitedStates.Square1FinancialcontrolsSquare1 Bank,whichoperatesonebranchlocatedinDurham,NorthCarolina.Square1Bankis the9thlargestinsureddepositoryinstitutioninNorthCarolinawithapproximately $2.4billionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. Uponconsummation,PacWestwouldbecomethe76thlargestdepositoryorganizationin theUnitedStates,withconsolidatedassetsof approximately$21.3billion,whichrepresent lessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnited States.PacWestwouldcontrolapproximately$14.4billionindeposits,whichrepresentless than1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates. Becausethistransactioninvolvestheacquisitionbyabankholdingcompanyof abank andnonbankcompanies,theBoardhasreviewedthetransactionunderbothsection3and section4of theBHCAct.Section3governstheacquisitionof abank;section4establishes thestandardsgoverningtheacquisitionof nonbankcompanies. InterstateandDepositCapAnalyses Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto 1 12U.S.C.§1842. 2 ThemergerofSquare1BankintoPWBissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).TheFDIC approvedthebankmergeronAugust24,2015. 3 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 4 12CFR262.3(b). 5 AssetdataareasofJune30,2015,andnationwideasset-rankingdataareasofMarch31,2015,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks,andsavingsassociations.

328 FederalReserveBulletin|January2016 whetherthetransactionisprohibitedunderstatelaw.7Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.8Inaddition,theBoardmaynotapprove aninterstateacquisitionif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStatesor 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof PacWestisCalifornia,andthehomestate of Square1FinancialisNorthCarolina.10PacWestiswellcapitalizedandwellmanaged underapplicablelaw,andPWBhasa“Satisfactory”CommunityReinvestmentAct (“CRA”)rating.11Inthiscase,NorthCarolina’sstatutewouldrequiretheapplicationof California’sfiveyearminimumagerequirement,andSquare1Bankhasbeeninexistence formorethanfiveyears.12 Onconsummationof theproposals,PacWestwouldcontrollessthan1percentof thetotal amountof depositsininsureddepositoryinstitutionsintheUnitedStates.Inaddition,the combinedorganizationwouldcontrol$12.0billion(orapproximately1.1percent)and $2.4billion(orapproximately0.7percent)of thetotalamountof depositsof insured depositoryinstitutionsinCaliforniaandNorthCarolina,respectively,whicharethetwo statesinwhichthecombinedorganizationwouldhavebankingoperationsuponconsummationof theproposal.Accordingly,inlightof allthefactsof record,theBoardmay approvetheproposalundersection3(d)of theBHCAct.13 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby 7 12U.S.C.§1842(d)(1)(A). 8 12U.S.C.§1842(d)(1)(B). 9 12U.S.C.§1842(d)(2)(A)and(B). 10 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonJuly1,1966,orthedateonwhichthecompanybecameabankholdingcompany, whicheverislater.Astatebank’shomestateisthestatebywhichthebankischartered.12U.S.C.§1841(o)(4). 11 12U.S.C.§2901-2908. 12 NorthCarolinalawappliestoanout-of-statebankorholdingcompanytherequirementsorlimitationsthat wouldbeimposedbysuchbank’sorholdingcompany’shomestateonanacquisitionmadebyaNorthCarolinabankorholdingcompanyintheotherstate.SeeN.C.Gen.Stat.§53-211(a).Inturn,California,PacWest’s homestate,providesthat“[n]oforeign(otherstate)bankthatdoesnotalreadymaintainaCaliforniabranch officemay...[m]ergeasthesurvivingbankwithaCaliforniabank...unlesstheCaliforniabankhasbeenin existenceforatleastfiveyears.”Cal.Fin.Code§1685.Consequently,afiveyearminimumagerequirement appliesinthiscase. 13 Onecommenterarguedthatthemergermayresultinviolationofsection109oftheRiegle-NealInterstate BankingandBranchingEfficiencyActof1994(the“Riegle-NealAct”),whichgenerallyprohibitsabankfrom establishingoracquiringabranchoutsideitshomestateforthepurposeofdepositproduction.TheBoard notesthattheloan-to-depositratiotestestablishedundersection109oftheRiegle-NealActisnotapplicable untiloneyearafterestablishmentoracquisitionofaninterstatebranchandthereforewouldnotbeappliedto PWBuntiloneyearafterconsummation.Furthermore,iftheloan-to-depositratiotestestablishedundersection109isnotsatisfiedbyPWBoneyearafterconsummation,PWBwouldnotviolatesection109unlessitis alsofoundbytheFDICnottobereasonablyhelpingtomeetthecreditneedsofthecommunitiesserved, includingthroughtheFDIC’sevaluationofthebank’sperformancerecordundertheCRA,whichiscurrently deemedtobe“Satisfactory.”See12U.S.C.§1835a.

LegalDevelopments:ThirdQuarter,2015 329 theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.14Inaddition,undersection4of theBHCAct,theBoardmustconsiderthe competitiveeffectsof aproposaltoacquireanonbankcompanyunderthebalancingtest of section4(j)of theBHCAct.15 PWBandSquare1Bankdonotcompetedirectlyinanybankingmarket.TheDepartment of JusticehasadvisedtheBoardthatconsummationof thetransactionwouldnotbelikely tohaveasignificantlyadverseeffectoncompetitioninanyrelevantmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedon bothparent-onlyandconsolidatedbases,aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,andearnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theapplicanttoabsorbthecostsof theproposalandtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancial factors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof the financialandmanagerialresourcesandtheproposedbusinessplan. PacWestandPWBarebothwellcapitalizedandwouldremainsoonconsummationof the proposedtransaction.Theproposedtransactionisabankholdingcompanymergerthatis structuredasanexchangeof shares.16Theassetquality,earnings,andliquidityof PWB andSquare1Bankareconsistentwithapproval,andPacWestappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.17Inaddition,futureprospectsareconsideredconsistentwithapproval. 14 12U.S.C.§1842(c)(1). 15 12U.S.C.§1843(j)(2)(A). 16 Asproposed,Square1FinancialwouldbemergedintoPacWestandsharesofSquare1Financialwouldbe convertedintoarighttoreceivesharesofPacWestcommonstock,basedonanexchangeratio.Additionally, outstandingoptions,warrants,andunvestedrestrictedstockofSquare1Financialwouldbecancelledin exchangeforcash.PacWesthasthefinancialresourcestofundtheacquisition. 17 OnecommenterexpressedconcernaboutthesafetyandsoundnessofPacWest,arguingthatthecompanyhasa highloan-to-depositratio,poorassetquality,andheavycoststructure.TheBoardhasconsideredthiscomment aswellasthefinancialresourcesofthecombinedorganization,includingassetqualityandothermeasuresof financialability. ThiscommenteralsonotedthatPacWesthaditscreditratingsbyFitchRatingswithdrawninApril2015. PacWestdoesnothaveanyoutstandingdebt,isnotissuinganydebt,andhasnoplanstoissuedebt.As aresult,PacWestaskedFitchnottoprovidearatingtothecompany,andPacWestdidnotrenewitscontract withFitch.Inaddition,inannouncingthewithdrawalofPacWest’srating,Fitchaffirmedtheratingand assignedPacWestastableoutlook.

330 FederalReserveBulletin|January2016 Basedonitsreviewof therecord,theBoardfindsthatPacWesthassufficientfinancial resourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of PacWest,Square1Financial,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyPacWest,theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,and theorganizations’recordsof compliancewithapplicablebanking,consumerprotection, andanti-money-launderinglaws. PacWest,Square1Financial,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.PacWest’sexistingrisk-managementprogramanditsdirectorate andseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof PacWesthavesubstantialknowledgeof andexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredPacWest’splansforimplementingtheproposal.PacWestis devotingsignificantresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessfortheseproposals.PacWesthasademonstratedrecordof successfullyintegrating organizationsintoitsoperationsandrisk-managementsystemsfollowingacquisitions. Since2000,PacWesthasacquiredandsuccessfullyintegratedintoitsoperationsmorethan 20bankingorganizations.Aspartof itsintegrationprocess,PacWestconductsacomprehensivereviewof thetarget’sactivitiesandthecompliance,policies,procedures,andinternalmonitoringassociatedwiththeseactivities.Whereappropriate,newelementsare introducedandincorporatedintoPacWest’spoliciesandprocessestoensuretheyareeffectiveforthecombinedorganization.Asaresultof thisintegrationprocessinconnection withits2014acquisitionof CapitalSourceInc.,PacWestoverhauledandsignificantly improveditsriskmanagementframeworktoaddressthenewactivitiesandriskprofilethat resultedfromthetransaction.PacWesthasalsoimprovedthedepthandexperienceof its managementthroughprioracquisitionsbyretainingmanagementfromacquisitiontargets. PacWestplanstofollowthisprocessinintegratingSquare1Bank. PacWestwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,PacWest’sandSquare1Financial’smanagementhastheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner, andPacWestplanstointegrateSquare1Financial’sexistingmanagementandpersonnelin amannerthataugmentsPacWest’sandPWB’smanagement.18 Basedonallthefactsof record,includingPacWest’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof PacWestandSquare1Financialincombattingmoney-launderingactivities,areconsistentwithapproval. 18 Afterconsummation,thechiefexecutiveofficerandpresidentofSquare1Bankwillbecomethepresidentof theSquare1divisionofPWB,andonecurrentdirectorofSquare1Financialwillbeappointedtotheboardof directorsofPacWest.

LegalDevelopments:ThirdQuarter,2015 331 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevant depositoryinstitutionsundertheCRA.19TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”)neighborhoods.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloanapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics. TheBoardalsoconsidersthesupervisoryassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. TheBoardconsultedwiththeFDICconcerningitsevaluationof theCRAperformanceof PWBandSquare1Bank,PWB’scompliancewithfairlendingandconsumerprotection lawsandregulations,andthecommentsreceivedontheproposal.TheFDICconsideredthecommentsopposingtheproposal,includingallegationsagainstPWBandSquare1 Bank,aspartof theFDIC’sreviewof theproposedmergerof thetwobanksandhas approvedthebankmerger. A.PublicCommentsRegardingtheProposal Inthiscase,theBoardreceived17commentsfrom13commentersobjectingtotheproposalonthebasisof PWB’sCRAperformancerecordandplansformeetingthecredit needsof thecommunitiesservedbythecombinedorganization.Of the13opposingcommenters,10commenters,ledbyaCaliforniabasedcommunitygroup,submittedsubstantiallyidenticalcommentsraisingidenticalissuesandconcerns.22Thesecommentersraised issuesandconcernsaboutPacWestanditsCRAactivitiessimilartothoseraisedinconnectionwiththeapplicationforBoardapprovalof PacWest’s2014acquisitionof Capital SourceInc.,whichwasgrantedbytheBoard.23 Commentersarguedthatonly42percentof thebank’sbusinessloansweremadetobusinesseswithlessthan$1millioninannualrevenuesin2014,andthatthebankshould 19 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 20 12U.S.C.§2901(b). 21 12U.S.C.§2903. 22 Onecommenter,ReinvestmentPartners,alsosubmittedapetitioninoppositiontotheproposal,withthenames ofapproximately158individuals. 23 SeePacWestBancorp,FRBOrderNo.2014-3(April1,2014).Asnotedbelow,PWB’sCRAperformance recordhasbeenevaluatedbytheFDICsincetheCapitalSourceacquisitionandhasimprovedsignificantly.

332 FederalReserveBulletin|January2016 extendatleast50percentof itsbusinessloanstothosebusinessesannually.24Commenters alsoarguedthatPacWesthasnotmadesufficientreinvestments,includingthroughsmall businesslending,inruralareasandthatthecompanyhasahistoryof closingbranchesin ruralareas.25Inaddition,commentersarguedthatSquare1BankhasastrongerCRAperformancerecordthanPacWestandtheproposalwilldiluteSquare1Bank’sCRAperformancebecausedepositscollectedbySquare1BankinNorthCarolinamaybereinvestedin PacWest’sassessmentareasoutsidethatstate.Itwasalsoarguedthattheproposalwould notprovideapublicbenefittotheaffectedcommunities.Thesecommentersurgedthat approvalof PacWest’sproposalbeconditionedonthesubmissionof astronger,multi-year CRAplanthatismadeavailablepublicly,includingonPacWest’swebsite. PWB’sandSquare1Bank’sBusinessesandPacWest’sResponsestoComments.PWB focusesonservingsmall-tomedium-sizedbusinessesthroughabroadrangeof banking productsandservices,includingdepositproducts,moneymarketaccounts,commercial loans,realestateconstructionloans,andSBA-guaranteedloans.Asubstantialmajorityof PWB’sloansareoriginatedwithinitslocalcommunitiestobusinesscustomersof different revenuesizes.PWBhas81brancheslocatedthroughoutCalifornia. Square1Bankprimarilyservesventurecapitalandprivateequityfirmsandtheirportfolio companiesbyprovidingdepositproducts,termcommercialrevolvinglinesof credit, asset-basedloans,creditcards,foreignexchange,cashmanagement,andlettersof credit. Square1Bankalsohasarecentlyformedassetmanagementsubsidiarythatprovides investmentadvisoryservicestoclientsof Square1Bank.Square1Bankoperatesone branchinDurham,NorthCarolina. PacWestcontendsthatPWB’sloanstobusinesseswithannualrevenuesof $1millionor lessgrewfromapproximately34percentof itssmallbusinessloansin2012to42percentof 24 Commentersalsoexpressedconcernabout:(i)PacWest’sdecisiontodeveloptwonewsmallbusinessproducts ratherthanparticipateinCalifornia’sstateloanguaranteeprogramassuggestedbycommenters;(ii)PacWest’s failuretocommitatleast$50,000peryeartotechnicalassistanceforsmallbusinesses;(iii)theabsenceofaformalizedprogramunderwhichPacWestwouldrefertocommunitylendersatleast20percentofthesmallbusinessloanapplicantsdeclinedbyPacWest;(iv)PacWest’sfailuretodevelopabankaccountwithfeaturessuggestedbyonecommenter;(v)PacWest’sfailuretocommitatleast50percentofitscharitablecontributionsto housingandeconomicdevelopment;(vi)thelevelofcharitableandphilanthropicactivitybySquare1Bank; (vii)theconcentrationofPacWestcommunitydevelopmentlendingandinvestmentsintaxcreditsandnon-equityequivalentinvestments;and(viii)theconcentrationofSquare1BankCRAlendingandinvestmentsin CRA-qualifyingmortgagebackedsecurities. AlthoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsofcommunitiesbymaking certainproductsorservicesavailableoncertaintermsoratcertainrates,theCRAneitherrequiresaninstitutiontoprovideanyspecifictypesofproductsorservicesnorauthorizesthefederalbankingagenciestodirecta bank’scommunitydevelopmentinvestmentorlendingactivitiestospecificgroups,individuals,projects,or typesofinvestmentssuchasthoserecommendedbycommenters.Moreover,neithertheCRAnortheagencies’ implementingrulesrequirethatinstitutionsengageinaspecificactivitysuchascharitablegivinginorderto meetcommunitycreditneedsofthecommunitiestheinstitutionsserve.Asexplainedbelow,theBoardhasconsideredwhethertheproductsPacWestandSquare1Financialhavechosentoprovidehelpmeetthecreditneeds oftheentirecommunity,includingLMIareas. CommentersalsoraisedconcernsthatPacWestdoesnothaveavendorprogramthattargetscontractingopportunitiestominority,womenanddisabled-ownedbusinessesandthatPacWesthasreceivedpaymentsfromthe FDICpursuanttothecompany’sloss-shareagreementwiththeagency.TheBoardbelievesthatthesecontentionsandconcernsareoutsidethelimitedstatutoryfactorsthattheBoardisauthorizedtoconsiderwhen reviewinganapplicationundertheBHCAct.SeeCITGroup,Inc.,FRBOrderNo.2015-20,n.71(2015);Bank ofAmericaCorporation,90FederalReserveBulletin217,223n.31(2004).SeealsoWesternBancshares,Inc.v. BoardofGovernors,480F.2d749(10thCir.1973)(“WesternBancshares”). 25 CommentersalsoarguedthatPacWest’sCRAplanforPWBisweakanddeceptivebecause,althoughitcommitsthatPWB’sCRAactivitieswillrepresentacertainpercentageofcoredeposits,theCRAplandefines “coredeposits”toexcluderoughly50percentofthebank’sdeposits.Theresult,incommenters’views,isthat PacWest’sCRAplanoverstatesthelevelofCRAactivitiesasapercentageofdeposits.NeithertheCRAnor thefederalbankingagencies’implementingrulesrequirethataninstitution’sCRAactivitiesrepresentaspecificpercentageofitsdeposits.Rather,aninstitution’sCRAperformanceismeasuredbyperformancetestsand standardsoutlinedinthefederalbankingagencies’CRAregulations.See12CFR228.21etseq.

LegalDevelopments:ThirdQuarter,2015 333 itssmallbusinessloansin2014andthatPWBhasagoalof extending50percentof its smallbusinessloanstobusinesseswith$1millionorlessinannualrevenues,assuggested bycommenters.ThesteadygrowthinsmallbusinesslendingexperiencedbyPWBreflects, inPacWest’sview,theorganization’sstrongcommitmenttosmallbusinesses.PacWestis alsoexpandingthetransactionaccountandsmallbusinesslendingproductsavailableto customersof itsfourrecentlyacquiredbranchesintheruralareasof California’sCentral Valley.PacWestalsohighlightstheFDIC’smostrecentCRAevaluationof PWBandnotes thatFDICexaminersconcludedthatthebank’srecordof openingandclosingbranches hadnotadverselyaffectedtheaccessibilityof itsdeliverysystems. PacWestalsoarguesthatitispreparingtomeetthecreditneedsof thecommunitiesitwill enterasaresultof thistransaction.PacWesthasengagedorganizationsinNorthCarolina communitiestodeterminethecreditneedsof thosecommunitiesandhowthoseneedscan bemetbythecombinedorganization.Asaresultof thisoutreach,PacWestplanstooffer, forexample,twotypesof smallbusinessloansnotcurrentlyavailablefromSquare1Bank forbusinessesinitscommunitieswithgrossannualrevenuesof $1millionorless. PacWestnotesthatithasdevelopedone-yearCRAplansratherthanmulti-yearplans becauseaone-yearplanallowsthecompanytobeflexibleandadaptiveasitexecutesits strategy.PacWestcontendsthat,thelengthof itsCRAplannotwithstanding,itiscommittedtoincreasingthedollaramountof PWB’sCRAactivitiesbyatleast10percentoverthe previousyear’sresultsif PWBhaspositivenetincomeateachyearend.PacWeststatesthat innocasewouldthedollaramountof PWB’soverallcommitmentbelessthanthepreviousyear’scommitment. B.Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationaswellasinformationandviewsprovidedbytheappropriatefederalsupervisors.26 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.27Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdatainadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulationstoassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 27 12U.S.C.§2906.

334 FederalReserveBulletin|January2016 homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;thegeographicdistributionof suchloans—includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberand amountof loansinlow-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamount of homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;28the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies.Consequently,theBoardconsiderstheoverallCRAratingand theratingonthelendingtesttobeimportantindicators,whentakenintoconsideration withotherfactors,indeterminingwhetheradepositoryinstitutionishelpingtomeetthe creditneedsof itscommunities. CRAPerformanceof PWB.PWBwasassignedanoverall“Satisfactory”ratingatitsmost recentCRAperformanceevaluationbytheFDIC,asof October27,2014(“PWBEvaluation”).29PWBreceiveda“HighSatisfactory”ratingontheLendingTestandtheInvestmentTestandan“Outstanding”ratingontheServiceTest.Theseratingsreflectsignificant improvementsinthebank’sCRAperformancerecordsinceitspreviousCRApublicevaluation,datedOctober2010.Inparticular,PWB’sratingsontheLendingTestandtheInvestmentTestimprovedfrom“LowSatisfactory”to“HighSatisfactory,”anditsratingonthe ServiceTestimprovedfrom“LowSatisfactory”to“Outstanding.” ExaminersfoundthatPWB’sresponsivenesstothecreditneedsof itsassessmentareaswas good.Examinersnotedthatasubstantialmajorityof thebank’sloanswereoriginated withinthebank’sassessmentareasandthedistributionof borrowersreflectedadequate penetrationamongbusinesscustomersof differentrevenuesizes,giventhebank’sprimary lendingfocusonsmall-andmedium-sizedbusinesses.Examinersalsonotedthatthegeographicdistributionof loansreflectedgoodpenetrationthroughouttheassessmentareas. PWBalsoexhibitedadequatepenetrationamongbusinesscustomersof differentrevenue sizes,andPWB’soriginationof smallbusinessloanstobusinesseswithannualrevenue under$1millionwassimilartoorbetterthanpeerbanksservingthesameassessment areas.FDICexaminersalsonotedthatwhilePWBmadelimiteduseof innovativeand/or flexiblelendingpractices,thebankmadearelativelyhighlevelof communitydevelopment loansandhadarecordof servingthecreditneedsof themosteconomicallydisadvantaged areas,low-incomeindividuals,and/orverysmallbusinesses.Moreover,examinersfound thattherelativelyhighlevelof communitydevelopmentloansmadebyPWBaddressed affordablehousing,communityservices,economicdevelopment,andrevitalizationaspects of communitydevelopmentlending. ExaminersfoundthatPWBhadasignificantlevelof qualifiedcommunitydevelopment investmentsandgrants,andparticularlythosethatarenotroutinelyprovidedbyprivate investors.ExaminersfoundthatPWBwasaleaderforcommunitydevelopmentinvest- 28 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 29 ThePWBEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examinersevaluated 2012and2013CRAsmallbusinessloandatacollectedandreportedand2014CRAsmallbusinessloandata collectedthroughJune30,2014.Theevaluationperiodforcommunitydevelopmentloans,innovative/flexible componentsoftheLendingTest,communitydevelopmentinvestments,andserviceswasOctober18,2010, throughOctober27,2014.Full-scopeevaluationprocedureswereperformedforthebank’sLosAngelesand SanDiegoassessmentareas.Limitedscopeevaluationprocedureswereperformedforthebank’sSanLuis Obispo,SantaBarbara,SanFrancisco,Fresno,Kern,andKings-Tulareassessmentareas.

LegalDevelopments:ThirdQuarter,2015 335 mentsandgrants.ExaminersalsofoundthatPWB’sperformanceexhibitedgoodresponsivenesstocreditandcommunityeconomicdevelopmentneedsbasedontheopportunities forsuchinvestmentsinitsassessmentareas.ExaminersnotedthatPWBmadesignificant useof innovativeand/orcomplexinvestmentstosupportcommunitydevelopmentinitiatives.Examinersalsonotedthatanoverwhelmingmajorityof PWB’sequityinvestments supportedaffordablehousing. ExaminersfoundPWBtobealeaderinprovidingcommunitydevelopmentservicesand exceededotherregionalbanksintermsof boththenumberof organizationsservedandthe numberof hoursprovided.Examinersobservedthatthebank’sdeliverysystemswere accessibletoallportionsof itsassessmentareas.Moreover,thebank’srecordof opening andclosingbrancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystems, particularlyinLMIgeographiesand/ortoLMIindividuals.30Of the46branchesclosed duringthereviewperiod,23wereconsolidatedwithexistingbrancheslocatedwithinclose proximitytotheirpreviouslocation,threewererelocated,10weresoldtoanotherfinancial institution,and10werepermanentlyclosed.Of the10permanentlyclosed,twowerein moderate-,fourwereinmiddle-,andfourwereinupper-incomecensustracts. CRAPerformanceof Square1Bank.Square1Bankwasassignedanoverall“Outstanding” ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof October17,2013 (“Square1Evaluation”).TheSquare1EvaluationwasconductedpursuanttoanFDIC approvedCRAstrategicplan,whichspecifiedmeasurablegoalsformeetingthelending, investment,andserviceneedsof thebank’sassessmentarea.31TheSquare1Evaluation includedafull-scopereviewof thebank’sperformancetowardmeetingthestrategicplan goalsinthedefinedassessmentareasof WakeandDurhamCounties,NorthCarolina,for planyears2010,2011,and2012understrategicplansapprovedbytheFDICinDecember2008andDecember2011. Square1Bankexceededallbuttwoof the“Outstanding”strategicplangoalsineacharea in2010,2011,and2012combined.Examinersnotedthat,althoughSquare1Bank’s2010 CRAloansandinvestmentsand2012servicehoursfellslightlybelowits“Satisfactory” goals,thebank’sperformanceexceeded,oftenbysignificantmargins,everyothergoalfor “Outstanding”performanceestablishedunderitsplan.Forexample,Square1Bank’sCRA grantsweremorethanthreetimesitsgoalfor“Outstanding”performanceineachyear,and its2012CRAloansandinvestmentsexceededitsgoalfor“Outstanding”byapproximately 33percent. TheFDIChasconductedannualupdatesonSquare1Bank’scompliancewithitsCRA StrategicPlanfor2013and2014.ExaminersconcludedthatSquare1Bankexceededits goalfor“Satisfactory”forCRAloansandinvestmentsandexceededitsgoalfor“Out- 30 TheFDICwillcontinuetoreviewPWB’sbranchclosingrecordinthecourseofconductingCRAperformance evaluations.Moreover,federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublicand totheappropriatefederalbankingagencybeforeclosingabranch.Section42oftheFederalDepositInsurance Act(12U.S.C.§1831r-1),asimplementedbytheJointPolicyStatementRegardingBranchClosings(64Fed. Reg.34,844(June29,1999)),requiresthatabankprovidethepublicwithatleast30days’notice,andthe appropriatefederalbankingagencywithatleast90days’notice,beforethedateofaproposedbranchclosing. Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings. 31 TheCRAregulationsprovidethattheappropriatefederalbankingagencywillassessabank’srecordofmeetingthecreditneedsofitsassessmentareasunderastrategicplanif,amongotherthings,thebankinvitespublic commentontheplanandtheplanisapprovedbysuchagency.TheFDICapprovedSquare1Bank’scurrent strategicplaninDecember2011,pursuantto12CFR345.27.

336 FederalReserveBulletin|January2016 standing”forbothCRAgrantsandCRAserviceactivityineachof theyears2013and 2014.32 PWB’sEffortsSincethePWBEvaluationandPlansfortheCombinedBank.PacWesthas representedthat,sincethePWBEvaluationwasconducted,communityreinvestmenthas remainedafocusof theorganization’sbankingactivities.Forexample,sincethetime periodcoveredbythePWBEvaluation,PWBhasincreasedthepercentageof itssmall businessloansmadetobusinesseswithlessthan$1millioningrossannualrevenues. PacWestrepresentsthatmarketingeffortsduringthefirstandsecondquartersof 2015have resultedinimprovedsmallbusinessactivityinthebank’sruralmarkets.PacWestalsorepresentsthatitscurrentlevelof communitydevelopmentlendingisonpacetoexceeditsperformanceduringthetimeperiodcoveredbythePWBEvaluationandthatPWBhassignificantlyincreaseditsinvestmentsanddonationswithinitscommunities.Further,PacWest representsthatthebank’sinvestmentsanddonationsthroughthefirstsixmonthsof 2015 alreadyexceed,byawidemargin,theannualizedamountof thebank’sinvestmentsand donationsduringthetimeperiodcoveredbythePWBEvaluation.PacWestalsorepresents thatitisonpaceforits2015communitydevelopmentservicehourstoexceeditsprioryear byasubstantialamount. PacWesthasalsoundertakeneffortstoidentifythecreditneedsof thecommunitiesserved bySquare1Bankthroughareviewof theneedsidentifiedbylocalorganizations,Square1 Bank’sCRAstrategicplan,Square1Bank’sCRAevaluationandtheCRAevaluationsof otherbanksoperatinginSquare1Bank’scommunity,populationanddemographicdataof DurhamandRaleighcommunities,andperiodicpublicationsof theFederalReserveBank of Richmond.Aspartof theseefforts,PacWesthasengagedinin-personmeetingswithten differentcommunitygroupslocatedinthecommunitiesservedbySquare1Banktoassess theneedsof Square1Bank’scommunity.Throughthesediligenceefforts,PacWestidentifiedalistof communityneedswithrespecttocreditanddepositproductsandservices— e.g.,loanstobusinesseswithgrossannualrevenuesof $1millionorless;loanstofinance thecreationandpreservationof affordablehousing;modificationof loansonsingle-family dwellings;loansandinvestmentsthatsupporteconomicdevelopmentactivities—inSquare 1Bank’scurrentassessmentareainDurhamandWakecounties,NorthCarolina. PacWestrepresentsthat,attherequestof theFDIC,thecompanyhasdevelopedaCRA planforthecombinedbankwithspecificgoalsforqualifyingCRAactivitiesthatreflect howthecombinedbankwouldmeetthecreditneedsof itscommunitiesafterconsummationof theproposedtransaction.Forexample,PacWestplanstogobeyondSquare1 Bank’sexistingpracticesbyinitiatingsmallbusinessandcommunitydevelopmentlending intheNorthCarolinacommunitiescurrentlyservedbySquare1Bank.Further,uponconsummationof theproposal,PacWestwilldedicateafull-timeofficerforcommunityreinvestmentmattersinNorthCarolinareinforcedbyPWB’sCRAresourcesinCalifornia. Thetransactionisintendedtocombinethestrengthsof thetwoorganizationstocreatea morediversifiedbankwithgreatergeographicandproductreach.Thecurrentsuiteof productsandservicesofferedbyeachof PWBandSquare1Bankwillcontinuetobe offeredbythecombinedorganization. Followingconsummation,Square1Bankwouldoperateasadivisionof PWB.Givenits businessfocusonlendingtoventurecapitalfirms,Square1Bankhistoricallyhasnot 32 Acommenterarguedthat,althoughSquare1BankhasprovidedgrantstocommunitygroupsinNorthCarolinaandhassatisfiedtherequirementsoftheCRA,thebank’sgrantmakinginitscommunitydoesnotbenefit thosemostinneedofreinvestmentfrombankinginstitutionsanddoesnotmeetthespiritoftheCRA requirements.

LegalDevelopments:ThirdQuarter,2015 337 offeredconsumerbankingdeposit,loan,orotherproductsandhasofferedonlylimited smallbusinessproducts.Asadivisionof PWB,Square1Bankwouldexpanditssuiteof productandserviceofferingstoincludethebroaderarrayof productsandservicesoffered byPacWest,including,forexample,personalloans,homeequitylinesof credit,automobile loans,andtraditionalbankingproductstocommercialbusinesses. Asadivisionof PWB,Square1Bankwouldalsoofferabroaderarrayof smallbusiness loanproductssuchasrealestateloansandequipmentloansandleases.Customersof Square1Bankwouldhaveaccesstotwonewbusinessproductsthatofferoverdraftprotectionandworkingcapitalforoperationsandexpansions.Theseproductsweredesignedfor smallbusinessesinneedof smallerlinesof creditwithlowerfeesandinterestrates,aswell assimplerapplicationprocessesandunderwritingrequirements,thantraditionalbusiness linesof credits. C.PublicBenefitsof theProposal Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.PacWestrepresentsthattheproposalwouldallowPacWesttoofferincreased productsandservicestocustomersof Square1Bank,whichcurrentlyconsistof venture capitalandprivateequityfunds.Asnoted,PWBwouldoffersmallbusinesslinesof credit, commercialrealestateloans,equipmentloansandleases,andPWB’sfullsuiteof retail bankingproductsandservicestoSquare1Bankcustomers. Additionally,PacWeststatesthatSquare1Bankcustomerswouldhaveaccesstoalarger networkof branchesandATMs,andPacWest’scustomerswouldhaveexpandedaccessto venturecapitalfundingandinvestmentadvisoryservices.Further,theproposedacquisitionswouldcreaterevenueenhancementandcostsavingstothecombinedorganization, whichPacWestrepresentswouldprovideitwithgreaterresourcestomakemoreloans. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,informationprovidedbyPacWest, confidentialsupervisoryinformation,andthepubliccommentsontheproposal.TheBoard hasalsoconsultedwithandconsideredtheviewsof theFDICconcerningtheproposaland thecommentsobjectingtotheproposal.Basedonthatreview,theBoardconcludesthatthe proposalwouldresultinpublicbenefitsthatoutweighthepotentialadverseeffectsandthat theconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) added“risktothestabilityof theUnitedStatesbankingorfinancialsystem”tothelistof possibleadverseeffectsthattheBoardmustweighagainstanyexpectedpublicbenefitsin consideringproposalsundersection3andsection4(j)of theBHCAct.33 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of themergedfirmandtheincrementaleffectof thetransactiononthesystemic 33 Sections604(d)and(e)oftheDodd-FrankAct,amending12U.S.C.§§1842(c)(7)and1843(j)(2)(A).

338 FederalReserveBulletin|January2016 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,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.35 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theUnitedStates bankingorfinancialsystem.Afterconsummation,PacWestwouldhaveapproximately $19.3billioninconsolidatedassets,andbyanyof anumberof alternativemeasuresof firm size,PacWestwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthat amergerthatresultsinafirmwithlessthan$25billionintotalconsolidatedassetswillnot posesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthe transactionwouldresultinasignificantincreaseininterconnectedness,complexity,crossborderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthis transaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Acquisitionof NonbankingCompanies Asnoted,PacWesthasfiledanoticeundersections4(c)(8)and4(j)of theBHCActto acquirecertainSquare1Financialnonbankingsubsidiaries,whichengageinfinancialand investmentadvisoryactivitiesthattheBoardhasdeterminedbyregulationaresoclosely relatedtobankingastobeaproperincidenttheretoforpurposesof section4(c)(8)of the BHCAct.36ThenonbankingsubsidiariestobeacquiredbyPacWestrelatetoSquare1 Financial’sinvestmentinandsponsorshipof a“fundof funds”thatinvestsinU.S.-based venturecapitalinvestmentfunds.PacWesthascommittedtoconducttheseactivitiesin accordancewiththerequirementsandlimitationsof theBHCAct,includingthelimitationsimposedbysection13of theBHCAct,commonlyreferredtoastheVolckerRule. Inevaluatingaproposalundersection4(j)of theBHCAct,theBoardmustdeterminethat theproposedacquisitionof nonbankingcompaniesbyPacWest“canreasonablybe expectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbanking practices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.”37 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 36 12CFR225.28(b)(6). 37 12U.S.C.§1843(j)(2)(A).

LegalDevelopments:ThirdQuarter,2015 339 Therecordindicatesthatconsummationof theproposalwouldcreateastrongerandmore diversifiedfinancialservicesorganizationandwouldexpandservices,productofferings, andgeographicscopetocurrentandfuturecustomersof PWBandSquare1Bank,aswell asmerger-relatedcostsavingstothecombinedorganization.Therecordalsoreflectsthat theproposednonbankacquisitionwithintheframeworkof RegulationYandBoardprecedentisnotlikelytoresultinsignificantadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancialsystem.Basedonall thefactsof record,andforthereasonsdiscussedabove,theBoardconcludesthatconsummationof theproposalcanreasonablybeexpectedtoproducepublicbenefitsthatwould outweighanylikelyadverseeffects.Accordingly,theBoarddeterminesthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwith approval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheproposalsshouldbe,andherebyare,approved.38Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditioned oncompliancebyPacWestwithalltheconditionsimposedinthisOrder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitments aredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardorFederalReserveBankof SanFrancisco,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveSeptember21,2015. 38 SeveralcommentersrequestedthattheBoardholdpublichearingsontheproposal.Section3(b)oftheBHC ActdoesnotrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.TheBoard’sregulationsprovideforahearingonanoticefiledundersection4oftheBHCActif therearedisputedissuesofmaterialfactthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2). Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredthecommenters’requestsinlightofallthefactsofrecord.Inthe Board’sview,commentershavehadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenters’requests donotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarifiedbyapublichearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthecommenters’viewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthesereasons, andbasedonallthefactsofrecord,theBoarddeterminesthatapublichearingisnotrequiredorwarrantedin thiscase.Accordingly,therequestsforapublichearingontheproposalaredenied. Inaddition,commentersrequestedanadditionalextensionofthecommentperiodfortheproposal.The Board’sRulesofProcedurecontemplatethatthepubliccommentperiodwillnotbeextendedabsentaclear demonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.12CFR262.25(b)(2).The commenters’requestsforadditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionofthe publiccommentperiodforthisproposal.Accordingly,theBoardhasdeterminednottoextendthepubliccommentperiod.

340 FederalReserveBulletin|January2016 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Order Issued Under Federal Reserve Act Auburn State Bank Auburn, Nebraska OrderApprovingtheMergerof BanksandtheEstablishmentof aBranch FRBOrderNo.2015–22(August31,2015) AuburnStateBank(“AuburnBank”),Auburn,Nebraska,astatememberbank,has requestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct1 (“BankMergerAct”)tomergewithTheCarsonNationalBankof Auburn(“Carson Bank”),Auburn,Nebraska.Inaddition,AuburnBankhasappliedundersection9of the FederalReserveAct(“FRA”)2toestablishandoperateabranchatthelocationof Carson Bank’ssoleoffice. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.3Thetimeforsubmittingcommentshasexpired.PursuanttotheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral.TheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthintheBankMergerActandtheFRA. AuburnBankandCarsonBankareundercommoncontrolof theGrantfamilyandhave beensince1946.4AuburnBank,withtotalassetsof approximately$99.7million,operates onlyinNebraska.AuburnBankisthe99thlargestinsureddepositoryinstitutionin Nebraska,controllingdepositsof approximately$77.8million,whichrepresentlessthan 1percentof thetotalamountof depositsininsureddepositoryinstitutionsinthestate (“statedeposits”).5 CarsonBank,withtotalassetsof approximately$71.8million,operatesonlyinNebraska. CarsonBankisthe113thlargestinsureddepositoryinstitutioninNebraska,controlling depositsof approximately$60.6million,whichrepresentlessthan1percentof thetotal amountof statedeposits. Onconsummationof theproposal,AuburnBankwouldbecomethe61stlargestinsured depositoryinstitutioninNebraska,controllingdepositsof approximately$138.4million, representinglessthan1percentof thetotalamountof statedeposits. 1 12U.S.C.§1828(c). 2 12U.S.C.§321. 3 12CFR262.3(b). 4 Threesiblings,JamesW.GrantIII,MaryKathleenGreen,andCarolSueSchulte,andtheirrespectivechildren controlmorethan87percentofthevotingsharesofAuburnBankandmorethan95percentofthevoting sharesofCarsonBank.MembersoftheGrantfamilyhavecontrolledmorethan25percentofthevoting sharesofAuburnBanksince1946,andmorethan25percentofthevotingsharesofCarsonBanksince1935. 5 AssetdataareasofDecember31,2014.DepositdataandstaterankingsareasofJune30,2014.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks,andsavingsandloan associations.

LegalDevelopments:ThirdQuarter,2015 341 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anattempttomonopolizethe businessof bankinginanyrelevantmarket.6TheBankMergerActalsoprohibitsthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitionortendto createamonopolyinanyrelevantmarket,unlesstheBoardfindsthattheanticompetitive effectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.7 AuburnBankandCarsonBankcompeteintheNemahaCountybankingmarket,whichis definedasNemahaCounty,Nebraska.Inassessingthecompetitiveeffectsof aproposed bankmerger,theBoardandtheDepartmentof Justice(“DOJ”)reviewmarketsharesand marketconcentrationinbankingmarketsinwhichthecombinedorganizationwouldoperateafterconsummationof theproposal,asmeasuredbytheHerfindahl-HirschmanIndex (“HHI”),undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”).8UndertheDOJBankMergerGuidelines,affiliatesare treatedasasingleentity.Underthisanalysis,amergerof affiliatedbankinginstitutions doesnotresultinachangetothecalculationof marketshareormarketconcentrationas measuredbytheHHI. Inreviewingpastproposalsinvolvingaffiliatedbankingorganizations,theBoardgenerally hasconsideredthecompetitiveeffectsof aproposalatthetimethebankingorganizations cameundercommoncontrol.9Inreviewingpastproposals,theBoardhasalsoconsidered whetherthebankingorganizationsbecameaffiliatedpriorto1950,whentheClaytonAntitrustActwasfirstextendedtobankmergers.10Inthosecases,theBoardhasconsidered whetherthebankingorganizationsweresmallinabsolutesizeatthetimeof theaffiliation andotherfactors.11 Inthiscase,AuburnBankandCarsonBankhavebeenaffiliatedfor69years,wellbefore theantitrustlawswereappliedtobankmergersand,todate,theaffiliationhasnotbeen challengedunderantitrustlawsbyfederalorstateauthorities.Atthetimeof theaffiliation, theClaytonAntitrustActdidnotextendtobankmergers,andneithertheBankMerger ActnortheBankHoldingCompanyAct,whichbothincludeantitrustprovisions,had beenenacted.Thus,theoriginalaffiliationdidnotrepresentanattempttoevadetheanti- 6 12U.S.C.§1828(c)(5)(A). 7 12U.S.C.§1828(c)(5)(B). 8 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDOJhasinformedtheBoardthatabankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unless thepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan200points.Althoughthe DOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin2010,theDOJhas confirmedthattheDOJBankMergerGuidelines,whichwereissuedin1995,werenotmodified.SeePress Release,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010/August/10-at- 938.html. 9 See,e.g.,LBTBancshares,Inc.,90FederalReserveBulletin485(2004);Mid-NebraskaBancshares,Inc.,64FederalReserveBulletin589(1978),aff’d,627F.2d266(D.C.Cir.1980);MahaskaInvestmentCo.,63Federal ReserveBulletin579(1977). 10 TheClaytonAntitrustActwasfirstappliedtobankmergerswithenactmentoftheCeller-KefauverAntimergerActof1950.SeeLawofDecember29,1950,ch.1184,64Stat.11251126(currentversionat15U.S.C. §18)(subjectingmergerstoscrutinyundertheClaytonAntitrustAct).Thelawswereextendedwithenactment oftheBankMergerActof1960.SeeBankMergerAct,Pub.L.No.86-463,74Stat.129(1960)(requiringthe Boardtoconsiderthecompetitiveeffectsofproposedbankmergers). 11 SeeVictoriaBankshares,Inc.,70FederalReserveBulletin229,230(1984)(“VictoriaOrder”);ShickleyState Company,70FederalReserveBulletin360(1984);FirstMoncoBancshares,Inc.,69FederalReserveBulletin293 (1983);TexasEastBanCorp,69FederalReserveBulletin636(1983)(“TexasOrder”).

342 FederalReserveBulletin|January2016 trustlawsortheBankMergerAct.In1946,AuburnBankcontrolledapproximately $2.2millionindeposits,whileCarsonBankcontrolledapproximately$2.9millionindeposits,whichwerebothwellbelowthemeansizeforallcommercialbanksintheUnitedStates atthattime.12 TheDOJhasconductedareviewof thecompetitiveeffectsof theproposalandhasadvised theBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal.Basedonallthefactsof record,includingthelongstandingaffiliationof Auburn BankandCarsonBank,thefactthattheaffiliationwasestablishedpriortotheapplication of theantitrustlawstobankmergers,thelackof anypreviouschallengetotheaffiliation of AuburnBankandCarsonBankoncompetitivegrounds,andthesmallabsolutesizeof bothinstitutions,bothatthetimeof theiraffiliationin1946andnow,theBoardconcludes thatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheNemahabankingmarketorinanyother relevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. 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. AuburnBankiswellcapitalizedandwouldremainsoonconsummationof theproposal. CarsonBankwouldbemergedintoAuburnBank.Theassetquality,earnings,andliquidityof AuburnBankareconsistentwithapproval,andAuburnBankappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof AuburnBank’sandCarsonBank’soperations.Futureprospectsareconsideredconsistent withapproval.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhas sufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof AuburnBankandhasreviewed theexaminationrecordsof AuburnBank,includingassessmentsof itsmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experienceswithAuburnBankandtheorganization’srecordof compliancewithapplicable banking,consumerprotection,andanti-money-launderinglaws.TheBoardalsohasconsideredAuburnBank’splansforimplementingtheproposal.AuburnBankisconsideredto 12 Atthetime,themeansizeforallcommercialbanksintheUnitedStateswas$10.3million.See,e.g.,Victoria Orderat230(institutionscontrolled$2.4millionand$1.4millionindeposits,respectively);TexasOrderat636 (institutionscontrolled$7.1millionand$1.9millionindeposits,respectively).Atthetimeoftheiraffiliationin 1946,AuburnBankandCarsonBankwerethetwolargestoffivedepositoryinstitutionsinNemehaCounty, withmarketsharesof31and41percent,respectively,andacombinedmarketshareof72percentofdeposits. Currently,AuburnBankandCarsonBankcontrolmarketsharesof33.7percentand26.3percent,respectively, andthecombinedentitywouldcontrolamarketshareof60percentofdeposits.

LegalDevelopments:ThirdQuarter,2015 343 bewellmanaged,anditsboardof directorsandseniormanagementhavesubstantialbankingexperience.AuburnBankwouldoperatetheacquiredbranchof CarsonBankunderits existingpoliciesandprocedures,whichareconsideredtobesatisfactory.Inaddition, AuburnBank’smanagementhastheexperienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof AuburnBank,aswellasthe recordsof effectivenessof AuburnBankandCarsonBankincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobeserved, theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthis evaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepository institutionsundertheCommunityReinvestmentAct(“CRA”).13Inaddition,theBoard considersthebanks’overallcompliancerecord,recentfairlendingexaminations,andother supervisoryassessments;thesupervisoryviewsof examiners;andothersupervisoryinformation.TheBoardmayalsoconsidertheacquiringinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansfollowingconsummation,andanyother informationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,14andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods.15Inaddition,fairlendinglawsrequirealllendinginstitutionstoprovide applicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainother characteristics. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof CRA performanceforAuburnBankandCarsonBank,thefairlendingandcompliancerecords of bothbanks,confidentialsupervisoryinformation,andinformationprovidedbyAuburn Bank. A.Recordof PerformanceundertheCRA TheBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions.16TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepository institutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthe creditneedsof itsentirecommunity,includingLMIneighborhoods.17Aninstitution’s 13 12U.S.C.§2901etseq. 14 12U.S.C.§2901(b). 15 12U.S.C.§2903. 16 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 17 12U.S.C.§2906.

344 FederalReserveBulletin|January2016 mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe applicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplythesmallbanklendingtesttoevaluatethe performanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Theinstitution’slendingperformanceisbasedontheinstitution’sloan-to-depositratioandotherlending-relatedactivities,suchasloanoriginations forsaletothesecondarymarkets,communitydevelopmentloans,andqualifiedinvestments;thepercentageof loansandotherlending-relatedactivitieslocatedintheinstitution’sassessmentareas;theinstitution’srecordof lendingtoandengaginginotherlending-relatedactivitiesforborrowersof differentincomelevelsandbusinessesandfarmsof differentsizes;thegeographicdistributionof theinstitution’sloans;andtheinstitution’s recordof takingactioninresponsetowrittencomplaintsaboutitsperformanceinhelping tomeetcreditneedsinitsassessmentareas.Consequently,theBoardconsiderstheCRA ratingtobeanimportantindicator,whentakenintoconsiderationwithotherfactors,in determiningwhetheradepositoryinstitutionishelpingtomeetthecreditneedsof its communities. CRAPerformanceof AuburnBank.AuburnBankwasassignedanoverall“Satisfactory” ratingbytheFederalReserveBankof KansasCity(“ReserveBank”)atitsmostrecent CRAperformanceevaluation,asof April9,2012(“AuburnBankEvaluation”).18ExaminersfoundthatAuburnBank’sloan-to-depositratioreflectedareasonableefforttoextend credit,giventhebank’ssize,financialcondition,thecompetitivelendingmarket,andthe creditneedsof theassessmentarea.Examinersconcludedthatthebank’slendingwithinits assessmentarea,includingitsdistributionof lendingtoborrowersof differentincomelevelsandtofarmsof differentrevenuesizes,wasreasonable.InevaluatingAuburnBank’s performance,examinersfoundthatAuburnBankhadasatisfactoryrecordof meetingthe creditneedsof itsassessmentarea,includingthoseof low-andmoderate-incomefamilies. CRAPerformanceof CarsonBank.CarsonBankwasassignedanoverall“Satisfactory” ratingatitsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrencyasof December2,2013(“CarsonBankEvaluation”).19Examinersfoundthat CarsonBank’saverageloan-to-depositratiowasreasonablegiveneconomicanddemographicfactors,andthebankoriginatedamajorityof itsloansinsidetheassessmentarea. ExaminersnotedthatCarsonBank’scommunitydevelopmentactivitiesdemonstrated goodresponsivenesstocommunitydevelopmentneedsinitsassessmentarea. B.AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Inthisregard,AuburnBankhasrepresentedthattheproposalwouldprovidecustomersof thecombinedorganizationwithaccesstoanexpandedbranchnetworkand wouldofferadditionalproductsandservicesnotcurrentlyofferedtoCarsoncustomers. 18 TheAuburnBankEvaluationwasconductedusingtheSmallInstitutionCRAExaminationProcedures.Examinersreviewedthebank’saverageloan-to-depositratiosincethepriorCRAexaminationdatedFebruary4, 2008;astatisticalsampleofagriculturallendingactivityfromSeptember2011throughMarch2012;andastatisticalsampleofthebank’sresidentialrealestatelendingactivityfromMarch2011throughMarch2012.The AuburnBankEvaluationreviewedthebank’sNemahaCountyassessmentarea. 19 TheCarsonBankEvaluationwasalsoconductedusingtheSmallInstitutionCRAExaminationProcedures. Examinersreviewedthebank’sagriculturallendingactivityfromMay27,2008,throughDecember2,2013. TheCarsonBankEvaluationreviewedthebank’sNemahaCountyassessmentarea.

LegalDevelopments:ThirdQuarter,2015 345 Theseproductsandservicesincludeinternetbillpay,mobilebanking,andremotedeposit capture.AuburnBankhasalsorepresentedthatcustomersof thecombinedorganization wouldbenefitfromahigherlegallendinglimitfollowingthemerger. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,andinformationprovidedbyAuburnBank.Basedonthatreview,theBoardconcludesthattheproposalwouldresultinpublicbenefitsandthattheconvenienceandneeds factorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”20 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.21These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision. Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors,suchas theopaquenessandcomplexityof aninstitution’sinternalorganization,thatareindicative of therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitution thatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothe broadereconomy.22 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,AuburnBankwouldhaveapproximately $171.5millioninconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.The Boardgenerallypresumesthataproposalthatinvolvesanacquisitionof lessthan$2billioninassets,orthatresultsinafirmwithlessthan$25billionintotalconsolidatedassets, willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidence thatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity, cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentin thistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. 20 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5). 21 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 22 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

346 FederalReserveBulletin|January2016 Establishmentof aBranch AuburnBankhasappliedundersection9of theFRAtoestablishabranchatthecurrent locationof CarsonBank,23andtheBoardhasconsideredthefactorsitisrequiredtoconsiderwhenreviewinganapplicationunderthatsection.24Specifically,theBoardhasconsideredAuburnBank’sfinancialcondition,management,capital,actionsinmeetingthe convenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditionedon compliancebyAuburnBankwithallthecommitmentsmadeinconnectionwiththisproposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Acquisitionof CarsonBankmaynotbeconsummatedbeforethe15thcalendardayafter theeffectivedateof thisorderorlaterthanthreemonthsaftertheeffectivedateof this order,unlesssuchperiodisextendedforgoodcausebytheBoardorbytheReserveBank actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveAugust31,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 23 CarsonBank’smainofficeandonlylocationis2301DahlkeAvenue,Auburn,Nebraska68305. 24 12U.S.C.§322;12CFR208.6.

347 Federal Reserve BULLETIN Index A Dodd-FrankWallStreetReformand Averageprimeofferrate(APOR),22 ConsumerProtectionAct (Dodd-Frank),53,68,89,96, B 115,131,150,159,197,207,218, BankHoldingCompanyAct(BHC 231,238 Act),ordersissuedunder BB&TCorporation,209–219 F CBFH,Inc.,117–126 FannieMae,6,228 ChemicalFinancial FarmServiceAgency(FSA),3,42 Corporation,199–208 FederalDepositInsuranceAct,91, FirstAmericanBank 162,199 Corporation,45–55 FederalDepositInsuranceCorporation IBERIABANK (FDIC),49,52,137,157,161, Corporation,105–117 214,217,237,288 KSRS,LLC,126–132 FederalHousingAdministration Merchants&FarmersBancshares, (FHA),3,6,13,42,50,228 Inc.,232–239 FederalReserveAct(FRA),orders MidlandStatesBancorp, issuedunder Inc.,67–80 BancoPopulardePuerto SimmonsFirstNational Rico,161–167 Corporation,132–151 BancoPopularNorth SouthsideBancshares,Inc.,81–91 America,168–174 SterlingBancorp,220–232 CentennialBank,175–181 SumitomoMitsuiFinancialGroup, CentralBankof Audrain Inc.,151–161 County,91–97 ViewPointFinancialGroup, ComericaBank,181–186 Inc.,55–65 FirstFarmersBank& BankMergerAct,56,68,69,72,92, Trust,187–194 202 TheBankof Versailles,240–242 BankSecrecyAct(BSA),240–241 VeritexCommunityBank,98–102 Bhutta,Neil,1–43 FederalReserveAct(FRA),202,208 FederalReserveBankof Kansas C City,241 CommunityReinvestmentAct FloridaOfficeof Financial (CRA),3,46,49,59,72–74, Regulation,53 85–86,100–106,121,130,136, FreddieMac,6 157,204,206,223,225,228–236, H 241 Herfindahl-HirschmanIndex ConsumerFinancialProtectionBureau (HHI),57,92,107,154 (CFPB),2,251,288,310 HomeMortgageDisclosureAct D (HMDA),49,50–52,53,74,87, Departmentof JusticeBankMerger 101,147,224 CompetitiveReview HomeOwnershipandEquity guidelines,70,83,107 ProtectionAct(HOEPA),2, Departmentof Justice(DOJ),93,127, 25–26 202,222 I Departmentof VeteransAffairs InternationalBankingAct,order (VA),3,13,42,50 issuedunder TaiwanCooperativeBank, Ltd.,195–198 J JapaneseFinancialServicesAgency (JFSA),153

348 FederalReserveBulletin|Index L O Lending Officeof theComptrollerof the Communitydevelopment,206,215, Currency(OCC),62,74,86,122, 226–227 149,226,229,251,288 Denialrate,51 Fair,50–52,61–62,74–77,87–89, P 100–102,112–115,122–124, Passivitycommitments,153 137–139,147,217,229–230 Popper,Jack,1–43 Manufacturedhomes,43 R Mortgage,225,226 RegulationH,98,182,240 Nonconventional,6 RegulationY,79,82,90 Smallbusiness,229 Ringo,DanielR.,1–43 Low-ormoderate-income(LMI) RuralHousingService(RHS),3,42 Borrowers,censustracts,incomes, neighborhoods,8,13,75,113, S 148,206,213,215,217,226,228 SmallBusinessAdministration (SBA),50 M Mortgage Originations,2 Refinance,5

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