Federal Reserve Bulletin, 2016-01

Federal Reserve Bulletin 2016 Compilation Board of Governors of the federal reserve system

Federal Reserve Bulletin 2016 Compilation BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

ThisandotherFederalReserveBoardreportsandpublicationsareavailableonlineat www.federalreserve.gov/publications/default.htm. Toordercopiesof FederalReserveBoardpublicationsofferedinprint, seetheBoard’sPublicationOrderForm(www.federalreserve.gov/files/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 ResidentialMortgageLendingfrom2004to2015:EvidencefromtheHome MortgageDisclosureActData ..............................................................................1 NeilBhuttaandDanielR.Ringo,of theDivisionof Researchand Statistics,preparedthisarticle.JimmyKelliherprovidedresearch assistance. LegalDevelopments:ThirdQuarter,2015 ............................................................27 LegalDevelopments:FourthQuarter,2015 .........................................................133 LegalDevelopments:FirstQuarter,2016 ............................................................219 LegalDevelopments:SecondQuarter,2016 ........................................................245 LegalDevelopments:ThirdQuarter,2016...........................................................313 Index .................................................................................................................373

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 linkstothemost recentdataonitssiteandlinkstootherdataprovidedbytheFederalReserveBankof New York,theU.S.Treasury,andtheFederalFinancialInstitutionsExaminationCouncil. OnlineaccesstotheBulletinisfree.Afreee-mailnotificationservice(www.federalreserve .gov/generalinfo/subscribe/notification.htm)isavailabletoalertsubscriberstothereleaseof articlesandordersintheBulletin,aswellaspressreleases,testimonies,andspeeches.The notificationmessageprovidesabrief descriptionandalinktotherecentposting. ‰ FederalReserveBulletin:www.federalreserve.gov/publications/bulletin.htm ‰ DatasourcesforthetablesinthediscontinuedStatisticalSupplementtotheFederal ReserveBulletin:www.federalreserve.gov/pubs/supplement/statsupdata/statsupdata.htm

1 Federal Reserve BULLETIN November 2016 Vol. 102, No. 6 Residential Mortgage Lending from 2004 to 2015: Evidence from the Home Mortgage Disclosure Act Data NeilBhuttaandDanielR.Ringo,of theDivisionof ResearchandStatistics,preparedthis article.JimmyKelliherprovidedresearchassistance. Thisarticleprovidesanoverviewof residentialmortgagelendingin2015anddiscussesa numberof changesinmortgagemarketactivityovertimebasedondatareportedunderthe HomeMortgageDisclosureActof 1975(HMDA).HMDArequiresmostmortgage lendinginstitutionswithofficesinmetropolitanareastodisclosetothepublicdetailed informationabouttheirhome-lendingactivityeachyear.TheHMDAdataincludethe dispositionof eachapplicationformortgagecredit;thetype,purpose,andcharacteristics of eachhomemortgagethatlendersoriginateorpurchaseduringthecalendaryear;the census-tractdesignationsof thepropertiesrelatedtothoseloans;loanpricinginformation; personaldemographicandotherinformationaboutloanapplicants,includingtheirraceor ethnicityandincome;andinformationaboutloansales(seeappendixAforafulllistof 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 1 The2015HMDAdatareflectpropertylocationsusingthecensus-tractgeographicboundariescreatedforthe2010 decennialcensusaswellasrecentupdatestothelistofmetropolitanstatisticalareas(MSAs)publishedbytheOfficeof ManagementandBudget.ThefirstyearforwhichtheHMDAdatausethismostrecentlistofMSAsis2014.For furtherinformation,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)continuestoberesponsibleforcollectingtheHMDAdatafromreportinginstitutionsandfacilitating publicaccesstotheinformation.InSeptemberofeachyear,theFFIECreleasestothepublicsummarydisclosure tablespertainingtolendingactivityfromthepreviouscalendaryearforeachreportinglenderaswellasaggregations ofhome-lendingactivityforeachmetropolitanstatisticalareaandforthenationasawhole.TheFFIECalsomakes availabletothepublicadatafilecontainingvirtuallyallofthereportedinformationforeachlendinginstitutionas wellasafilethatincludeskeydemographicandhousing-relateddataforeachcensustractdrawnfromcensussources.

2 FederalReserveBulletin|November2016 getsextendedeachyear,whoobtainssuchcredit,andwhichinstitutionsprovidesuch credit. In2015,housepricescontinuedtheirupwardtrendevidentsince2012,andmortgage interestratesremainedlow,althoughslightlyabovethehistoricallowsreachedinlate2012 andearly2013.Mortgagecreditconditionscontinuedtoslowlyease,butcreditremained moredifficulttoobtainforindividualswithlowercreditscores.Reportsthroughoutthe yearfromtheSeniorLoanOfficerOpinionSurveyonBankLendingPracticesindicatethat severallargebanksrelaxedtheircreditrequirements,onnet,formortgagesthatwere eligibleforpurchasebythegovernment-sponsoredenterprises(GSEs)orthatmetthe ConsumerFinancialProtectionBureau’sstandardsforqualifiedmortgages.4Growthin newhousingconstructioncontinuedatamoderatepace.5 ThisarticlepresentsfindingsfromtheHMDAdatadescribingmortgagemarketactivity andlendingpatternsovertime,includingtheincidenceof higher-pricedornonprime lendingandratesof denialonmortgageapplications,acrossdifferentdemographicgroups andlendertypes.6Someof thekeyfindingsareasfollows: 1. Thenumberof mortgageoriginationsin2015rose22percent,to7.4millionfrom 6.1millionin2014.Forloanssecuredbyone-tofour-familyproperties,growthwas stronginbothhome-purchaseoriginations—whichincreasedto3.7millionfrom 3.2millionin2014—andrefinanceoriginations—whichincreasedto3.2millionfrom 2.4millionin2014. 2. Thenonconventionalshare(thatis,loanswithmortgageinsurancefromtheFederal HousingAdministration(FHA)orguaranteesfromtheDepartmentof Veterans Affairs(VA),theFarmServiceAgency(FSA),ortheRuralHousingService(RHS))of first-lienhome-purchaseloansforone-tofour-family,owner-occupied,site-built(that is,notmanufactured)propertiesstoodatabout39percentin2015,upfrom 36percentin2014anddownfromapeakof 54percentin2009.Theriseinthe nonconventionalsharein2015reflectsanincreaseinFHAlendingaftertheFHA significantlyreducedtheannualmortgageinsurancepremium(MIP)itcharges borrowers. 3. BlackandHispanicwhiteborrowersincreasedtheirshareof home-purchaseloansfor one-tofour-family,owner-occupied,site-builtpropertiesin2015.TheHMDAdata indicatethat5.5percentof suchloanswenttoblackborrowers,upfrom5.2percentin 2014,while8.3percentwenttoHispanicwhiteborrowers,upfrom7.9percentin 2014,buildingongainsbothgroupsexperiencedfrom2013to2014.Theshareof home-purchaseloanstolow-ormoderate-income(LMI)borrowersincreasedslightly to28percentin2015from27percentin2014. 4. In2015,onlyabout3percentof conventionalhome-purchaseloansand2percentof conventionalrefinanceloanswerehigherpriced.However,smallbanksandcredit unionsweremuchmorelikelytooriginateconventionalhigher-pricedloansthanlarge banksandmortgagecompaniesandthusaccountedforahighlydisproportionate shareof conventionalhigher-pricedloansin2015.Forexample,whilesmallbanksand creditunionsaccountedforabout18percentof conventionalhome-purchaseloans, theyoriginatedabout47percentof higher-pricedconventionalhome-purchaseloans. 4 ThesurveyisavailableontheBoard’swebsiteatwww.federalreserve.gov/boarddocs/snloansurvey. 5 Formoreinformationoncreditandeconomicconditionsduring2015,seeBoardofGovernorsoftheFederal ReserveSystem(2016),MonetaryPolicyReport(Washington:BoardofGovernors,February10), www.federalreserve.gov/monetarypolicy/mpr_default.htm. 6 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.Thedata usedtopreparethisarticlearedrawnfromtheinitialpublicreleasefor2015andfromamendedHMDAdata foryearspriortothat.Consequently,numbersinthisarticlefortheyears2014andearliermaydiffersomewhat fromnumberscalculatedfromthepublicreleasefiles.

ResidentialMortgageLendingfrom2004to2015 3 5. Theshareof mortgagesorigi- Figure1.Numberofhome-purchaseandrefinance natedbynondepository,indemortgageoriginationsreportedundertheHomeMortgage pendentmortgagecompanies DisclosureAct,1994–2015 hasincreasedsharplyinrecent years.In2015,thisgroupof A. Home purchase Millions of loans lendersaccountedfor 6 50percentof first-lienowneroccupanthome-purchase 5 loans,up3percentagepoints over2014.Independentmortgagecompaniesalsooriginated 4 48percentof first-lienowneroccupantrefinanceloans,an increaseof 6percentagepoints 3 from2014.Bothlevelsare higherthanatanypointsince 2 atleast1995. 1 Mortgage Applications and 1994 1997 2000 2003 2006 2009 2012 2015 Originations B. Refinance Millions of loans 15 In2015,6,913institutionsreported dataonnearly12.1millionhome mortgageapplications(including 12 about2millionapplicationsthat wereclosedbythelenderfor 9 incompletenessorwerewithdrawn bytheapplicantbeforeadecision wasmade)thatresultedinabout 6 7.4millionoriginations.The numberof originationsin2015was upfrom6millionoriginationsin 3 2014(table1). 0 Refinancemortgagesforone-to 1994 1997 2000 2003 2006 2009 2012 2015 four-familypropertiesincreasedby 860,000,or36percent,from Note:Thedataareannual.Mortgageoriginationsforone-tofour-familyowner- 2014to2015followingdeclinesin occupiedproperties,withjunior-lienloansexcludedin2004andlater. theprevioustwoyears.One-to four-familyhome-purchaseoriginationsgrewbyalmost421,000,or13percent,from2014. Mostone-tofour-familyhome-purchaseloansarefirstliensforowner-occupiedproperties.Inthepastfouryears,suchloanshavegrownover50percent,fromlessthan 2.1millionin2011to3.2millionin2015.However,thevolumeof suchhome-purchase originationsstillstandswellbelowitspeakin2005andisnearlevelsobservedinthe mid-1990s(figure1).7Thenumberof first-lienhome-purchaseloansfornon-owneroccupiedproperties—thatis,purchasesof rentalproperties,vacationproperties,and secondhomes—increasedfrom378,000in2014to403,000in2015. 7 TheHMDAdatapriorto2004didnotprovidelienstatusforloans,andthusthenumberofloanspriorto2004 includesbothfirst-andjunior-lienloans.Thatsaid,includingjunior-lienhome-purchaseloansin2015doesnot changetheconclusionthathome-purchaselendingin2015wassimilartothatinthemid-1990s,particularly 1994.

4 FederalReserveBulletin|November2016 Table1.Applicationsandoriginations,2004–15 Numbersofloans,inthousands,exceptasnoted Characteristicofloan 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 andofproperty 1–4Family Homepurchase Applications 9,804 11,685 10,929 7,609 5,060 4,217 3,848 3,650 4,023 4,586 4,670 5,181 Originations 6,437 7,391 6,740 4,663 3,139 2,793 2,547 2,430 2,742 3,139 3,241 3,662 Firstlien,owneroccupied 4,789 4,964 4,429 3,454 2,628 2,455 2,218 2,073 2,343 2,703 2,809 3,200 Site-built,conventional 4,107 4,425 3,912 2,937 1,581 1,089 1,005 999 1,251 1,630 1,738 1,894 Site-built,nonconventional 553 411 386 394 951 1,302 1,151 1,019 1,033 1,007 1,003 1,230 FHAshare(percent) 74.6 68.6 66.0 65.8 78.9 77.0 77.4 70.9 68.0 62.8 58.3 64.6 VAshare(percent) 21.6 26.7 29.0 27.1 15.2 13.9 15.2 18.2 19.9 24.2 28.3 26.1 FSA/RHSshare(percent) 3.9 4.7 5.0 7.1 5.9 9.0 7.4 10.9 12.0 13.1 13.4 9.4 Manufactured,conventional 106 100 101 95 68 43 44 40 44 51 51 56 Manufactured,nonconventional 24 27 30 29 28 21 17 15 14 14 16 20 Firstlien,non-owneroccupied 857 1,053 880 607 412 292 285 314 355 388 378 403 Juniorlien,owneroccupied 738 1,224 1,269 552 93 44 42 41 43 46 53 58 Juniorlien,non-owneroccupied 53 150 162 50 6 2 2 1 1 1 2 2 Refinance Applications 16,085 15,907 14,046 11,566 7,805 9,983 8,433 7,422 10,526 8,564 4,527 5,940 Originations 7,591 7,107 6,091 4,818 3,491 5,772 4,969 4,330 6,668 5,141 2,368 3,228 Firstlien,owneroccupied 6,497 5,770 4,469 3,659 2,934 5,301 4,516 3,856 5,930 4,393 1,999 2,841 Site-built,conventional 6,115 5,541 4,287 3,407 2,363 4,264 3,835 3,315 4,971 3,634 1,607 2,152 Site-built,nonconventional 297 151 110 180 506 979 646 508 917 715 362 658 FHAshare(percent) 68.3 77.3 87.5 91.5 92.2 83.7 79.3 63.2 61.2 61.2 47.6 59.5 VAshare(percent) 31.4 22.4 12.3 8.3 7.6 15.9 20.3 35.9 37.8 37.6 51.9 40.3 FSA/RHSshare(percent) .2 .3 .2 .1 .2 .4 .4 .9 .9 1.2 .5 .3 Manufactured,conventional 77 70 60 56 42 36 25 25 31 32 22 21 Manufactured,nonconventional 7 8 12 16 22 22 10 9 11 12 8 10 Firstlien,non-owneroccupied 618 582 547 474 330 350 359 394 660 673 309 328 Juniorlien,owneroccupied 464 729 1,036 661 219 115 88 74 73 70 56 55 Juniorlien,non-owneroccupied 13 25 39 23 9 7 6 5 5 5 4 4 Homeimprovement Applications 2,200 2,544 2,481 2,218 1,413 832 670 675 779 833 842 921 Originations 964 1,096 1,140 958 573 390 341 335 382 425 409 474 Multifamily1 Applications 61 58 52 54 43 26 26 35 47 51 46 52 Originations 48 45 40 41 31 19 19 27 37 40 35 41 Totalapplications 28,151 30,193 27,508 21,448 14,320 15,057 12,977 11,782 15,375 14,034 10,085 12,094 Totaloriginations 15,040 15,638 14,011 10,480 7,234 8,974 7,876 7,122 9,828 8,744 6,054 7,404 Memo Purchasedloans 5,142 5,868 6,236 4,821 2,935 4,301 3,229 2,939 3,163 2,788 1,802 2,102 Requestsforpreapproval2 1,068 1,260 1,175 1,065 735 559 445 429 474 474 497 531 Requestsforpreapprovalthat wereapprovedbutnotactedon 167 166 189 197 99 61 53 55 64 69 64 63 Requestsforpreapproval thatweredenied 171 231 222 235 177 155 117 130 149 123 127 114 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).

ResidentialMortgageLendingfrom2004to2015 5 Intable1,thevolumeof first-lien Figure2.Nonconventionalshareofhome-purchase lendingforowner-occupiedpropermortgageoriginations,1994–2015 tiesisfurtherdisaggregatedbyloan andpropertytype.(Versionsof Percent 100 table1containingloancountsand dollarvaluesbymonthareavail- 90 ableintheExcelfilepostedonline withthisarticle.)Inadditiontolien 80 andoccupancystatus,theHMDA Conventional dataprovidedetailsonthetypeof 70 propertysecuringtheloan(sitebuiltormanufacturedhome)and 60 onthetypeof loan(conventional ornot).8Asnotedearlier, 50 nonconventionallendinginvolves loanswithmortgageinsuranceor 40 otherguaranteesfromfederal governmentagencies,includingthe 30 FHA,theVA,theRHS,andthe FHA FSA.Conventionallendingencom- 20 passesallotherloans,including thosesoldtotheGSEsFannieMae VA 10 andFreddieMac. FSA/RHS 0 Nonconventionalloansaremore 1994 1997 2000 2003 2006 2009 2012 2015 commonforhomepurchasesthan forrefinancingsandusuallyinvolve Note:Thedataareannual.Home-purchasemortgageoriginationsforone-to four-familyowner-occupiedproperties,withjunior-lienloansexcludedin2004 highloan-to-value(LTV)ratios— andlater.NonconventionalloansarethoseinsuredbytheFederalHousing thatis,theborrowersproviderela- Administration(FHA)orbackedbyguaranteesfromtheU.S.Departmentof VeteransAffairs(VA),theFarmServiceAgency(FSA),ortheRuralHousing tivelysmalldownpayments.For Service(RHS). site-builtproperties, nonconventionalhome-purchase loansincreasednearly23percentin2015,whileconventionalloansroseabout9percent. Thenonconventionalshareof first-lienhome-purchaseloansforone-tofour-family, owner-occupied,site-builtpropertiesstoodatabout39percentin2015,upslightlyfrom 36percentin2014butdownsignificantlyfromitspeakof 54percentin2009inthewakeof thefinancialcrisis(figure2).9 Figure2showsthatthemarkeddeclineinthenonconventionalsharesince2009reflectsa decreaseintheFHAshareof loans,whiletheVAandFSA/RHSshareshavebeensteadier. OnefactorthatmayhelpexplainthefluctuationsintheFHAshareconcernschangesin theupfrontandannualMIPsthattheFHAchargesborrowers.Forexample,between October2010andApril2013,theannualMIPforatypicalhome-purchaseloanmorethan 8 Manufactured-homelendingdiffersfromlendingonsite-builthomes,inpartbecausemostofthehomesare soldwithoutlandandaretreatedaschattel-securedlending,whichtypicallycarrieshigherinterestratesand shortertermstomaturitythanthoseonloanstopurchasesite-builthomes(forpricinginformationonmanufacturedhomeloans,seetable8).Thisarticlefocusesalmostentirelyonsite-builtmortgageoriginations,which constitutethevastmajorityoforiginations(asshownintable1).Thatsaid,itisimportanttokeepinmind that,becausemanufacturedhomestypicallyarelessexpensivethansite-builthomes,theyprovidealow-cost housingoptionforhouseholdswithmoremoderateincomes. 9 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.

6 FederalReserveBulletin|November2016 doubled,from0.55percentof theloanamountto1.35percent.10InJanuary2015,the annualMIPwasreducedto0.85percentformostborrowers,andtheFHAshareof homepurchaseloansincreased.Inasupplementaryanalysis,wefindthatthereducedannual MIPincreasedthetotalnumberof home-purchaseoriginationstolower–creditscore, high-LTVborrowers.11 Theremainderof table1providesadditionaldetailsonthebreakdownof one-tofourfamilyhome-purchaseandrefinanceloansbylienandoccupancystatusandbyproperty andloantype.12Table1alsoprovidesthenumberof applicationsforandoriginationsof home-improvementloansforone-tofour-familyproperties,manyof whicharejuniorliens orunsecured,andloansforthepurchaseof multifamilyproperties(consistingof fiveor moreunits).Finally,theHMDAdataincludedetailsaboutpreapprovalrequestsforhomepurchaseloansandloanspurchasedbyreportinginstitutionsduringthereportingyear, althoughthepurchasedloansmayhavebeenoriginatedatanypointintime.Lenders reportedroughly531,000preapprovalrequests;roughly67percentof theserequeststurned intoanactualloanapplicationforaspecificpropertyin2015.13Table1alsoshowsthat, for2015,lenderspurchased2.1millionloansfromotherinstitutions. 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(andcontainsinformationbytypeof loanratherthanbyapplicantorneighborhoodcharacteristic),thesetablesfocusonfirstlienhome-purchaseandrefinanceloansforone-tofour-family,owner-occupied,site-built properties.Ascanbeseenfromtable1,suchloansaccountedforabout80percentof all HMDAoriginationsin2015. The Distribution of Home Loans across Demographic Groups Table2showsdifferentgroups’sharesof home-purchaseandrefinanceloansandhow theseshareshavechangedovertime.Forexample,blackborrowers’shareof homepurchaseloans(conventionalandnonconventionalloanscombined)was5.5percentin 2015,upfrom5.2percentin2014butstilllowerthanitspeakof 8.7percentin2006. 10 ChangestotheFHA’supfrontandannualMIPsovertimehavebeendocumentedinUrbanInstitute,Housing FinancePolicyCenter(2014),HousingFinanceataGlance:AMonthlyChartbook(Washington:UrbanInstitute,March),www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-1.Atypical FHAhome-purchaseloanhasanLTVofover95percentandaloanterminexcessof15years.Theupfront premium,onnet,wasunchangedbetween2010and2013;itwasbrieflyincreasedfrom1.75percentto 2.25percentandloweredbackto1.00percentin2010,andthenitwasraisedbackto1.75percentin2012. 11 SeeNeilBhuttaandDanielRingo(2016),“ChangingFHAMortgageInsurancePremiumsandtheEffectson Lending,”FEDSNotes(Washington:BoardofGovernorsoftheFederalReserveSystem,September29), https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/changing-fha-mortgage-insurance-pre miums-and-the-effects-on-lending-20160929.html. 12 NotethatundertheregulationsthatgovernHMDAreporting,manystandalonejunior-lienloansarenot reportedbecauseeitherthelenderdoesnotknowthepurposeoftheloanorthereasonscitedfortheloanare notonesthattriggerareportingrequirement.Unlessajuniorlienisusedforhomepurchaseorexplicitlyfor homeimprovements,ortorefinanceanexistinglien,itisnotreportedunderHMDA.Further,homeequity linesofcredit,manyofwhicharejuniorliensandcouldalsobeusedtohelppurchaseahome,donothaveto bereportedintheHMDAdataregardlessofthepurposeoftheloan. 13 Reporterscan,butarenotrequiredto,reportpreapprovalrequeststhattheyapprovebutarenotactedonby thepotentialborrower.

ResidentialMortgageLendingfrom2004to2015 7 Table2.Distributionofhomeloans,bypurposeofloan,2004–15 Percentexceptasnoted Characteristicofborrower 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 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 5.3 BlackorAfricanAmerican 7.1 7.7 8.7 7.6 6.3 5.7 6.0 5.5 5.1 4.8 5.2 5.5 Hispanicwhite 7.6 10.5 11.7 9.0 7.9 8.0 8.1 8.3 7.7 7.3 7.9 8.3 Non-Hispanicwhite 57.1 61.7 61.2 65.4 67.5 67.9 67.6 68.7 70.0 70.2 69.1 68.1 Otherminority2 1.4 1.3 1.1 1.0 .9 .9 .9 .8 .8 .7 .8 .8 Joint 2.3 2.3 2.3 2.5 2.8 2.8 2.7 2.8 2.9 3.1 3.3 3.5 Missing 19.8 11.5 10.5 10.1 9.6 9.3 9.1 8.6 8.2 8.2 8.3 8.5 All 100 100 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 27.7 24.6 23.6 24.7 28.1 36.7 35.5 34.4 33.3 28.5 27.1 28.0 Middle 26.9 25.7 24.7 25.2 27.1 26.7 25.6 25.2 25.2 25.2 25.6 26.1 High 41.4 45.5 46.7 47.0 43.1 34.7 37.4 38.8 40.0 44.7 46.1 44.8 Incomenotusedornotapplicable 4.0 4.2 5.0 3.1 1.7 1.9 1.5 1.6 1.5 1.6 1.3 1.2 All 100 100 100 100 100 100 100 100 100 100 100 100 Neighborhoodincome4 Lowormoderate 14.5 15.1 15.7 14.4 13.1 12.6 12.1 11.0 12.8 12.7 13.3 13.5 Middle 48.7 49.2 49.5 49.6 49.8 50.2 49.4 49.4 43.6 43.7 44.6 45.2 High 35.8 34.7 33.7 35.1 35.9 35.8 37.7 39.1 43.2 43.2 41.8 41.0 All 100 100 100 100 100 100 100 100 100 100 100 100 B.Refinance Borrowerraceandethnicity1 Asian 3.5 2.9 3.0 3.1 3.1 4.1 5.2 5.4 5.5 4.7 4.3 5.0 BlackorAfricanAmerican 7.4 8.3 9.6 8.4 6.0 3.5 2.9 3.1 3.3 4.4 5.4 5.0 Hispanicwhite 6.2 8.6 10.1 8.7 5.3 3.2 3.0 3.3 3.9 5.0 6.2 6.3 Non-Hispanicwhite 57.2 60.9 59.6 62.7 70.7 74.6 74.3 73.5 72.5 70.5 67.8 67.2 Otherminority2 1.4 1.4 1.3 1.1 .8 .6 .5 .6 .6 .7 .9 .8 Joint 2.1 2.1 1.9 2.0 2.2 2.6 2.7 2.8 3.1 3.1 3.2 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 12.4 All 100 100 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 26.2 25.5 24.7 23.3 23.5 19.6 19.0 19.2 19.6 21.1 22.1 19.0 Middle 26.3 26.8 26.1 25.6 25.5 22.5 22.5 21.3 21.8 21.7 21.9 21.0 High 38.8 40.8 43.7 46.1 44.8 45.8 49.6 48.1 47.7 46.3 44.9 45.1 Incomenotusedornotapplicable 8.7 6.9 5.5 5.0 6.2 12.1 8.9 11.4 10.9 10.9 11.1 14.9 All 100 100 100 100 100 100 100 100 100 100 100 100 Neighborhoodincome4 Lowormoderate 15.3 16.5 17.9 16.1 11.9 7.7 7.2 7.4 10.1 12.1 13.3 12.3 Middle 50.0 51.3 52.0 52.2 51.9 47.5 46.1 46.1 41.9 43.7 45.2 43.8 High 33.9 31.6 29.4 31.0 35.2 43.5 46.0 46.0 47.6 43.9 41.2 43.7 All 100 100 100 100 100 100 100 100 100 100 100 100 Memo Numberofhome-purchaseloans (thousands) 4,660 4,836 4,298 3,331 2,533 2,391 2,157 2,018 2,284 2,638 2,741 3,124 Numberofrefinanceloans(thousands) 6,412 5,692 4,397 3,588 2,869 5,243 4,481 3,823 5,888 4,349 1,969 2,810 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Rowsmaynotsumto100becauseofroundingor,forthe distributionbyneighborhoodincome,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).

8 FederalReserveBulletin|November2016 Similarly,theHispanicwhiteshareof home-purchaseloanswas8.3percentin2015,up from7.9percentin2014,althoughwellbelowthe11.7percentshareseenin2006.14Ina supplementaryanalysis,weuseHMDAdatamatchedtocreditrecorddatatobetterunderstandthedeclineinminoritymarketsharessince2006,andwefindthatsharpreductionsin lendingtoindividualswithlowcreditscorescanexplainmuchof thedecreaseinblackand Hispanicwhitemarketshares.15 Intermsof borrowerincome,theshareof home-purchaseloanstoLMIborrowersrose from27.1percentin2014to28.0percentin2015.16Inaccordancewithdefinitionsusedby thefederalbanksupervisoryagenciesinenforcementof theCommunityReinvestmentAct, LMIborrowersaredefinedasthosewithincomesof lessthan80percentof estimated currentareamedianfamilyincome(AMFI);AMFIiscalculatedbasedontheincomesof residentsof themetropolitanareaornonmetropolitanportionof thestateinwhichthe loan-securingpropertyislocated.17 From2014to2015,theshareof home-purchaseloansoriginatedinhigh-incomeneighborhoods(censustracts)decreasedslightlyfrom41.8percentto41.0percent.18LMIand middle-incometractsbothsawsmallgains.Intable2,itisimportanttonotethatsharesby neighborhoodincomein2012andthereafterarenotperfectlycomparablewiththosein 2011andearlierbecausecensus-tractdefinitionsandcensus-tractmedianfamilyincome estimateswererevisedin2012.Thecurrenttractdemographicmeasuresarebasedon2010 censusdataand2006–10AmericanCommunitySurveydata,whereasthe2004–11data reliedon2000censusincomeandpopulationdata.19Inaddition,theOfficeof ManagementandBudgetpublishednewmetropolitanareadelineationsin2014,socautionshould beexercisedincomparingrelativeincomemeasurementsbetween2013andlateryears. Average Loan Size by Demographic Group and Jumbo Lending Table3showstheaveragedollarvalueof home-purchaseandrefinanceloansbydifferent groupsandhowtheseaverageshavechangedovertime.Alldollaramountsarereportedin nominalterms.Overall,home-purchasedollarvaluesfollowthehistoricaltrendof home prices,risingduringthemid-2000s,fallingsharplythrough2008and2009,andthenbeginningtorecoversinceabout2011.Thetrendsdiffersubstantiallybyraceandethnicity, however.Theaveragehome-purchaseloantoaHispanicwhiteborrowerin2015wasfor $209,000,upfrom$198,000in2014butstillwellbelowthepeakof $238,000in2006.In contrast,theaveragehome-purchaseloanamountforanon-Hispanicwhiteborrowerwas 14 Thebottomoftable2providesthetotalloancountsforeachyear,andthusthenumberofloanstoagiven groupinagivenyearcanbeeasilyderived.Forexample,thenumberofhome-purchaseloanstoAsiansin2015 wasabout164,000,derivedbymultiplying3.1millionloansby5.3andthendividingby100. 15 SeeNeilBhuttaandDanielRingo(2016),“CreditAvailabilityandtheDeclineinMortgageLendingto MinoritiesaftertheHousingBoom,”FEDSNotes(BoardofGovernorsoftheFederalReserveSystem, September29),https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/credit-availability-and-thedecline-in-mortgage-lending-to-minorities-after-the-housing-boom-20160929.html. 16 Notethatthesumofrefinancesharesacrossborrower-incomegroupsissignificantlylessthan100percent becauseincomeisnotalwaysreliedoninunderwritingdecisions,particularlyinrecentyears,whichappearsto reflectincreasedusageofnonconventionalstreamlinerefinanceprograms.Indeed,in2015,about89percentof refinanceloansforwhichborrowerincomewasnotreportedwerenonconventional. 17 Middle-incomeborrowershaveincomesofatleast80percentandlessthan120percentofAMFI,andhighincomeborrowershaveincomesofatleast120percentofAMFI. 18 DefinitionsforLMI,middle-income,andhigh-incomeneighborhoodsareidenticaltothoseforLMI,middleincome,andhigh-incomeborrowersbutarebasedontheratioofcensus-tractmedianfamilyincometoAMFI measuredfromthe2006–10AmericanCommunitySurveydata. 19 Formoreinformationonthetransitiontothenewcensus-tractdata,seeRobertB.Avery,NeilBhutta, KennethP.Brevoort,andGlennB.Canner(2012),“TheMortgageMarketin2011:HighlightsfromtheData ReportedundertheHomeMortgageDisclosureAct,”FederalReserveBulletin,vol.98(December),pp.1–46, www.federalreserve.gov/pubs/bulletin/2012/default.htm.

ResidentialMortgageLendingfrom2004to2015 9 Table3.Averagevalueofhomeloans,bypurposeofloan,2004–15 Thousandsofdollars,nominal,exceptasnoted Characteristicofborrowerandof 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 neighborhood A.Homepurchase Borrowerraceandethnicity1 Asian 280 316 326 334 299 276 293 291 304 328 344 360 BlackorAfricanAmerican 166 183 197 197 184 172 174 174 179 193 199 209 Hispanicwhite 189 224 238 220 186 168 168 168 176 190 198 209 Non-Hispanicwhite 193 211 216 222 209 195 204 204 213 226 231 239 Otherminority2 206 240 257 245 216 196 201 198 206 219 229 241 Joint 233 255 261 269 255 248 263 261 274 289 293 303 Missing 216 248 261 280 265 242 256 262 279 298 293 303 Borrowerincome3 Lowormoderate 114 116 117 123 128 129 128 125 131 132 132 141 Middle 165 170 170 176 182 187 189 184 192 194 193 204 High 281 306 313 317 297 291 303 302 313 323 328 340 Incomenotusedornotapplicable 208 235 254 266 218 195 214 225 233 260 273 315 Neighborhoodincome4 Lowormoderate 159 180 189 188 175 160 164 163 158 171 178 188 Middle 172 190 197 196 186 174 177 173 178 191 196 206 High 258 284 294 301 277 257 270 271 282 300 306 316 Memo Allhome-purchaseloans 201 221 228 232 217 202 210 210 221 235 240 249 Conventionaljumboloans(percentof originations)5 11.2 12.7 9.4 6.8 2.3 1.3 1.7 2.2 2.9 4.0 4.8 5.3 Conventionaljumboloans(percentof loaneddollars)5 29.4 32.5 26.8 21.9 10.1 6.2 7.4 9.5 11.9 14.5 16.5 17.3 B.Refinance Borrowerraceandethnicity1 Asian 274 325 370 368 321 298 313 309 308 304 341 363 BlackorAfricanAmerican 151 180 199 192 173 184 180 174 181 171 174 199 Hispanicwhite 178 219 252 244 193 190 191 183 190 180 190 214 Non-Hispanicwhite 180 205 221 222 205 209 210 208 212 206 216 239 Otherminority2 190 229 269 258 211 217 218 207 213 201 213 240 Joint 210 246 265 262 243 247 254 249 254 249 266 292 Missing 194 226 246 250 242 243 248 253 253 244 245 268 Borrowerincome3 Lowormoderate 114 124 124 126 129 138 133 128 135 128 123 136 Middle 162 181 183 181 180 185 179 174 182 171 174 193 High 256 294 320 311 275 268 274 280 277 276 301 324 Incomenotusedornotapplicable 150 178 240 240 194 204 203 185 212 193 198 231 Neighborhoodincome4 Lowormoderate 142 169 188 185 164 172 172 167 163 153 157 182 Middle 158 184 201 198 182 184 182 175 181 173 180 201 High 245 282 313 311 272 259 265 269 269 270 290 311 Memo Allrefinanceloans 185 212 232 231 212 216 220 218 221 213 222 247 Conventionaljumboloans(percentof originations)5 9.2 11.4 10.2 7.5 2.0 .9 1.6 2.4 2.2 3.0 4.2 4.9 Conventionaljumboloans(percentof loaneddollars)5 25.8 29.6 28.3 23.0 9.0 4.1 6.9 10.7 9.1 12.7 16.5 16.8 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes. 1 Seetable2,note1. 2 Seetable2,note2. 3 Seetable2,note3. 4 Seetable2,note4. 5 Fractionofloansthatareconventionalandhaveloanamountsinexcessofthesingle-familyconformingloan-sizelimitsforeligibilityfor purchasebythegovernment-sponsoredenterprises.

10 FederalReserveBulletin|November2016 about$239,000in2015,higherthanthepre-crisispeakin2007of about$222,000.Asian borrowerstookoutthelargestloans,averaging$360,000forhomepurchasesand$363,000 forrefinancingsin2015,whereasloanstoblackborrowersaveraged$209,000forhome purchasesand$199,000forrefinancings.20 Intermsof borrowerincome,forLMIborrowers,theaveragehome-purchaseloanamount increasedto$141,000in2015from$132,000in2014;italsoincreasedbyasimilarmagnitudeformiddle-incomeborrowers.High-incomeborrowerssawtheiraveragehomepurchaseloanvalueriseto$340,000in2015from$328,000in2014.Averageloanvalues increasedacrossallborrower-incomegroupsforrefinanceloansaswell. Theincreaseinjumbolending,coincidingwiththegeneralhousingmarketrecovery, continuedin2015.Astable3shows,conventionaljumboloans—thosewithloanamounts inexcessof theGSEs’conformingloanlimitsandnoothergovernmentguarantee— madeup5.3percentof allfirst-lienhome-purchaseloansforowner-occupied,one-tofourfamily,site-builthomesin2015,upfrom4.8percentin2014.21Amongrefinanceloans,the conventionaljumbofractionincreasedto4.9percentfrom4.2percentin2014.Becauseof theirlargersize,jumboloansmakeupacorrespondinglylargershareof thedollarvolume of mortgages,accountingfor17.3percentof home-purchaseloansand16.8percentof refinanceloansin2015.Sincethefinancialcrisis,mostnewjumboloanshavebeenheldin theoriginatingbank’sportfolio,asthemarketformortgage-backedsecuritieswithouta governmentguaranteeisthin.22 Variation across Demographic Groups in Nonconventional Loan Use Table4showsthatblackandHispanicwhiteborrowersaremuchmorelikelytouse nonconventionalloans(FHA,VA,RHS,andFSAloans)thanconventionalloans comparedwithotherracialandethnicgroups.In2015,amonghome-purchaseborrowers, 70percentof blacksand63percentof Hispanicwhitestookoutanonconventionalloan, whereasabout36percentof non-Hispanicwhitesandjust17percentof Asiansdidso. Thesenumbershavedeclinedfromtheirpeaksin2009and2010,whenwelloverthreefourthsof blacksandHispanicwhites,andoverone-half of non-Hispanicwhites,tookout nonconventionalloans. Nonconventionalusageisalsomoreprevalentforborrowerswithlowerincomesandin neighborhoodswithlowerincomes.In2015,about53percentof LMIhome-purchase borrowersand50percentof thoseborrowingtopurchasehomesinLMIneighborhoods usednonconventionalloans,comparedwith26percentof high-incomeborrowersand 29percentof borrowersinhigh-incomeneighborhoods.WhileblackandHispanicwhite borrowerstendtohavelowerincomes,onaverage,thannon-Hispanicwhiteborrowers,the previouslymentionedracialandethnicdifferencesinnonconventionalloanusepersist 20 Medianloanamounts(notshownintables)followedsimilartrendsasaverageloanamounts. 21 Aloanqualifiesasjumbointable3iftheloanamountisabovetheGSEs’conformingloan-sizelimitfora single-familyhomeforthatyearandlocation.Theconformingloan-sizelimitwasmostlyuniformacrossthe nationpriorto2008.ThelimitsinAlaska,Hawaii,theU.S.VirginIslands,andGuamare50percenthigher thaninthenationatlarge.Fortheyears2008andthereafter,designatedhigher-costareashaveelevatedlimits. For2015,thegeneralconformingloan-sizelimitwas$417,000,andthemaximumhigh-costarealoan-sizelimit was$625,500(and50percenthigherinAlaska,Hawaii,theU.S.VirginIslands,andGuam).Conforming loan-sizelimitsincreasewiththenumberofunitsthatmakeuptheproperty,buttheHMDAdatadonotdifferentiatebetweenpropertieswithanywherefromonetofourunits.Someloansinthetablemaythereforehave beenmisclassifiedasjumbodespitebeingeligibleforpurchasebyaGSE. 22 SeeNeilBhutta,JackPopper,andDanielR.Ringo(2015),“The2014HomeMortgageDisclosureActData,” FederalReserveBulletin,vol.101(November),pp.1–43,www.federalreserve.gov/pubs/bulletin/2015/default .htm.

ResidentialMortgageLendingfrom2004to2015 11 Table4.Nonconventionalshareofhomeloans,bypurposeofloan,2004–15 Percentexceptasnoted Characteristicofborrower 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 andofneighborhood A.Homepurchase Borrowerraceandethnicity1 Asian 2.9 1.8 2.1 2.6 13.4 26.1 26.6 25.8 21.9 16.1 14.7 16.6 BlackorAfricanAmerican 21.7 14.3 13.6 21.7 64.1 82.0 82.9 80.3 77.2 70.8 68.0 70.2 Hispanicwhite 13.7 7.5 7.0 12.4 51.4 75.4 77.0 74.1 70.7 63.1 59.5 62.6 Non-Hispanicwhite 11.1 8.9 9.5 11.5 35.4 52.0 50.3 47.4 42.2 35.5 33.4 36.0 Otherminority2 14.0 9.3 9.4 14.8 48.4 67.6 68.8 65.9 62.2 55.5 53.9 55.1 Joint 16.9 12.8 14.4 17.2 46.4 59.4 56.3 53.6 48.9 42.1 41.3 43.7 Missing 11.3 5.1 5.7 8.8 32.7 50.6 49.4 45.9 39.4 31.9 32.2 35.0 Borrowerincome3 Lowormoderate 20.3 15.2 14.9 16.0 46.1 65.3 66.6 64.5 59.7 52.5 50.3 53.3 Middle 14.3 11.0 12.6 16.8 46.1 60.4 59.3 57.0 51.5 45.6 44.8 47.6 High 5.3 3.9 4.9 7.5 26.7 38.5 37.2 34.3 29.5 25.1 24.2 26.3 Neighborhoodincome4 Lowormoderate 15.8 9.7 9.6 13.8 45.5 64.4 65.1 61.2 57.9 49.9 48.0 50.3 Middle 14.1 10.2 10.8 14.2 42.7 59.8 59.4 56.9 52.0 44.7 43.0 45.6 High 7.1 5.4 6.1 7.6 27.4 43.4 42.0 39.5 34.6 28.2 26.1 28.9 Memo Allborrowers 11.9 8.5 9.0 11.8 37.6 54.4 53.4 50.5 45.2 38.2 36.6 39.4 B.Refinance Borrowerraceandethnicity1 Asian 1.2 .7 .6 1.0 4.6 5.7 4.7 4.3 5.9 6.7 6.8 9.8 BlackorAfricanAmerican 11.1 5.8 4.4 10.2 39.2 53.8 42.0 37.8 38.6 37.1 39.1 49.4 Hispanicwhite 5.6 2.6 1.9 3.9 20.5 36.2 28.1 22.9 26.9 25.8 21.2 32.0 Non-Hispanicwhite 4.0 2.4 2.6 4.9 15.9 16.8 13.6 12.2 14.2 14.8 16.3 21.0 Otherminority2 5.5 3.4 2.4 4.9 20.0 28.3 23.3 21.9 25.5 24.9 25.0 32.6 Joint 7.5 3.7 3.4 6.2 19.5 21.1 16.6 16.3 20.1 20.5 25.5 28.0 Missing 4.2 1.9 1.7 4.1 18.7 19.0 12.5 13.6 16.5 16.7 21.4 25.5 Borrowerincome3 Lowormoderate 2.3 1.6 2.9 5.7 18.3 16.6 14.0 11.5 9.3 9.3 13.0 16.5 Middle 1.7 1.3 2.7 6.2 19.6 13.2 12.2 10.9 8.9 9.5 13.2 14.8 High .8 .6 1.1 2.7 10.5 7.2 6.7 6.3 5.5 6.1 8.8 9.2 Neighborhoodincome4 Lowormoderate 5.9 3.2 2.9 6.3 24.6 31.3 23.1 19.7 22.2 22.1 22.4 29.5 Middle 5.2 3.0 2.9 5.8 20.2 22.3 17.5 16.1 18.4 19.0 20.9 26.8 High 2.9 1.7 1.6 3.0 11.3 12.1 10.0 9.3 11.7 12.4 14.5 18.4 Memo Allborrowers 4.6 2.6 2.5 5.0 17.6 18.7 14.4 13.3 15.6 16.4 18.4 23.4 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Excludesapplicationswherenocreditdecisionwasmade. NonconventionalloansarethoseinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.DepartmentofVeterans Affairs,theFarmServiceAgency,ortheRuralHousingService. 1 Seetable2,note1. 2 Seetable2,note2. 3 Seetable2,note3. 4 Seetable2,note4.

12 FederalReserveBulletin|November2016 withinincomegroups.23Withrespecttorefinanceloans,minorityandlower-income borrowersareagainmorelikelytousenonconventionalthanconventionalloans.In general,however,nonconventionalloansarelessprevalentinrefinancelending.24 Greaterrelianceonnonconventionalloansmayreflecttherelativelylowdown-payment requirementsof theFHAandVAlendingprograms,whichservetheneedsof borrowers whohavefewassetstomeetdown-paymentandclosing-costrequirements.25Thepatterns of productincidencecouldalsoreflectthebehaviorof lenderstosomeextent;forexample, concernshavebeenraisedaboutthepossibilitythatlenderssteerborrowersincertain neighborhoodstowardsuchloans.26 Denial Rates and Denial Reasons In2015,theoveralldenialrateonapplicationsforhome-purchaseloansof 12.1percent,as wellasthedenialrateforrefinanceloanapplicationsof 27.4percent,wassomewhatlower thanin2014(table5).27Overlongerhorizons,denialrateshaveexhibitedsignificant variation,andthesechangesdifferbytypeof loan.Forexample,forconventionalhomepurchaseloanapplications,thedenialrateof 10.8percentin2015was7.7percentage pointslowerthanin2006,whilefornonconventionalhome-purchaseloanapplications,the denialrateof 13.9percentin2015was1.8percentagepointshigherthanin2006.Variationsinrawdenialratesovertimereflectnotonlychangesincreditstandards,butalso changesinthedemandforcreditandinthecompositionof borrowersapplyingformortgages.Forexample,thedenialrateonapplicationsforconventionalhome-purchaseloans waslowerin2015thanduringthehousingboomyears,eventhoughmostmeasuresof creditavailabilitysuggestthatcreditstandardsaretightertoday.28Thisresultmaystem fromarelativelylargedropinapplicationsfromriskierapplicants. Asinpastyears,black,Hispanicwhite,and“otherminority”borrowershadnotablyhigher denialratesin2015thannon-Hispanicwhiteborrowers,whiledenialratesforAsian borrowersweremoresimilartothosefornon-Hispanicwhiteborrowers.Forexample,the denialratesforconventionalhome-purchaseloanswereabout23percentforblack borrowers,17percentforHispanicwhiteborrowers,12percentforAsianborrowers, 18percentforotherminorityborrowers,and9percentfornon-Hispanicwhiteborrowers. Previousresearchandexperiencegainedinthefairlendingenforcementprocessshowthat differencesindenialratesandintheincidenceof higher-pricedlending(thetopicof the nextsubsection)amongracialorethnicgroupsstem,atleastinpart,fromfactorsrelatedto 23 SeeBhutta,Popper,andRingo,“The2014HomeMortgageDisclosureActData,”innote22. 24 Thereportednonconventionalshareofrefinanceloansislowerthanthetrueshareforthegroupscategorized byborrowerincomebecause,inmostnonconventionalrefinanceloans,incomeisnotreported.Thus,when incomeisreportedonarefinanceloan,theloanislikelytobeconventional. 25 FindingsoftheFederalReserveBoard’sSurveyofConsumerFinancesfor2013indicatethatliquidassetlevels andfinancialwealthholdingsforminoritiesandlower-incomegroupsaresubstantiallysmallerthantheyare fornon-Hispanicwhiteborrowersorhigher-incomepopulations.SeeBoardofGovernorsoftheFederal ReserveSystem,“2013SurveyofConsumerFinances,”webpage,www.federalreserve.gov/econresdata/scf/ scfindex.htm. 26 See,forexample,GlennB.Canner,StuartA.Gabriel,andJ.MichaelWoolley(1991),“Race,DefaultRiskand MortgageLending:AStudyoftheFHAandConventionalLoanMarkets,”SouthernEconomicJournal,vol.58 (July),pp.249–62. 27 Denialratesarecalculatedasthenumberofdeniedloanapplicationsdividedbythetotalnumberofapplications,excludingwithdrawnapplicationsandapplicationfilesclosedforincompleteness. 28 BoththeMortgageBankersAssociationandtheUrbanInstitutepublishindexesofmortgagecreditavailability suggestingthatstandardshavebeenmuchtightersincethecrisis.SeeWeiLi,LaurieGoodman,EllenSeidman, JimParrott,JunZhu,andBingBai(2014),“MeasuringMortgageCreditAccessibility,”workingpaper (Washington:UrbanInstitute,November),www.urban.org/research/publication/measuring-mortgage-creditaccessibility.

ResidentialMortgageLendingfrom2004to2015 13 Table5.Denialrates,bypurposeofloan,2004–15 Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ofborrower A.Homepurchase Conventionalandnonconventional1 Allapplicants 14.4 16.0 18.0 18.7 18.0 15.5 15.6 15.8 14.9 14.4 13.2 12.1 Asian 13.7 15.9 16.9 17.5 19.2 16.3 15.8 16.5 15.8 15.3 14.0 12.6 BlackorAfricanAmerican 23.6 26.5 30.3 33.5 30.6 25.5 24.8 26.0 26.0 25.5 22.7 20.8 Hispanicwhite 18.3 21.1 25.1 29.5 28.3 22.2 21.8 21.1 20.2 20.5 18.2 16.1 Non-Hispanicwhite 11.1 12.2 12.9 13.3 14.0 12.8 12.9 13.1 12.5 12.0 11.0 10.0 Otherminority2 19.4 20.8 24.0 26.7 25.5 21.2 21.9 20.9 20.8 21.2 18.9 17.2 Conventionalonly Allapplicants 14.6 16.3 18.5 19.0 18.3 15.8 15.2 15.1 13.6 12.9 11.8 10.8 Asian 13.7 16.0 17.1 17.5 19.1 15.8 14.8 15.5 14.4 14.2 13.1 11.9 BlackorAfricanAmerican 25.0 27.8 31.9 35.7 37.6 35.8 33.6 33.2 32.0 28.5 24.7 23.3 Hispanicwhite 18.6 21.4 25.7 30.5 32.5 26.9 24.9 24.2 22.4 21.5 18.8 17.2 Non-Hispanicwhite 11.2 12.3 13.2 13.3 14.1 13.3 12.9 12.7 11.6 10.8 9.8 9.1 Otherminority2 19.7 21.2 24.8 27.8 29.0 25.9 28.0 24.6 23.6 22.5 20.1 18.3 Nonconventionalonly1 Allapplicants 13.3 12.5 12.1 16.2 17.4 15.3 16.0 16.5 16.3 16.8 15.7 13.9 Asian 12.6 11.6 10.6 15.5 20.2 17.7 18.6 19.3 20.2 20.6 18.8 16.1 BlackorAfricanAmerican 17.7 16.8 16.2 22.8 25.3 22.6 22.7 23.9 24.0 24.1 21.8 19.7 Hispanicwhite 16.3 17.2 15.7 20.5 23.1 20.4 20.7 19.9 19.3 19.9 17.8 15.5 Non-Hispanicwhite 10.7 10.2 10.0 13.1 13.9 12.5 13.0 13.6 13.7 14.1 13.2 11.7 Otherminority2 16.8 16.3 15.2 18.6 20.9 18.7 18.7 18.8 18.9 20.1 17.7 16.3 B.Refinance Conventionalandnonconventional1 Allapplicants 29.5 32.6 35.4 39.6 37.7 24.0 23.3 23.8 19.9 23.3 30.9 27.4 Asian 18.8 23.5 27.5 32.6 32.5 21.4 19.5 20.1 17.3 21.0 27.9 23.8 BlackorAfricanAmerican 39.9 42.2 44.1 52.0 56.0 42.2 41.7 40.0 32.8 35.0 45.8 43.3 Hispanicwhite 28.7 30.1 33.2 43.0 49.1 36.4 33.4 33.2 27.5 29.6 36.7 32.6 Non-Hispanicwhite 24.1 26.9 30.1 33.7 32.2 20.7 20.6 21.3 17.8 20.5 27.5 24.1 Otherminority2 33.7 35.5 40.6 52.0 57.4 37.3 35.3 34.4 30.0 32.1 41.6 40.2 Conventionalonly Allapplicants 30.1 32.9 35.6 39.9 37.0 22.1 21.3 22.3 19.4 22.5 29.5 26.4 Asian 18.8 23.5 27.5 32.5 31.5 20.2 18.5 19.4 17.0 20.5 27.1 23.1 BlackorAfricanAmerican 41.7 43.0 44.7 53.3 60.9 48.6 41.4 40.6 34.8 36.0 47.0 47.8 Hispanicwhite 29.3 30.2 33.3 43.2 50.2 38.9 33.6 33.5 28.9 30.6 37.3 34.7 Non-Hispanicwhite 24.6 27.1 30.4 33.9 31.5 19.1 18.9 20.1 17.4 19.9 26.1 23.2 Otherminority2 34.5 35.7 40.9 52.6 59.4 38.4 34.8 34.4 31.1 32.6 40.9 41.3 Nonconventionalonly1 Allapplicants 15.0 20.1 21.9 31.6 40.9 31.1 33.3 32.2 22.2 26.7 36.6 30.3 Asian 15.0 20.0 22.0 38.5 48.9 37.2 34.2 32.7 22.2 26.9 37.5 29.6 BlackorAfricanAmerican 17.5 23.6 24.6 33.7 43.5 35.1 42.2 39.1 29.5 33.1 43.9 37.8 Hispanicwhite 15.7 23.6 26.3 34.6 43.4 31.4 33.0 32.3 23.3 26.6 34.5 27.7 Non-Hispanicwhite 12.0 17.6 19.7 28.3 36.1 27.4 29.3 29.0 19.7 23.8 33.7 27.3 Otherminority2 15.2 25.8 22.2 34.8 45.4 34.1 37.0 34.4 26.6 30.6 43.8 37.9 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 NonconventionalloansarethoseinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.Departmentof VeteransAffairs,theFarmServiceAgency,ortheRuralHousingService. 2 Seetable2,note2.

14 FederalReserveBulletin|November2016 creditriskthatarenotavailableintheHMDAdata,suchascredithistory(includingcredit scores),ratioof totaldebtservicepaymentstoincome(DTI),andLTVratios.Differential costsof loanoriginationandthelocalcompetitiveenvironment,aswellasillegal discrimination,mayalsobearonthedifferencesinpricing. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency FairLendingExaminationProcedures.29Theavailabilityof broaderinformationallowsthe examinerstodrawstrongerconclusionsaboutinstitutioncompliancewiththefairlending laws. Lenderscan,butarenotrequiredto,reportuptothreereasonsfordenyingamortgage application,selectingfromninepotentialdenialreasons(asshownintable6).Among deniedfirst-lienapplicationsforone-tofour-family,owner-occupied,site-builtproperties in2015,about74percentof deniedhome-purchaseapplicationsandabout60percentof deniedrefinanceapplicationshadatleastonereporteddenialreason.Thetwomost frequentlyciteddenialreasonsforbothhome-purchaseandrefinanceloansweretheapplicant’scredithistoryandDTIratio(notethatthesumacrosscolumnsintable6canadd uptomorethan100percentbecauselenderscancitemorethanonedenialreason).For bothhome-purchaseandrefinanceapplications,theDTIratioandcollateralaremore likelytobecitedasdenialreasonsonconventionalthannonconventionalapplications. Denialreasonsvaryacrossracialandethnicgroupstosomedegree.Forexample,among deniedhome-purchaseloanapplicationsin2015,credithistorywascitedasadenialreason foralmost27percentof deniedblackapplicants,19percentof deniedHispanicwhite applicants,20percentof deniednon-Hispanicwhiteapplicants,andjust12percentof deniedAsianapplicants.TheDTIratiowascitedmostoftenasadenialreasonforAsian home-purchaseapplicantsat30percent,comparedwith22percentfornon-Hispanicwhite applicantsatthelowerend.Finally,collateralwascitedmostoftenasadenialreasonon home-purchaseapplicationsfornon-Hispanicwhiteapplicantsat15percent,compared with11percentforblackapplicants. The Incidence of Higher-Priced Lending Currentprice-reportingrulesunderHMDA,ineffectsinceOctober2009,definehigherpricedfirst-lienloansasthosewithanannualpercentagerate(APR)of atleast 1.5percentagepointsabovetheaverageprimeofferrate(APOR)forloansof asimilartype (forexample,a30-yearfixed-ratemortgage).30Thespreadforjunior-lienloansmustbeat least3.5percentagepointsforsuchloanstobeconsideredhigherpriced.TheAPOR, whichispublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil,isan estimateof theAPRonloansbeingofferedtohigh-qualityprimeborrowersbasedonthe contractinterestratesanddiscountpointsreportedbyFreddieMacinitsPrimaryMortgageMarketSurvey.31 29 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf. 30 Formoreinformationabouttherulechangesrelatedtohigher-pricedlendingandthewaysinwhichtheyaffect theincidenceofreportedhigher-pricedlendingovertime,seeAveryandothers,“The2009HMDAData,”in note9. 31 SeeFreddieMac,“MortgageRatesSurvey,”webpage,www.freddiemac.com/pmms;andFederalFinancial

ResidentialMortgageLendingfrom2004to2015 15 Table6.Reasonsfordenial,bypurposeofloan,2015 Percent Credit Unveri- Typeofloan Debt-to- Employ- Insuf- applica- Mortgage No Credit fiable andraceandethnicity income ment Collateral ficient tion insurance Other reason history informaofborrower ratio history cash incom- denied given tion plete A.Homepurchase Conventionalandnonconventional1 Allapplicants 23.4 3.8 20.4 13.7 6.9 5.2 9.3 .6 10.1 26.3 Asian 30.5 4.8 12.3 12.5 8.5 8.5 11.8 .6 11.0 21.5 BlackorAfricanAmerican 25.3 3.0 26.6 10.5 7.8 4.9 6.8 .6 9.9 27.4 Hispanicwhite 25.3 4.1 19.4 12.1 6.9 6.1 6.9 .5 12.0 28.4 Non-Hispanicwhite 22.2 3.8 20.1 14.7 6.5 4.9 9.4 .6 9.8 26.5 Otherminority2 25.5 3.5 24.3 11.4 8.0 5.2 7.9 .4 10.2 25.6 Conventionalonly Allapplicants 24.8 3.2 20.5 15.7 7.5 5.4 10.0 1.0 9.9 22.8 Asian 30.6 4.3 11.3 13.4 9.0 8.7 13.0 .7 10.8 20.2 BlackorAfricanAmerican 26.0 2.4 33.0 13.0 8.9 4.0 5.8 1.6 10.4 21.6 Hispanicwhite 27.0 3.1 21.7 15.3 8.0 5.6 6.9 1.0 13.0 22.7 Non-Hispanicwhite 23.9 3.2 19.8 16.5 7.1 5.2 10.1 1.0 9.3 23.5 Otherminority2 26.8 3.4 27.0 11.6 9.3 5.6 7.7 .8 10.3 23.8 Nonconventionalonly1 Allapplicants 21.7 4.4 20.3 11.4 6.1 5.0 8.4 .1 10.3 30.4 Asian 30.0 6.5 15.9 9.3 6.8 7.7 7.8 .07 11.8 26.5 BlackorAfricanAmerican 24.9 3.4 23.2 9.2 7.3 5.3 7.4 .1 9.6 30.5 Hispanicwhite 24.2 4.7 17.7 10.0 6.1 6.4 6.9 .1 11.4 32.3 Non-Hispanicwhite 19.9 4.6 20.4 12.3 5.7 4.4 8.6 .1 10.5 30.6 Otherminority2 24.3 3.6 21.8 11.2 6.7 4.9 8.2 .1 10.1 27.2 B.Refinance Conventionalandnonconventional1 Allapplicants 14.8 .9 16.8 13.9 2.7 3.6 11.0 .1 7.8 39.8 Asian 23.1 1.4 13.5 11.2 3.3 5.4 10.7 .1 9.3 35.8 BlackorAfricanAmerican 11.0 .5 18.8 11.3 2.8 2.7 8.4 .1 7.4 47.6 Hispanicwhite 18.6 1.0 19.5 10.3 3.5 4.0 9.1 .1 9.1 38.5 Non-Hispanicwhite 14.7 .9 16.1 14.9 2.6 3.7 10.5 .1 7.7 40.1 Otherminority2 13.7 .7 16.1 9.9 2.3 3.8 8.8 .1 7.5 48.2 Conventionalonly Allapplicants 17.5 .9 17.4 14.9 2.7 4.2 9.7 .1 8.0 37.5 Asian 24.9 1.4 13.4 11.9 3.5 5.7 10.3 .1 9.2 34.2 BlackorAfricanAmerican 13.3 .5 19.9 12.0 2.5 3.2 6.7 .2 7.6 46.9 Hispanicwhite 21.3 1.0 20.1 11.2 3.5 4.4 7.7 .1 9.0 37.1 Non-Hispanicwhite 17.2 1.0 16.8 16.0 2.6 4.3 9.4 .1 7.9 37.5 Otherminority2 15.9 .8 17.3 10.5 2.3 4.6 7.6 .1 7.8 45.9 Nonconventionalonly1 Allapplicants 7.8 .7 15.1 11.3 2.7 2.0 14.2 .03 7.3 46.0 Asian 12.0 .9 14.0 6.9 2.2 3.2 13.4 .0 9.7 46.5 BlackorAfricanAmerican 7.4 .4 17.1 10.1 3.3 1.8 11.1 .02 7.1 48.7 Hispanicwhite 10.9 .9 18.0 7.7 3.4 3.0 13.0 .06 9.6 42.5 Non-Hispanicwhite 7.3 .7 14.0 11.7 2.5 2.0 13.8 .04 7.1 47.5 Otherminority2 8.7 .6 13.2 8.5 2.3 1.9 11.5 .0 6.8 53.5 Note:Deniedfirst-lienmortgageapplicationsforone-tofour-family,owner-occupied,site-builthomes.Columnssumtomorethan100because lendersmayreportuptothreedenialreasons.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 Seetable5,note1. 2 Seetable2,note2. InstitutionsExaminationCouncil,“FFIECRateSpreadCalculator,”webpage,www.ffiec.gov/ratespread/ newcalc.aspx.

16 FederalReserveBulletin|November2016 In2015,thefractionof home-purchaseloans(again,firstliensforone-tofour-family, owner-occupied,site-builtproperties)abovethehigher-pricedthresholddecreasedto 7.6percentfrom11.6percentin2014(asshownintable7.A).Thisdecreasestemmedfrom adropinthehigher-pricedshareof nonconventionalloansfrom26percentto14.5percent, whilethehigher-pricedshareof conventionalloansincreasedslightly,from3.1percentto 3.2percent. Table7.Aalsoshowsthat,in2015aswellasearlieryears,blackandHispanicwhite borrowershadthehighestincidencesof higher-pricedloanswithinboththeconventional andnonconventionalloantypes.Thistableprovidestherawratesof higher-pricedlending bygroupfrom2004to2015,but,asdiscussedindetailinpreviousBulletinarticles,the rawratesreportedinthepublicHMDAdatacanbedifficulttocompareoverlongertime horizonsfortwomainreasons.First,adifferentprice-reportingrulewasinplacepriorto October2009,withthespreadbetweenamortgage’sAPRandtherateonaTreasurybond of comparableterm(ratherthantheAPOR)reportedif itroseabove3percentagepoints.32 Second,thepreviousprice-reportingrulecreatedunintendeddistortionsinreportingover time(whichiswhythereportingrulewaschanged),sodatafromyearspriorto2009are notevendirectlycomparablefromyeartoyear.33 Table7.Bprovidesadjustedratesof higher-pricedlendingthatareintendedtobemore comparableovertime.Usingthedatesof applicationandorigination(whicharenot releasedinthepublicHMDAdatafiles)andassumingallloansare30-yearfixed-rate mortgages,wecanestimatetheAPRof loansthatwereoriginatedundertheoldpricing rule.34ThisestimatedAPRcanthenbecomparedwiththeAPOR,asisdoneunderthe newprice-reportingrule.Finally,becausetheimpliedthresholdspreadovertheAPOR duringthepreviousreportingregimegottoashighasabout2.5percentagepoints, table7.Breportsthefractionof loanswithanestimatedAPRspreadovertheAPOR(or theactualreportedspreadforloansmadeunderthenewrules)of atleast2.5percentage points—ratherthan1.5percentagepoints,asintable7.A.35Higher-pricedlendingbythis measurevirtuallydisappearedby2008andhasnotreemerged,likelyreflectingthelackof subprimemortgagelending. Thehigher-pricedfractionof FHAhome-purchaseloanswasabout22percentin2015 (table8).Incontrast,about1percentof VAandFSA/RHShome-purchaseloanswere higherpriced.In2014,thehigher-pricedfractionof FHAhome-purchaseloanswasmuch higher,ataround44percent.TheJanuary2015reductionintheFHA’sannualMIP appearstohavemovedmanyFHAhome-purchaseloansunderthereportingthreshold. TheJune2013increaseinthetermlengthoverwhichtheannualMIPmustbepaid remainedineffect,however.Asaresult,thefractionof FHAhome-purchaseloanspriced overthereportingthresholdin2015wasstillsubstantiallyhigherthanbeforethe2013rule change,despitealowerannualMIP. 32 Thereportingthresholdforjuniorlienswas5percentagepoints. 33 Thesedistortionsarerelatedtothefactthatchangesinlong-termTreasuryratesdonotalwaysleadtoparallel changesinmortgagerates.Foradiscussionofhowtheoldrulecouldproducemisleadingdataabouttrends inhigher-pricedlending,seeNeilBhuttaandDanielR.Ringo(2014),“The2013HomeMortgageDisclosure ActData,”FederalReserveBulletin,vol.100(November),pp.1–32,www.federalreserve.gov/pubs/bulletin/2014/ default.htm. 34 Theassumptionthatallmortgageswerefixedratelikelyunderstatestheextentofhigher-pricedlendingduring theearlyyearsofthehousingboom.Duringthisperiod,adjustable-ratemortgageswerequiteprevalent,and theAPRsonsuchloansaretiedtoevenshorter-termTreasuryratesthanaretheAPRsonfixed-ratemortgages.Thus,whentheyieldcurveisrelativelysteep,asitwasin2004,thebarforadjustable-ratemortgagesto bereportedashigherpricedwouldhavebeenevenhigherthanforfixed-ratemortgages. 35 Foramoredetaileddiscussionofthisadjustmenttechnique,seeAveryandothers,“The2009HMDAData,”in note9.

ResidentialMortgageLendingfrom2004to2015 17 Table7.Incidenceofhigher-pricedlending,bypurposeofloan,2004–15 A.Unadjusted Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ofborrower Homepurchase Conventionalandnonconventional1 Allborrowers 9.8 22.5 23.2 12.7 8.1 4.6 2.2 3.3 3.1 7.1 11.6 7.6 Asian 5.5 16.3 16.4 7.6 4.0 2.4 1.0 1.5 1.4 3.1 5.2 3.6 BlackorAfricanAmerican 24.3 46.7 46.4 27.6 14.5 7.1 3.0 5.0 5.3 14.3 25.6 16.2 Hispanicwhite 17.5 42.0 43.3 25.9 15.8 8.1 3.9 6.1 5.9 16.9 28.4 18.5 Non-Hispanicwhite 7.8 15.5 16.0 9.6 7.2 4.3 2.2 3.1 2.9 6.2 9.5 6.2 Otherminority2 14.4 30.3 30.7 16.1 9.1 5.3 2.3 3.5 3.4 8.8 13.6 8.9 Conventionalonly Allborrowers 11.0 24.5 25.3 14.0 7.3 4.6 3.3 3.8 3.2 2.9 3.1 3.2 Asian 5.6 16.6 16.7 7.7 3.3 1.9 1.0 1.3 1.2 1.1 1.5 2.1 BlackorAfricanAmerican 30.6 54.1 53.4 34.0 17.4 8.7 6.1 8.0 6.7 6.1 7.7 6.8 Hispanicwhite 20.0 45.3 46.3 28.9 17.7 11.0 9.6 10.7 8.7 7.3 6.5 8.3 Non-Hispanicwhite 8.6 16.9 17.5 10.5 6.5 4.8 3.4 3.9 3.2 2.9 3.0 2.9 Otherminority2 16.1 33.3 33.6 18.5 9.5 6.7 4.6 5.5 5.1 4.9 5.0 4.9 Nonconventionalonly1 Allborrowers 1.2 .9 1.8 3.0 9.5 4.6 1.3 2.7 3.0 13.9 26.2 14.5 Asian 2.4 .6 .8 1.3 8.2 3.9 .8 2.0 1.9 13.4 26.2 11.4 BlackorAfricanAmerican 1.4 1.6 2.5 4.5 12.8 6.8 2.4 4.3 4.9 17.6 34.0 20.2 Hispanicwhite 2.0 1.4 3.5 4.5 14.0 7.1 2.2 4.5 4.8 22.5 43.3 24.6 Non-Hispanicwhite 1.0 .7 1.5 2.5 8.4 3.9 1.0 2.3 2.6 12.1 22.4 12.2 Otherminority2 4.4 .7 2.1 2.4 8.8 4.7 1.2 2.5 2.4 11.9 20.9 12.2 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 2.5 Asian 5.8 15.1 19.5 12.5 3.1 .9 .4 .5 .4 .5 1.1 .7 BlackorAfricanAmerican 30.0 46.2 50.7 38.1 22.8 9.0 6.5 6.8 4.1 3.8 5.6 5.1 Hispanicwhite 18.2 32.6 36.9 26.5 15.1 7.0 4.4 4.4 2.6 3.1 4.7 3.9 Non-Hispanicwhite 12.3 20.4 25.0 17.6 10.2 3.7 1.8 2.2 1.5 2.0 3.3 2.4 Otherminority2 17.6 26.9 32.3 23.8 13.9 4.7 2.6 2.6 2.0 2.2 3.1 2.8 Conventionalonly Allborrowers 15.2 25.7 31.0 21.8 10.4 3.1 1.3 1.5 1.2 1.5 2.2 1.6 Asian 5.8 15.2 19.6 12.5 2.9 .7 .2 .3 .3 .3 .7 .4 BlackorAfricanAmerican 33.7 49.0 52.8 41.5 27.6 9.9 4.0 4.2 2.9 3.3 3.8 3.1 Hispanicwhite 19.2 33.4 37.5 27.3 16.0 7.2 3.3 3.3 2.3 2.4 2.8 2.4 Non-Hispanicwhite 12.8 20.9 25.6 18.2 9.8 3.1 1.3 1.6 1.2 1.6 2.3 1.7 Otherminority2 18.2 27.7 32.9 24.5 14.7 4.8 1.9 2.2 1.7 2.0 2.1 2.0 Nonconventionalonly1 Allborrowers 1.5 .9 3.1 6.6 13.2 6.7 4.9 5.9 3.2 3.9 8.1 5.4 Asian 3.6 2.1 2.5 4.9 8.9 4.8 3.1 4.0 1.8 2.6 7.1 3.3 BlackorAfricanAmerican 1.0 1.2 4.1 7.8 15.2 8.2 9.8 10.9 6.0 4.6 8.3 7.1 Hispanicwhite 2.0 .9 2.6 6.2 11.6 6.6 7.3 7.9 3.6 5.1 12.1 7.0 Non-Hispanicwhite 1.3 .7 2.8 6.0 12.1 6.5 4.6 5.9 3.3 4.2 8.6 5.4 Otherminority2 8.1 3.9 9.6 9.9 10.5 4.5 4.6 4.3 2.9 2.8 5.9 4.4 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 Seetable5,note1 2 Seetable2,note2.

18 FederalReserveBulletin|November2016 Table7.Incidenceofhigher-pricedlending,bypurposeofloan,2004–15 B.Adjusted Percent Typeofloanandraceandethnicityof 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 borrower Homepurchase Conventionalandnonconventional1 Allborrowers 7.4 18.3 17.1 6.3 1.3 1.3 .6 .8 .8 .7 .8 .7 Asian 3.8 13.0 11.4 3.1 .5 .5 .3 .3 .3 .3 .4 .5 BlackorAfricanAmerican 19.3 40.3 38.5 16.7 1.9 1.3 .6 .7 .9 1.0 1.2 1.2 Hispanicwhite 12.3 34.5 32.8 13.0 2.1 1.4 1.0 1.3 1.6 1.5 1.6 1.5 Non-Hispanicwhite 5.8 12.1 10.9 4.3 1.3 1.4 .7 .8 .8 .7 .7 .6 Otherminority2 10.5 24.7 22.7 8.0 1.5 1.4 .8 .9 1.1 .9 .9 .9 Conventionalonly Allborrowers 8.2 20.0 18.7 7.1 1.9 2.3 1.3 1.4 1.2 .9 .8 .8 Asian 3.8 13.3 11.6 3.2 .5 .6 .3 .4 .4 .3 .4 .5 BlackorAfricanAmerican 24.4 46.9 44.5 21.2 4.7 4.0 2.6 2.6 2.7 1.7 1.4 1.8 Hispanicwhite 14.0 37.2 35.2 14.8 3.9 4.6 3.9 4.1 4.5 2.8 2.3 2.8 Non-Hispanicwhite 6.5 13.2 12.0 4.9 1.9 2.6 1.3 1.5 1.2 .8 .7 .7 Otherminority2 11.6 27.2 25.0 9.3 2.7 3.7 2.3 2.5 2.6 1.7 1.3 1.5 Nonconventionalonly1 Allborrowers .9 .3 .2 .3 .4 .4 .1 .2 .3 .5 .7 .5 Asian 2.2 .3 .1 .2 .2 .2 .1 .2 .2 .3 .4 .2 BlackorAfricanAmerican 1.0 .5 .3 .6 .4 .7 .2 .3 .3 .8 1.1 1.0 Hispanicwhite 1.6 .3 .3 .2 .5 .4 .1 .3 .3 .8 1.1 .7 Non-Hispanicwhite .8 .2 .2 .2 .3 .3 .1 .2 .3 .5 .7 .5 Otherminority2 3.9 .3 .2 .2 .3 .3 .1 .1 .2 .3 .6 .4 Refinance Conventionalandnonconventional1 Allborrowers 11.3 20.1 21.3 12.7 4.3 1.4 .6 .8 .7 .7 1.0 .6 Asian 4.1 12.2 12.1 5.4 .8 .2 .1 .2 .1 .1 .2 .1 BlackorAfricanAmerican 24.3 38.5 39.0 26.4 10.6 3.5 2.6 3.3 2.5 1.6 2.0 1.3 Hispanicwhite 13.4 27.0 25.8 14.8 5.6 2.5 1.8 1.8 1.1 .9 1.1 .7 Non-Hispanicwhite 9.5 15.9 16.9 10.3 4.1 1.4 .6 .8 .7 .7 1.1 .6 Otherminority2 13.2 22.0 22.3 14.5 7.1 2.1 .9 1.1 1.1 .8 1.1 .7 Conventionalonly Allborrowers 11.8 20.7 21.9 13.3 5.1 1.5 .5 .6 .4 .4 .7 .5 Asian 4.1 12.3 12.1 5.4 .9 .2 .1 .1 .0 .0 .1 .1 BlackorAfricanAmerican 27.3 40.8 40.7 29.4 17.1 6.3 2.0 1.8 1.0 1.0 1.4 1.1 Hispanicwhite 14.1 27.7 26.2 15.4 6.9 3.5 1.4 1.3 .8 .7 .8 .8 Non-Hispanicwhite 9.9 16.3 17.3 10.9 4.8 1.6 .5 .6 .4 .5 .8 .5 Otherminority2 13.6 22.6 22.7 14.9 8.3 2.8 .9 .9 .7 .7 .7 .6 Nonconventionalonly1 Allborrowers 1.0 .6 .7 .5 .4 .5 1.2 2.5 2.4 1.8 2.4 .9 Asian 2.9 1.8 1.3 1.4 .5 .3 .5 1.5 1.4 1.1 1.9 .4 BlackorAfricanAmerican .6 .8 1.2 .6 .5 1.1 3.5 5.9 4.9 2.6 3.0 1.5 Hispanicwhite 1.4 .4 .3 .6 .7 .8 2.8 3.5 1.9 1.3 2.0 .6 Non-Hispanicwhite .8 .4 .4 .3 .4 .5 1.0 2.4 2.5 2.1 2.8 1.0 Otherminority2 6.3 3.4 7.8 6.3 1.9 .4 1.1 2.0 2.2 1.2 2.2 .8 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1.Seetextfordetailsonhowadjustedincidencesofhigher-pricedlendingarecalculated. 1 Seetable5,note1 2 Seetable2,note2.

ResidentialMortgageLendingfrom2004to2015 19 Table8.Distributionofpricespread,2015 Percentexceptasnoted LoanswithAPORspreadabove1.5percentagepoints1 Total Purposeandtypeofloan Distribution,bypercentagepointsofAPORspread number Number Percent 1.5–1.99 2–2.49 2.5–2.99 3–3.99 4–4.99 5ormore Site-builthomes Homepurchase Conventional 1,894,090 59,959 3.2 53.7 20.3 10.2 8.8 3.4 3.6 FHA2 793,828 173,157 21.8 78.0 18.4 2.4 .9 .14 .12 VA/RHS/FSA3 435,792 5,080 1.2 84.5 7.8 1.6 3.8 2.0 .3 Refinance Conventional 2,151,796 33,573 1.6 51.1 18.6 10.1 11.2 5.1 3.9 FHA2 391,651 34,582 8.8 70.0 13.2 7.9 6.2 .5 2.2 VA/RHS/FSA3 266,758 1,009 .4 92.3 3.9 .7 2.2 .8 .2 Manufacturedhomes Homepurchase Conventional 56,155 43,331 77.2 6.7 4.9 7.3 13.1 10.8 57.3 FHA2 15,408 8,383 54.4 57.2 25.4 6.5 1.7 .6 8.7 VA/RHS/FSA3 4,372 181 4.1 90.1 7.7 .6 1.7 0 0 Refinance Conventional 20,591 5,869 28.5 27.2 15.3 13.3 18.3 11.4 14.6 FHA2 6,783 1,529 22.5 68.7 19.3 6.7 4.4 .3 .7 VA/RHS/FSA3 3,439 59 1.7 88.1 11.9 0 0 0 0 Note:First-lienmortgagesforone-tofour-familyowner-occupiedhomes. 1 Averageprimeofferrate(APOR)spreadisthedifferencebetweentheannualpercentagerateontheloanandtheAPORforloansofasimilar typepublishedweeklybytheFederalFinancialInstitutionsExaminationCouncil.Thethresholdforfirst-lienloansisaspreadof 1.5percentagepoints. 2 LoansinsuredbytheFederalHousingAdministration. 3 LoansbackedbyguaranteesfromtheU.S.DepartmentofVeteransAffairs,theRuralHousingService,ortheFarmServiceAgency. HOEPA Loans UndertheHomeOwnershipandEquityProtectionAct(HOEPA),certaintypesof mortgageloansthathaveinterestratesorfeesabovespecifiedlevelsaresubjecttoadditional consumerprotections,suchasspecialdisclosuresandrestrictionsonloanfeatures.New rulesextendingHOEPA’sprotectionsfromrefinanceandhomeequityloanstoalsoinclude home-purchaseloansandhomeequitylinesof creditbecameeffectiveonJanuary10, 2014.Theserulesalsoaddednewprotectionsforhigh-costmortgages,suchasapre-loan counselingrequirementforborrowers. Thenewrulesalsochangedthebenchmarkusedtoidentifyhigh-costloansthatare coveredbyHOEPA’sprotections.Insteadof usingtheyieldonTreasurysecurities,highcostloansareidentifiedbycomparingaloan’sAPRwiththeAPOR.HOEPAcoverage nowappliestofirstlienswithanAPRmorethan6.5percentagepointsabovetheAPOR.If theloanisajuniorlienortheloanamountislessthan$50,000andtheloanissecuredby personalproperty(suchasamanufacturedhome),thenthehigh-costthresholdis 8.5percentagepointsabovetheAPOR.Priorto2014,HOEPA’sprotectionsweretriggered if theloan’sAPRexceeded8percentagepointsabovetherateonaTreasurysecurityof

20 FederalReserveBulletin|November2016 Table9.DistributionofHOEPAloans,bycharacteristicofloan,2004–15 Percentexceptasnoted Loansbypurpose,lienstatus,property 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 type,andamount HOEPAloans(total) 24,437 35,985 15,195 10,780 8,577 6,446 3,407 2,373 2,193 1,868 1,271 1,248 Loanpurpose Homepurchase 0 0 0 0 0 0 0 0 0 0 31.3 39.5 Homeimprovement 37.7 26.1 42.4 45.4 30.5 31.1 32.6 32.3 31.5 30.1 17.8 14.9 Refinance 62.3 73.9 57.6 54.6 69.5 68.9 67.4 67.7 68.5 69.9 50.9 45.6 Lienstatus First 55.5 60.5 53.6 52.8 78.5 84.1 83.9 82.8 84.6 84.2 90.4 88.4 Junior 44.5 39.5 46.4 47.2 21.5 15.9 16.1 17.2 15.4 15.8 9.6 11.6 Propertytype Sitebuilt 88.0 91.8 83.7 81.0 72.7 67.8 68.3 65.7 65.7 68.8 75.4 83.3 Manufacturedhome 12.0 8.2 16.3 19.0 27.3 32.2 31.7 34.3 34.3 31.2 24.6 16.7 Loanamount Lessthan$50,000 72.4 48.4 72.1 74.3 66.7 72.5 76.5 77.8 75.6 71.3 52.8 36.9 Greaterthan$50,000 27.6 51.6 27.9 25.7 33.3 27.5 23.5 22.2 24.4 28.7 47.2 63.1 Note:Mortgagesforone-tofour-familyhomes.HOEPAloansaremortgageswithtermsthattriggeredtheadditionalprotectionsprovidedbythe HomeOwnershipandEquityProtectionAct. similartermforfirstliens,and10percentagepointsforjuniorliens.Finally,underthenew rules,HOEPAcoverageisalsotriggeredif thepointsandfeesexceedcertain thresholds.36 WhileHOEPAloanswereneveralargefractionof themortgagemarket,theyhavebecome evenrarersincethehousingboom.In2005,lendersreportednearly36,000HOEPAloans (table9).In2015,thetotalwasonly1,248loans(aboutthesameasin2014),despitethe extensionof HOEPAprotectionstohome-purchaseloans. Lending Institutions In2015,therewere6,913reportinginstitutions(table10).Thetotalconsistedof 3,954 banksandthrifts(hereafter,banks),of which3,209weresmall,definedashavingassetsof lessthan$1billion;1,971creditunions;132mortgagecompaniesaffiliatedwithdepositories(banksandcreditunions);and856independentmortgagecompanies.37Banks collectivelyaccountedforabout42percentof allreportedmortgageoriginations;independentmortgagecompanies,about44percent;creditunions,9percent;andaffiliates,the remainder. Manyinstitutionsreportlittleactivity.About44percentof institutions(3,071outof 6,913) reportedfewerthan100mortgageoriginationsin2015,accountingforabout122,000 36 Underthenewrules,aloanisalsoconsideredhighcostifthepointsandfeesexceed5percentofthetotalloan amountforaloanamountequaltoormorethan$20,000and8percentofthetotalloanamountor$1,000for aloanlessthan$20,000,withtheloanamountsadjustedannuallyforinflationfromthebaseyearof2014. 37 DataonbankassetsweredrawnfromtheFederalDepositInsuranceCorporationReportsofConditionand Income.The$1billionthresholdisbasedonthecombinedassetsofallbankswithinagivenbankingorganization.DataavailableintheHMDAReporterPanel(availableathttps://www.ffiec.gov/hmda/hmdaflat.htm)can beusedtohelpidentifythevarioustypesofinstitutions.Affiliateinstitutionsincludeallmortgagecompanies knowntobewhollyorpartiallyownedbyadepository—thatis,institutionsforwhichthe“otherlendercode” intheReporterPanelequals1,2,or5.MostcreditunionsreporttotheNationalCreditUnionAdministration, exceptfourlargecreditunions(BoeingEmployeesCreditUnion,NavyFederalCreditUnion,Pentagon FederalCreditUnion,andStateEmployeesCreditUnion),whichreporttotheConsumerFinancialProtection Bureau.

ResidentialMortgageLendingfrom2004to2015 21 Table10.Lendingactivity,bytypeofinstitution,2015 Percentexceptasnoted Typeofinstitution1 Institutionsandtypeofactivity Affiliated Independent Smallbank Largebank Creditunion mortgage mortgage All company company Numberofinstitutions 3,209 745 1,971 132 856 6,913 Applications(thousands) 858 3,963 1,104 551 5,619 12,094 Originations(thousands) 621 2,470 670 359 3,285 7,404 Purchases(thousands) 24 1,107 19 185 767 2,102 Numberofinstitutionswithfewerthan100loans 1,765 129 1,067 27 83 3,071 Originations(thousands) 71.6 5.6 40.7 1.1 3.1 122.1 Numberofinstitutionswithfewerthan25loans 611 41 419 9 40 1,120 Originations(thousands) 7.5 .5 5.2 .1 .5 13.8 Home-purchaseloans(thousands)2 234 929 202 197 1,562 3,124 Conventional 72.2 74.9 85.2 57.1 47.7 60.6 Higher-pricedshareofconventionalloans 11.0 1.8 5.3 1.4 2.4 3.2 LMIborrower3 30.1 23.7 26.6 30.8 30.0 28.0 LMIneighborhood4 12.1 11.8 12.9 12.5 14.9 13.5 Non-Hispanicwhite5 81.1 69.6 69.9 71.1 64.7 68.1 Minorityborrower5 11.8 17.9 14.8 16.2 23.4 19.9 Sold6 72.7 72.2 47.3 96.2 97.8 84.8 Refinanceloans(thousands)2 161 932 251 122 1,344 2,810 Conventional 82.9 90.9 95.8 76.2 62.3 76.6 Higher-pricedshareofconventionalloans 7.6 1.2 2.7 .6 .7 1.6 LMIborrower3 20.1 20.2 23.2 17.9 17.4 19.0 LMIneighborhood4 10.0 11.1 12.9 10.9 13.3 12.3 Non-Hispanicwhite5 83.6 69.5 70.0 70.2 62.8 67.2 Minorityborrower5 8.1 16.5 14.6 14.8 19.3 17.1 Sold6 71.3 72.0 37.4 95.6 98.9 82.7 1 Smallbanksconsistofthosebankswithassets(includingtheassetsofallotherbanksinthesamebankingorganization)oflessthan $1billionattheendof2015.Affiliatedmortgagecompaniesarenondepositorymortgagecompaniesownedbyoraffiliatedwithabanking organizationorcreditunion. 2 First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes. 3 Seetable2,note3. 4 Seetable2,note4. 5 Seetable2,note1.“Minorityborrower”referstononwhite(excludingjointormissing)orHispanicwhiteapplicants. 6 Excludesoriginationsmadeinthelastquarteroftheyearbecausetheincidenceofloansalestendstodeclineforloansoriginatedtowardthe endoftheyear,aslendersreportaloanassoldonlyifthesaleoccurswithinthesameyearasorigination. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome (https://www.fdic.gov). originations,or2percentof alloriginations.About16percentof institutionsoriginated fewerthan25loans,intotalaccountingforaboutone-fifthof 1percentof alloriginations. Table10providesseveralotherstatisticstohelpcomparethelendingpatternsof different typesof institutionsin2015,andwediscusssomehighlightshere.First,depositoriestend tooriginateasignificantlyhigherfractionof conventionalloansthannondepositories. Second,in2015,smallbanksandcreditunionsaccountedforahighlydisproportionate shareof conventionalhigher-pricedloans.About11percentof conventionalhomepurchaseloansforone-tofour-family,owner-occupied,site-builtpropertiesoriginatedby smallbankswerehigherpriced,aswereover5percentof suchloansoriginatedbycredit unions.Incontrast,about2percentof suchloansoriginatedbyothertypesof institutions werehigherpriced.Thenumbersforbothhome-purchaseandrefinancelendingimplythat,

22 FederalReserveBulletin|November2016 eventhoughsmallbanksandcreditunionsaccountedforlessthan18percentof conventionalhome-purchaseandrefinanceloans,theyoriginatedover47percentof conventional higher-pricedloans.38 Third,smallbanksandcreditunionsaresignificantlylesslikelytooriginatemortgagesto minorityborrowers,comparedwithindependentmortgagecompanies,butaremoresimilar toindependentmortgagecompaniesintermsof theirshareof lendingtoLMIborrowers andneighborhoods. Fourth,theHMDAdataprovideinformationonwhetheroriginatedloansweresoldwithin thesamecalendaryearandthetypeof institutiontowhichtheyweresold,suchasoneof theGSEsorabankinginstitution(seeappendixAforafulllistof purchasertypes). Table10displaysthefractionof loanssoldwithinthecalendaryear,asopposedtobeing heldinportfolio.39Nondepositoriessoldvirtuallyallof theirloansin2015.Incontrast, creditunionssoldlessthanone-half of thehome-purchaseloanstheyoriginatedanda littlemorethanone-thirdof therefinanceloanstheyoriginated.Thatsaid,portfolio lendingamongdepositorieshasdeclinedsignificantlyovertime. Table11liststhetop25reportinginstitutionsaccordingtotheirtotalnumberof originations,alongwiththesamesetof lendingcharacteristicsasthoselistedintable10.40Wells Fargoreportedthemostoriginations,withabout436,000.41Thenext-highesttotalwasfor QuickenLoans,followedbyBankof AmericaandJPMorganChase(JPMC).Overall,the top25lendersaccountedforabout33percentof allloanoriginationsin2015,down slightlyfrom34percentin2014.Thesesamefirmsalsopurchasedover1.2millionloans fromotherlendinginstitutionsduring2015(theseloanscouldhavebeenoriginatedin2015 orinearlieryears). Thetopinstitutionsdiffersignificantlyintheirlendingpatterns.Forexample,about 95percentof JPMC’shome-purchaseloanswereconventional,comparedwithlessthan 50percentforQuickenLoans.Regardingloansales,NavyFederalCreditUnionsoldonly about51percentof itshome-purchaseoriginations,whereastheaverageacrossthetop25 institutionswasabout83percent.Finally,thecompositionof borrowersvariedacrossthe top25institutions.Forsomeinstitutions,one-thirdormoreof home-purchaseborrowers 38 Theshareofconventionalloansoriginatedby,forexample,smallbankscanbecalculatedfromthedatain table10.Toobtainthesmallbankshareofconventionalhome-purchaseloans,multiplythenumberofhomepurchaseloanssmallbanksoriginated(234,000)bythepercentagethatwereconventional(72.2),anddivide thisresultbytheproductofthetotalnumberofhome-purchaseloans(3.1million)andthepercentagethat wereconventional(60.6).Tocalculatetheshareofhigher-pricedconventionalhome-purchaseloansoriginated bysmallbanks,dividethenumberofsuchloansoriginatedbysmallbanks(11percentof72.2percentof 234,000)bytheirtotalnumber(3.2percentof60.6percentof3.1million).Similarcalculationsapplytorefinanceloansandotherinstitutiontypes. 39 BecauseloansalesarerecordedintheHMDAdataonlyiftheloansareoriginatedandsoldinthesame calendaryear,loansoriginatedtowardtheendoftheyeararelesslikelytobereportedassold.Forthatreason, statisticsonloansalesarecomputedusingonlyloansoriginatedduringthefirstthreequartersoftheyear. 40 Someinstitutionsmaybepartofalargerorganization;however,thedataintable11areatthereporterlevel. Becauseaffiliateactivityhasdeclinedmarkedlysincethehousingboom,atop25listattheorganizationlevelis notlikelytobesignificantlydifferent. 41 Notably,marketsharesderivedfromtheHMDAdatacandiffermarkedlyfrommarketsharesbasedoninformationcompiledbyInsideMortgageFinance.ForHMDAreportingpurposes,institutionsreportonlymortgageapplicationsinwhichtheymakethecreditdecision.UnderHMDA,ifanapplicationisapprovedbya thirdparty(suchasacorrespondent)ratherthanthelendinginstitution,thenthatpartyreportstheloanasits ownoriginationandthelendinginstitutionreportstheloanasapurchasedloan.Alternatively,ifathird partyforwardsanapplicationtothelendinginstitutionforapproval,thenthelendinginstitutionreportsthe applicationunderHMDA(andthethirdpartydoesnotreportanything).Incontrast,InsideMortgageFinance considersloanstohavebeenoriginatedbytheacquiringinstitutionevenifathirdpartymakesthecreditdecision.Thus,manyofthelargerlendingorganizationsthatworkwithsizablenetworksofcorrespondents reportconsiderablevolumesofpurchasedloansintheHMDAdata,whileInsideMortgageFinanceconsiders manyofthesepurchasedloanstobeoriginations.

ResidentialMortgageLendingfrom2004to2015 23 Table11.Top25respondentsintermsoftotaloriginations,2015 Percentexceptasnoted Home-purchaseloans2 Total Total Respondent Ins t t y i p tu e t 1 ion (th o o a r u t i i s g o a i n n n s - ds) ( 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 436 468 156 76.8 .6 18.5 11.3 67.1 20.6 76.3 QuickenLoans,Inc. Ind.mort.co. 366 0 66 49.0 .3 28.8 13.6 54.6 13.2 99.9 BankofAmerica,NA Largebank 170 27 47 84.9 .0 18.5 11.3 61.5 28.5 60.4 JPMorganChaseBank,NA Largebank 170 212 56 95.0 .6 13.5 8.8 63.8 21.2 37.8 U.S.Bank,NA Largebank 113 143 32 80.0 1.1 28.3 11.7 68.6 12.1 78.3 FreedomMortgageCorp. Ind.mort.co. 100 66 15 46.7 .2 26.3 14.1 62.2 24.4 97.8 loanDepot.com Ind.mort.co. 99 0 27 56.2 1.6 19.1 13.5 52.2 26.4 100.0 FlagstarBank,FSB Largebank 98 16 44 58.1 1.7 25.5 12.9 66.8 25.1 95.4 CaliberHomeLoans,Inc. Ind.mort.co. 70 31 44 53.5 2.5 32.2 16.0 60.3 23.2 94.2 PNCBank,NA Largebank 69 0 20 68.1 .0 34.8 14.4 62.9 15.2 85.2 Citibank,NA Largebank 67 26 22 96.6 .0 12.4 13.3 43.8 30.9 52.7 NavyFederalCreditUnion Creditunion 63 0 30 40.5 25.4 22.3 12.9 53.4 21.9 50.8 NationstarMortgage Ind.mort.co. 60 28 1 80.0 .9 22.8 11.1 58.1 23.4 99.9 StearnsLending,Inc. Ind.mort.co. 59 37 30 47.5 1.5 32.0 16.8 63.2 26.7 100.0 PrimeLending,a Affiliated 58 1 41 55.3 2.2 30.3 12.8 70.9 16.2 99.9 PlainsCapitalCompany mort.co. GuildMortgageCo. Ind.mort.co. 56 7 34 43.4 3.5 31.8 18.0 59.3 20.9 99.7 DitechFinancialLLC Ind.mort.co. 54 73 4 68.0 .5 26.8 13.6 71.7 18.2 99.9 ShoreMortgage Ind.mort.co. 50 0 21 82.1 1.7 28.1 14.3 62.5 29.6 100.0 GuaranteedRate,Inc. Ind.mort.co. 50 0 27 74.1 1.0 23.4 13.0 73.3 15.5 100.0 FairwayIndependent Ind.mort.co. 49 1 36 48.3 2.3 34.5 13.8 72.8 17.6 99.7 MortgageCorp. BranchBankingand Largebank 48 48 19 74.7 .2 26.9 12.5 69.6 10.8 72.9 TrustCo. RegionsBank Largebank 45 0 16 66.9 3.4 29.6 12.7 75.7 19.9 64.6 SunTrustMortgage,Inc. Affiliated 43 45 15 86.3 .1 17.9 10.4 63.0 16.9 96.3 mort.co. AcademyMortgageCorp. Ind.mort.co. 41 0 29 42.2 2.7 33.6 15.8 66.9 23.2 99.7 USAAFederalSavingsBank Largebank 41 1 32 27.6 .0 15.4 9.7 64.7 15.6 95.5 Top25institutions … 2,476 1,231 865 64.6 2.0 24.3 12.8 63.7 20.5 83.4 Allinstitutions … 7,404 2,102 3,124 60.6 3.2 28.0 13.5 68.1 19.9 84.8 1 Seetable10,note1. 2 First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes. 3 Shareofconventionalloansthatarehigherpriced. 4 Seetable2,note3. 5 Seetable2,note4. 6 Seetable2,note1.“Minorityborrower”referstononwhite(excludingjointormissing)orHispanicwhiteapplicants. 7 Seetable10,note6. ...Notapplicable. Source:FFIECHMDAdata;bankassetdatadrawnfromFederalDepositInsuranceCorporationReportsofConditionandIncome(https://www .fdic.gov). (continuedonnextpage) wereLMI,whileatotherinstitutions,fewerthan20percentof borrowerswereinthat category.42Althoughitisdifficulttoknowpreciselywhysuchvariationexists,thesedifferencescouldreflectdifferentbusinessstrategies,differentcustomerdemandsinthe marketsandgeographicregionstheinstitutionsserve,orsomecombinationof thesetwo broadfactors. 42 Notethatforlenderswithasignificantnonconventionalshareofrefinanceloans(forexample,FreedomMortgageCorporation),borrowerincomemaynotbereportedformostloans,thuspushingdowntheLMIshareof borrowers.

24 FederalReserveBulletin|November2016 Table11.Top25respondentsintermsoftotaloriginations,2015–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 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 M or in ro o w rit e y r6 b Sold7 WellsFargoBank,NA Largebank 186 85.3 .6 18.1 11.7 66.9 18.7 88.3 QuickenLoans,Inc. Ind.mort.co. 279 67.0 .2 23.4 12.7 53.6 11.5 100.0 BankofAmerica,NA Largebank 94 97.2 .1 24.3 12.9 64.1 24.3 79.0 JPMorganChaseBank,NA Largebank 88 97.6 1.2 19.4 9.6 68.3 18.4 51.4 U.S.Bank,NA Largebank 57 94.3 3.4 23.1 12.7 63.6 11.3 55.4 FreedomMortgageCorp. Ind.mort.co. 77 9.0 .0 3.8 15.4 61.6 23.4 100.0 loanDepot.com Ind.mort.co. 62 67.0 .5 17.1 12.1 64.5 18.6 100.0 FlagstarBank,FSB Largebank 41 78.5 .4 14.5 11.0 63.7 25.7 91.5 CaliberHomeLoans,Inc. Ind.mort.co. 18 75.4 .4 16.9 11.8 64.9 18.3 96.8 PNCBank,NA Largebank 30 86.5 .1 28.9 13.5 68.4 11.5 62.3 Citibank,NA Largebank 35 96.3 .0 22.1 12.3 58.9 19.7 81.4 NavyFederalCreditUnion Creditunion 15 48.0 1.7 14.6 11.3 53.7 23.9 50.4 NationstarMortgage Ind.mort.co. 49 88.2 2.1 11.7 17.4 62.6 25.7 99.9 StearnsLending,Inc. Ind.mort.co. 24 66.0 .1 18.4 14.2 64.6 23.6 100.0 PrimeLending,a Affiliated 11 84.7 1.0 18.1 10.9 74.7 14.7 100.0 PlainsCapitalCompany mort.co. GuildMortgageCo. Ind.mort.co. 12 63.7 .3 17.3 15.6 65.0 18.5 99.9 DitechFinancialLLC Ind.mort.co. 37 96.5 .1 37.6 16.5 66.6 19.3 99.9 ShoreMortgage Ind.mort.co. 23 94.3 .3 17.1 11.3 62.5 27.5 100.0 GuaranteedRate,Inc. Ind.mort.co. 17 91.4 .2 13.1 9.6 76.7 12.7 100.0 FairwayIndependent Ind.mort.co. 8 76.5 .4 18.6 11.3 79.6 11.1 99.8 MortgageCorp. BranchBankingandTrustCo. Largebank 13 92.3 .5 23.1 11.0 71.8 8.6 73.5 RegionsBank Largebank 16 95.7 .6 26.6 13.4 79.4 15.6 23.9 SunTrustMortgage,Inc. Affiliated 22 89.9 .1 22.2 10.5 65.8 15.0 97.3 mort.co. AcademyMortgageCorp. Ind.mort.co. 7 74.3 .8 20.8 12.0 77.6 14.8 99.9 USAAFederalSavingsBank Largebank 7 32.8 .0 9.1 9.5 60.8 17.0 86.2 Top25institutions … 1,229 77.1 .6 19.8 12.6 62.9 17.7 87.2 Allinstitutions … 2,810 76.6 1.6 19.0 12.3 67.2 17.1 82.7

ResidentialMortgageLendingfrom2004to2015 25 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

26 FederalReserveBulletin|November2016 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 ‰ spreadabovecomparableTreasurysecurityforapplicationstakenpriorto October1,2009 ‰ spreadaboveaverageprimeofferrateforapplicationstakenonorafterOctober1,2009 For loans subject to the Home Ownership and Equity Protection Act ‰ indicatorof whetherloanissubjecttotheHomeOwnershipandEquityProtectionAct

27 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.4CITGroupcontrolsCIT Bank,whichoperatesasingle,nonretailbankingofficeinSaltLakeCity,Utah,soliciting nationwidedepositsthroughanInternet-baseddeposit-takingplatform.CITBankisthe 10thlargestinsureddepositoryinstitutioninUtah,withapproximately3.1percentof the totaldepositsininsureddepositoryinstitutionsinthatstate. 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 ThemergerofCITBankintoOneWestBankissubjecttotheapprovaloftheOfficeoftheComptrollerofthe Currency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).Upon consummationofthebankmerger,CITGroupintendstochangethenameofthecombinedbanktoCITBank, NationalAssociation. 4 Assetandnationwidedeposit-rankingdataareasofDecember31,2014,unlessotherwisenoted.Statedepositdata areasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,savingsbanks,andsavingsandloanassociations.

28 FederalReserveBulletin|January2016 Onconsummationof thisproposal,CITGroupwouldbecomethe41stlargestinsured depositoryorganizationintheUnitedStatesbydeposits,controllingapproximately $30billionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsintheUnitedStates.CITGroupwouldbecomethe36thlargest depositoryorganizationintheUnitedStatesbyassets,withconsolidatedassetsof approximately$70billion.BecauseCITBankandOneWestBankdonothaveoverlappingoperations,thecombinedbankwouldcontinuetorankasthe10thand13thlargestinsured depositoryinstitutioninUtahandCalifornia,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,toprovideinterestedpersonsanopportunitytopresentoral commentsonthefactorsthattheBoardmustreviewundertheBHCAct.6Approximately 111individualsprovidedoraltestimonyatthepublicmeeting,asubsetof whichalso submittedwrittencomments.7Intotal,approximately2,364individualsandorganizations submittedcommentsontheproposalorally,inwriting,orboth.Commentersincluded communitygroups,nonprofitorganizations,customersof thetwobankingorganizations,a memberof Congress,andotherinterestedorganizationsandindividuals. Alargenumberof commenterssupportedtheproposal.8Manyof thesecommenters contendedthattheproposalwouldbenefitcommunitiesinCalifornia,includingthrough increasedemployment,businessdevelopmentopportunities,andaccesstoresourcesand servicesprovidedbythecombinedinstitution.CommentersalsocommendedOneWest Bankforitscommitmenttolocalcommunitiesanddescribedfavorableexperienceswith thesmallbusiness,communitydevelopment,andmortgageprogramsof theOneWestorganization.Inaddition,commenterspraisedCITGroupandIMBHoldco’scharitable contributionsandnotedthatofficersandemployeesof theseinstitutionsfrequently providevaluableresourcesandservicestocommunityorganizations. Asignificantnumberof commenterseitheropposedtheproposal,requestedthattheBoard approvetheproposalonlysubjecttocertainconditions,orexpressedconcernsaboutthe proposal.9Manycommentersquestionedwhethertheproposalwouldresultinpublic 5 12CFR225.16(b);12CFR262.3(b). 6 ThepublicmeetingwasheldjointlybytheBoardandtheOCConFebruary26,2015,attheLosAngeles BranchoftheFederalReserveBankofSanFrancisco. 7 TheBoardpermittedcommenterswhorequestedtoparticipateinthepublicmeetingbutwereunabletoattend tohavetheirwrittencommentspresentedbyotherparticipantsatthemeeting. 8 Approximately2,177commenterssupportedtheproposal,ofwhichapproximately2,093commenters submittedsubstantiallyidenticalformletters.Ofthesecommenters,approximately51commentersprovided oralcommentsinsupportoftheproposal. 9 Approximately187commentersopposedtheproposal.Ofthesecommenters,approximately39commenters submittedindividualizedwrittencomments,andapproximately88commenterssubmittedsubstantiallyidenticalformletters.Approximately60personsprovidedoralcommentsinoppositiontotheproposal.Two commenters,theCaliforniaReinvestmentCoalitionandNationalPeople’sAction,submittedpetitionsinoppositiontotheproposal,withthenamesofapproximately15,559and6,500individuals,respectively.

LegalDevelopments:ThirdQuarter,2015 29 benefits,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.TheBoardalsoconsideredalltheinformation presentedintheapplicationandsupplementalfilingsbyCITGroup,variousreportsfiled bytherelevantcompanies,publiclyavailableinformation,andotherinformationand reports.Inaddition,theBoardconsultedwiththerelevantfinancialsupervisoryagencies andreviewedconfidentialsupervisoryinformation,includingexaminationreportsonthe depositoryinstitutionholdingcompaniesandthedepositoryinstitutionsinvolved.Aftera reviewof allthefactsof record,andforthereasonsdiscussedinthisorder,theBoardhas concludedthatthestatutoryfactorsitisrequiredtoconsiderundertheBHCActare consistentwithapprovalof theproposal. 10 Commentersallegedthatthenumberofconsumercomplaintsthebankhasreceivedconcerningreversemortgageloansareindicativeofissueswithitslendingandservicingpracticesregardingthisproduct. 11 12U.S.C.§2901etseq.

30 FederalReserveBulletin|January2016 FactorsGoverningBoardReviewof theTransaction TheBHCActsetsforththefactorsthattheBoardmustconsiderwhenreviewingthe formationof abankholdingcompanyortheacquisitionof banks.12Thesefactorsinclude thecompetitiveeffectsof theproposalintherelevantgeographicmarkets;thefinancialand managerialresourcesandfutureprospectsof thecompaniesandbanksinvolvedinthe proposal;theeffectivenessof theinvolvedinstitutionsincombattingmoney-laundering activities;theconvenienceandneedsof thecommunitiestobeserved,includingtherecords of performanceundertheCRAof theinsureddepositoryinstitutionsinvolvedinthe transaction;andtheextenttowhichtheproposalwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.Inproposals involvinginterstatebankacquisitionsbybankholdingcompanies,theBoardalsomust considertheconcentrationof depositsasapercentageof thetotaldepositscontrolledby insureddepositoryinstitutionsintheUnitedStatesandinrelevantindividualstates,aswell ascompliancewiththeotherprovisionsof 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’shomestateorinanystateinwhichtheacquirerandtargethaveoverlapping bankingoperations.15 Forpurposesof theBHCAct,thehomestateof CITGroupisUtah,andOneWestBank’s homestateisCalifornia.16CITGroupiswellcapitalizedandwellmanagedunderapplicablelaw,andCITBankhasasatisfactoryCRArating.Therearenominimumage requirementsunderCalifornialawthatapplytoCITGroup’sacquisitionof IMBHoldco andOneWestBank.17 Onconsummationof theproposedtransaction,CITGroupwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin 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 31 theUnitedStates.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,and methodsforprovidingservicestocustomers,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddetermines thatcompetitiveconsiderationsareconsistentwithapproval.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.TheBoardalso considerstheabilityof theorganizationtoabsorbthecostsof theproposalandthe proposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,the Boardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthe futureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialand managerialresourcesandtheproposedbusinessplan. 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,theappropriate bankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. 20 Asproposed,IMBHoldcowouldultimatelybemergedintoCITGroup,andeachIMBHoldcoownership interestwouldbeconvertedintoarighttoreceiveCITGroupcommonstockandcash,basedonanexchange ratio.CITGrouphasthefinancialresourcestofundtheexchange.

32 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 wouldbesupplementedtoaddresstheadditionalbusinesslinesandrisksassociatedwith IMBHoldco’sandOneWestBank’soperations,andtheseareconsideredacceptablefroma supervisoryperspective.Inaddition,managementof CITGroupandIMBHoldcohasthe experienceandresourcesthatshouldallowthecombinedorganizationtooperateinasafe andsoundmanner,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,andthelevelofcompensationdoesnotraisesafetyandsoundness concerns.IndeterminingincentivecompensationforexecutivesatIMBHoldcoandOneWestBank,aswellas thoseatCITGroup,theapplicantalsoisexpectedtofollowtheguidanceissuedbytheBoardregarding incentivecompensation.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’s businessoperations.

LegalDevelopments:ThirdQuarter,2015 33 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 thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtombveetthe creditneedsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublic benefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCRA.25Inaddition,theBoardconsidersthe banks’overallcompliancerecord,theresultsof recentfairlendingexaminationsandother supervisoryassessments;thesupervisoryviewsof examiners;othersupervisoryinformation;andcommentsreceivedontheproposal.TheBoardalsomayconsidertheapplicant institution’sbusinessmodel,marketingandoutreachplans,plansfollowingconsummation, andanyotherinformationtheBoarddeemsrelevant. Inconsideringthisproposal,theBoardhasconsideredallthefactsof record,including reportsof examinationof theCRAperformanceof CITBankandOneWestBank,thefair lendingandcompliancerecordsof bothbanks,confidentialsupervisoryinformation, informationprovidedbyCITGroup,andpubliccommentsreceivedontheproposal.The BoardalsoconsultedwiththeConsumerFinancialProtectionBureau(“CFPB”)andthe OCCconcerningtheirevaluationsof OneWestBank’scompliancewithfairlendingand consumerprotectionlawsandregulationsandthecommentsreceivedontheproposal.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’semployeesandexecutivesandthatthecombinedbankwouldinclude representativesfromHispanic,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.

34 FederalReserveBulletin|January2016 Manycommenterssupportedtheproposal.27Thesecommentersgenerallybelievedthatthe CITGroupandOneWestBankorganizationsprovidevaluableservicestotheircommunities.Inparticular,commenterscontendedthattheproposalwouldresultinastrongbank thatwouldsupporttheretentionandcreationof jobsinthecommunitiesitserves. CommentersalsocontendedthattheproposalwouldexpandopportunitiesforLMIand minorityborrowersandbusinessesbyincreasingaccesstocreditandfosteringpartnership opportunitiesbetweenthecombinedorganizationandgroupsthatserveLMIandminority individuals.ThesecommentersalsopraisedOneWestBankanditsmanagementforthe bank’scommunityoutreacheffortsandsupportforvariouscommunitydevelopment programsandinitiatives,includingprogramsthathelpprovidemortgagecounselingfor minorityborrowers,mentoringforat-riskyouth,andservicesandassistanceforservicedisabledveterans.CommentersalsonotedOneWestBank’ssupportforschool,faith-based, arts,andfinancialliteracyprograms,manyof whichtargetminorityandLMIindividuals. TheBoardreceivedalargenumberof commentsopposingtheproposalonthebasisof the CRArecordsof theinvolvedinstitutions.Asignificantnumberof commentsallegedthat CITBankisnotmeetingitsobligationstohelpmeetthecreditneedsof allthecommunitiesacrosstheUnitedStatesfromwhichitcollectsdepositsthroughitsInternet-based deposit-takingplatform.28Manycommentersalsoexpressedconcernsthatthecombined organization’sfutureperformanceundertheCRAwillnotbecommensuratewiththe combinedbank’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, commentersallegedthatOneWestBankfailedtokeepaccuraterecordsandpaperwork relatedtomortgageloansaspartof theloanmodificationandforeclosureprocesses; 27 AnumberofcommentersallegedthatOneWestBankinappropriatelysolicitedpubliccommentsinsupportof theapplication,includingbyprovidingfinancialincentives.TheBoardinvitescommentsfromallmembersof thepublicthathaveaninterestintheapplication.TheBoardconsidersalltimelyandsubstantivecommentson anapplicationwithoutregardtothecommenters’motivationforsupportingoropposingtheapplication. 28 Forexample,onecommenterallegedthatCITBankhascollectedasignificantamountofdepositsfrom MonroeCounty,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 35 unfairlyacceleratedloansanddeniedloanmodifications;32failedtoprovideasinglepoint of contacttoassistborrowers;pursuedforeclosureproceedingsagainstborrowersduring theloanmodificationprocess;inappropriatelyadvisedborrowerstodefaultontheirloans inordertoqualifyforloanmodificationprogramsandsubsequentlyforeclosedonthe defaultedloans;andfailedtoinformconsumersof theirrightsatthetimeof reversemortgageloanorigination,maturity,ordefault.CommentersalsoallegedthatOneWestBank prohibitedthespouseandotherrelatedpartiestodeceasedreversemortgageloan borrowersfromsatisfyingthemortgageandretainingtheproperty,andimproperly requiredtheestatesof reversemortgageloanborrowerstorecordtrustsinpublicproperty records.CommentersalsocontendedthatOneWestBankinflatedpropertyappraisalsand therebyfrustratedtheeffortsof thesurvivingspouseandheirsof deceasedreversemortgageloanborrowerstokeeptheirfamilyhomes.33Somecommentersalsoallegedthat OneWestBankhasalloweditsstockof foreclosedrealpropertytofallintodisrepairand therebyhascontributedtoblightin,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.

36 FederalReserveBulletin|January2016 tionshavefocusedoncommerciallendingandcommercialrealestatelending,althoughthe bankcontinuestoofferretailandconsumerproductsandservices. C.Recordsof PerformanceundertheCRA TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,38andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includingLMIneighborhoods.39Inadditiontocompliancewiththerequirementsof theCRA,fairlendinglawsrequirealllending institutionstoprovideapplicantswithequalaccesstocredit,regardlessof theapplicant’s race,ethnicity,orcertainothercharacteristics. TheBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbythe appropriatefederalsupervisorsof theCRAperformanceof therelevantinstitutions.40The CRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitution prepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecreditneeds of itsentirecommunity,includingLMIneighborhoods.41Aninstitution’smostrecent CRAperformanceevaluationisaparticularlyimportantconsiderationintheapplications processbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimary federalsupervisorof 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’slendinginitsassessmentareasandthenumber andamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;the distributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupperincomeindividuals;42theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies.Consequently,theBoardconsiderstheoverallCRA ratingassignedtothebank’sperformance,aswellasthebank’sratingonthelendingtest, tobeimportantindicators,whentakenintoconsiderationwithotherfactors,indeter- 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 37 miningwhetheradepositoryinstitutionishelpingtomeetthecreditneedsof its communities. CRAPerformanceof CITBank.CITBankwasassignedanoverall“Satisfactory”ratingat itsmostrecentCRAperformanceevaluationbytheFDIC,asof March18,2013(“CIT BankEvaluation”).43Examinersnotedthatthebankoriginatedanadequateamountof communitydevelopmentloans,whichsupportedaffordablehousing,revitalization,and stabilizationinthebank’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 and2014toalevelthatexceededthetargetlevelneededtoobtainanoutstandingCRA ratingunderthestrategicplan.47Similarly,CITGroupreportedthatthelevelof communitydevelopmentservicesprovidedbyCITBank’semployeesin2013and2014exceeded thetargetnumberof hoursneededtoobtainanoutstandingCRArating. CITGroupnotedthattheorganizationisamajorcommerciallenderandhelpsmeetsthe creditneedsof thecommunitiesitserves,consistentwithitsbusinessfocus,through, amongotherthings,smallbusinesslending.CITGroupisthelargestoriginatorof SBA 7(a)loansintheUnitedStatesandalsooriginatesSBA504certifieddevelopmentcompany programloans.Theseloanshelpstart-upandexistingsmallbusinesseswithfinancing guaranteedforavarietyof generalbusinesspurposesandencourageeconomicdevelopmentwithinacommunitybyprovidingsmallbusinesseswithlong-term,fixed-rate financingtoacquiremajorfixedassetsforexpansionormodernization.Moreover,theCIT organizationhasbeenamongthetopsmallbusinesslendersintheUnitedStatesandhas 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’srecordof meetingthecreditneedsofitsassessmentareasunderastrategicplanif,amongotherthings,thebankinvites publiccommentontheplanandtheplanisapprovedbysuchagency.TheFDICapprovedCITBank’sstrategicplandatedJanuary2013,pursuantto12CFR345.27. 47 CITBankreportedthatitmadeitscommunityinvestmentsinnonprofitorganizationsfocusingonsupporting affordablehousing;alleviatingpoverty,homelessness,andunemployment;promotingcommunitydevelopment; andprovidingforeclosurecounseling.

38 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’sbranchdistributioninitsassessmentareaswasgood,with13percentof allbrancheslocatedinLMIcensustracts.Examiners 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.Examinersfoundthis disparitytobereasonablyexplainedontwobases.First,theLosAngelesAAsawhighcompetitioninmortgage lending,asseveralmajorbankswerethedominanthomemortgagelendersinthearea.Second,thebank’s businessfocuswasonimprovingtheperformanceofexistingloansthroughmodificationprograms,suchas HAMP,ratherthanonloanorigination. 51 SomecommentersallegedthatOneWestBankhasapoorrecordofcharitabledonationscomparedtopeer institutions.TheBoardnotesthatneithertheCRAnortheagencies’implementingrulesrequirethatinstitutionsengageincharitablegiving. 52 Forexample,withintheLosAngelesAA,thebankinvestedinLowIncomeHousingTaxCredits(“LIHTC”) thathelpedfundanaffordablehousingprojectandplaceddepositswithninedifferentminority-ownedfinancialinstitutions.See26U.S.C.§42. CommenterscriticizedOneWestBankforinvestingprimarilyinCRA-qualifyingmortgage-backedsecurities andnotmakingequityequivalentinvestments.Inaddition,anumberofcommentersallegedthatCITGroup andOneWestBankprovidedgrantstoorganizationsinreturnfortheirsupportofthemergerproposaland refusedtoinvestinorlendtoorganizationsthatopposedtheproposal.TheCRAdoesnotrequirethatinstitutionsmeetthecreditneedsofthecommunitiestheyservebymakingequityequivalentinvestmentsanddoes notauthorizethefederalbankingagenciestodirectabank’scommunitydevelopmentinvestmentorlending activitiestospecificgroups,individuals,projects,ortypesofinvestments.

LegalDevelopments:ThirdQuarter,2015 39 notedthattheoperatinghoursof thebank’sbranchesweregenerallysimilaratalllocations, regardlessof theincomelevelof thegeography.Examinersobservedthat,duringtheevaluation periodintheLosAngelesAA,OneWestBankprovidedarelativelyhighlevelof community developmentservicesthatwereresponsivetoavarietyof communitydevelopmentneedsand thatthebank’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’sevaluationofthe combinedbank’sCRAperformancepursuantto12CFR25.27.TheOCCwillexaminethecombinedbank undertheCRAlending,investment,andservicetestsapplicabletolargebanks. Commentersexpressedconcernsthatthecombinedbank’sCRAassessmentareaswillnotincludetheentire areafromwhichthecombinedbanksolicitsdeposits.Asnotedabove,CITBanksolicits,andthecombined bankexpectstosolicit,depositsnationwidethroughtheInternet.Asnotedabove,undertheCRA,depository institutionsdelineatetheirownassessmentareas,subjecttocertaincriteria,andexaminersinvestigatewhether theexaminedinstitution’sassessmentareascomplywiththesecriteria.See,e.g.,12CFR228.41.

40 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’stransformation intoamoretraditionalcommercialbankingorganizationwithabalancedretailand commercialoperationthatincludesOneWestBank’straditionalretailbranchdepositfundingbase. InresponsetoallegationsregardingCITBank’sCRAperformance,CITGroupnotedthat CITBankreceiveda“Satisfactory”ratinginitsmostrecentCRApublicevaluation. Moreover,CITGroupstatedthattheenhancedlendingandearningcapacityof the combinedorganizationwouldimproveitsabilitytomeetitsCRAobligations. 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 IndependentForeclosureReviewandinstitutedextensivechangestoitsresidentialmortgageservicingandforeclosureactivitiestoensurethattheseactivitiesareconductedina safeandsoundmannergoingforward.55 55 TheConsentOrderresultedfrominteragencyon-sitereviewsofseveralmortgageservicingcompanies, includingOneWestBank,thatfoundcriticalweaknessesintheseservicers’mortgageservicingandforeclosure processesthatresultedinunsafeandunsoundpractices.OneWestBankandtheOfficeofThriftSupervision enteredintotheorderonApril13,2011,relatingtothebank’smortgageservicingandforeclosureactivities.In connectionwithOneWestBank’sconversionintoanationalbank,theorder’stermswerefullyincorporated intoaConsentOrderissuedbytheOCCagainstOneWestBankonMarch11,2014. BetweenApril2011andApril2012,theOCCandtheBoardissuedenforcementactionsagainst15mortgage loanservicersinadditiontoOneWestBankfordeficientpracticesinmortgageloanservicingandforeclosure processing.Inadditiontomandatingthecorrectionofservicingpractices,theactionsrequiredtheservicersto hireindependentconsultantstoconductfilereviewstodetermineifborrowerssufferedfinancialinjuryand wereeligibleforfinancialremediation.

LegalDevelopments:ThirdQuarter,2015 41 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 branchesinlow-income censustracts,allegingthattwoof OneWestBank’s73brancheswereinsuchcensustracts.As notedintheOneWestBankEvaluation,OCCexaminersfoundthat11middle-andupperincomebranchesinthebank’sassessmentareashaveatleast33percentormoreLMIfamily population,andthatOneWestBankservesalargerportionof theLMIpopulationduetothe largepercentageof LMIfamiliesresidinginthevariouscensustracts. SomecommentersallegedthatOneWestBankhasadisproportionatelylownumberof branchesinminorityneighborhoods.OneWestBank’sbranchnetworkwasinheritedfrom IndyMacandtwootherfaileddepositoryinstitutions.OneWestBank’spolicyon branchingrecognizesthepotentialimpactof anybranchopenings,closures,consolidations, andrelocationsonminorityresidents. SeveralcommentersexpressedconcernsaboutOneWestBank’srecordof branchclosings, allegingthatOneWestBank’sbranchclosingsinthelastfiveyearshavehadadisproportionatelynegativeeffectonLMIandminorityneighborhoods.IntheOneWestBankEvaluation,OCCexaminersnotedthatthebank’sclosingandopeningof branchesinthe assessmentareasreceivingfull-scopereviewsdidnotadverselyaffecttheaccessibilityof branches,particularlyinLMIgeographies.Duringtheevaluationperiod,OneWestBank consolidatedthreebranchesandrelocatedonebranch,allwithinupper-incomecensus tracts.Moreover,theBoardhasconsideredthefactthatfederalbankinglawprovidesa specificmechanismforaddressingbranchclosings,includingtheprovisionof noticetothe publicandtheappropriatefederalsupervisoryagencybeforethebranchisclosed.58 AcommentercriticizedCITGroupfornotcommittingtoopennewbranchesinunderservedneighborhoods,andanumberof commentersexpressedconcernsthatplanned 56 SomecommentersexpressedconcernsthatthecombinedbankwouldseektoserveLMIneighborhoodsusing technologyandmobilebankingratherthanthroughbranchesandATMs.Inaddition,anumberof commentersrequestedthatthecombinedbankintroducemoreproductstargetedtoLMIcustomers.The revisedplanisrequiredtodescribehowthecombinedbank’salternativesystemsfordeliveringretailbanking serviceswilleffectivelyprovideneededretailbankingservicesinLMIgeographiesortoLMIindividuals.In addition,asnotedabove,althoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsof communitiesbymakingcertainproductsorservicesavailable,theCRAdoesnotrequireaninstitutionto provideanyspecificproductsorservices. 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.

42 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’ssmallbusinessloansweremadein 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 43 majority-minoritycensustracts.Inaddition,Asian-ownedbanksandotherlendersattract asignificantportionof theapplicationsfromAsianborrowersinCaliforniaand,asa result,thelendingpatternstoAsianborrowersinCaliforniamayreflectacompetitive mortgagelendingmarketratherthandiscriminatorylendingpractices.63 CITGroup’sandOneWestBank’sFairLendingProgram.CITGroupandOneWestBank havebothinstitutedpoliciesandprocedurestohelpensurecompliancewithallfairlending andotherconsumerprotectionlawsandregulations.CITGrouphasstatedthat,on consummation,CITGroup’sexistingrisk-managementframeworkwouldbeimplemented atthecombinedorganizationandOneWestBank’sexistingfairlendingprogramwouldbe implementedatthecombinedbank,supplementedappropriatelytoreflecttheorganizations’newbusinessprofile. OneWestBankprovidesfairlendingtrainingandeducationforallemployees.Thetraining includesprogramsonthebank’spoliciesandproceduresaswellasapplicablefairlendinglaws. Thetwoorganizations’legalandcompliancerisk-managementprogramsincludeafair lendingriskassessmentthatisupdatedannuallyormorefrequently,basedonmaterial changestothebank’sstrategy,operations,products,orservices.OneWestBank’sassessmentincludesanevaluationof theriskof OneWestBank’slendingactivities,alongwithan assessmentof thequalityof thecontrolsandtheresultingresidualrisk.Throughtherisk assessment,OneWestBankidentifiesareasof higherfairlendingriskandconducts targetedcompliancereviewsof theseareas. OneWestBank’sFairandResponsibleLendingDepartmentconductsanannualcomparativefilereview.Inthisreview,theDepartmentevaluatesloanfilesformortgageapplicants inprotectedclassesagainstloanfilesforsimilarlysituatedapplicantswhoarenotina protectedclasstodetectpossibledisparatetreatmentwithrespecttocreditdecisionsand pricing.CITGrouprepresentsthatOneWestBank’scomparativefilereviewshavenot identifiedconcernsrelatedtodiscriminationagainstapplicantsinprotectedclasses. OneWestBankmaintainsasecondaryreviewprocessforalldeniedmortgageloanapplicationstoensurethatallqualifiedapplicantsareapproved.Thissecondreviewisconducted toensurethatthebank’sfairlendingstandardsareappliedfairlyanduniformlytoall applicants,thatallpossibleavenuesof approvalhavebeenexploredpriortoformaldenial, andthattheapplicantwasnotdeniedbasedonanyprohibitedbasis. E.MortgageLoanServicing,Modification,andForeclosurePractices Asnoted,alargenumberof commentersexpressedconcernsaboutOneWestBank’smortgageservicing,loanmodification,andforeclosureprocessingactivities,withsomemaking assertionsaboutindividualwrongfultreatmentandsuggestinganoverallpracticeof wrongfulconductsuchasfailuretomaintainforeclosedpropertyinminorityneighborhoods.64TheissuesraisedbythecommentersrelatingtoOneWestBank’smortgage servicing,loanmodification,andforeclosureprocessingactivitiesareof concerntothe Board.Inevaluatingtheissuesraisedbythecommenters,theviewsof thebank’sprimary 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.

44 FederalReserveBulletin|January2016 regulatorsareparticularlyimportantconsiderationstotheBoardbecauseof theprimary regulator’sproximityto,andaccesstoinformationregarding,theinstitution. TheBoardhasconsultedOneWestBank’sprimaryfederalbankingregulator,theOCC. IssuesraisedbythecommentersrelatingtoOneWestBank’smortgageservicing,loan modification,andforeclosureprocessingactivitieswereaddressedaspartof areviewof the bank’scompliancewithaConsentOrderissuedbytheOCCagainstOneWestBank relatingtomortgageservicingandforeclosurepractices.Specifically,theOCCreviewedthe mortgageservicingandtheinitiationandhandlingof foreclosureproceedingsbyOneWest Bankaspartof theagency’sassessmentof thebank’scompliancewiththeConsent Order,includingthebank’simplementationof appropriatepoliciesandprocedures.Under theConsentOrder,OneWestBankwasrequired,amongotherthings,tohaveanindependentconsultantreviewandidentifyborrowersfinanciallyharmedbythebank’sdeficient practicesinmortgageservicingandforeclosureprocessing,andtoprovideremediationto harmedborrowers. Toaccomplishthis,OneWestBankwasrequiredtoretainanindependentconsultantto conductcomprehensivereviewsof thebank’sforeclosureactivitytoidentifywhether borrowerswhosemortgageswereservicedbythebankandwhosehomeswereintheforeclosureprocessduring2009or2010(“in-scopeborrowers”)sufferedfinancialinjury becauseof servicererrors,omissions,orotherdeficiencies.65ThereviewforOneWestBank encompassedanin-scopepopulationof morethan192,000borrowerloanfiles.66Oncethe reviewsof borrowers’foreclosureactionshadbeencompleted,theindependentconsultantdeterminedthenumberof injuredborrowerswhowereeligibleforcompensation,and OneWestBankmadepaymentstoinjuredborrowers.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-partyvendor qualitycontrolpoliciesandprocedurestoensureadequateoversightof anythird-party serviceprovidersthatperformforeclosureorrelatedfunctions;68and(iv)aplantoensure 65 UndertheIndependentForeclosureReview,beforeproceedingwiththefilereviews,thebankingorganizations submittedproposalsoutliningtheindependentconsultantstheywishedtoengage,whichweresubjectto nonobjectiondeterminationsbytheregulators.Theindependentconsultants’engagementlettersweresubject toextensivereviewandrevisionpriortoacceptancebytheagencies.Theservicers,includingOneWestBank, alsowererequiredtocontactallin-scopeborrowersandprovidethemwiththeopportunitytorequestareview oftheirforeclosureactionbyanindependentconsultanttodeterminewhethertheborrowersufferedfinancial injurybecauseoferrorsbytheirservicerandpotentiallyreceiveremediation. 66 Thein-scopepopulationincludedresidentialforeclosureactionsorproceedings(includingforeclosuresthat wereinprocessorcompleted)forloansservicedbyOneWestBankthathadbeenpendingatanytimefrom January1,2009,toDecember31,2010,aswellasresidentialforeclosuresalesthatoccurredduringthistime period. 67 Theappropriateamountofcompensationtobeprovidedtoborrowerswasbasedonfinancialremediation guidanceissuedbytheregulatorsforgeneralcategoriesofharmandwasnotintendedtoreplacethetypeof specificfindingofactualharmorlossesthatmightbedeterminedbyacourt.SeePressRelease,Boardof GovernorsoftheFederalReserveSystem,AgenciesReleaseFinancialRemediationGuidance,ExtendDeadlineforRequestingaFreeIndependentForeclosureReviewtoSeptember30,2012,(June21,2012),availableatwww .federalreserve.gov/newsevents/press/bcreg/20120621a.htm. 68 Aspartofthecomplianceplan,OneWestBankwasrequiredtoimplementacceptablepoliciesandprocedures foroutsourcingforeclosureorrelatedfunctionssuchaspropertymanagementofrealestateacquiredthrough orinlieuofforeclosure,toensurethatthebank’smortgageservicingandforeclosureactivitiesareconductedin asafeandsoundmanner.

LegalDevelopments:ThirdQuarter,2015 45 thetimelydeliveryof accurateinformationtoborrowersinforeclosure,lossmitigation,and loanmodificationactivities. TheOCChasconductedtargetedexaminationsof OneWestBank’seffortstosatisfytheterms of theConsentOrder,includingeffortstodevelopacomplianceprogramforthebank’s servicingandforeclosureoperationsandtoimplementeffectivepolicyandproceduralchanges toachievecompliancewiththeprovisionsof theConsentOrder;commitmentof resourcesto addressandcorrectidentifiedservicingdeficiencies;andcompletionof theIndependentForeclosureReview.Basedontheseexaminationsandothersupervisoryinformation,theOCC determinedthatOneWestBankhadsatisfiedallof therequirementsrelatedtoitsmortgage servicingandforeclosureprocessingactivitiesandhadaprogramandassociatedpolicies andproceduresthataresatisfactoryfromasupervisoryperspective.Consequently,the OCCliftedtheConsentOrder69effectiveJuly14,2015.70Inaddition,theOCChas approvedthemergerof OneWestBankandCITBankonJuly21,2015. F.AdditionalInformationonConvenienceandNeedstobeServedbytheCombined Organization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.71CITGrouprepresentsthattheproposalwouldprovidecustomersof the combinedorganizationaccesstoanexpandedsuiteof productsandservicesthatarenot currentlyavailablefromeitherorganizationonastandalonebasis.Forexample,CITGroup representsthatIMBHoldco’sexistingcustomerswouldhaveaccesstoCITGroup’swider suiteof businessfinancingproducts,suchassmall-ticketleasing,commerciallending,and factoringproducts.Inaddition,CITGrouprepresentsthatCITGroup’sexisting customerswouldhaveaccesstoOneWestBank’sdepositandcashmanagementservices, andCITGroup’ssmallerbusinesscustomerswouldhaveaccesstoadditionalproductsand servicesfromOneWestBank’slendingplatform.Further,CITGroupstatedthatthe 69 IMBHoldcoissubjecttoaConsentOrderoverseenbytheBoardthatrequiresenhancedoversightofmortgage servicingandforeclosureprocessing.TheBoardismonitoringthesustainabilityoftheremediationimplementedbyIMBHoldcotocomplywiththeConsentOrder.CITGroup,asIMBHoldco’ssuccessor,would becomesubjecttotheConsentOrderuponconsummationoftheproposedtransactionandhasstatedthatit wouldcomplywiththerequirementsoftheConsentOrder. 70 AnumberofcommentersurgedCITGrouptocommittotheBoardtoimproveitsmortgageservicingand foreclosurepractices. CommentersalsonotedseveralotherjudicialproceedingstowhichOneWestBankisapartythatallege wrongfulconductbyOneWestBankrelatingtomortgageforeclosureandservicing,includingdualtracking.In addition,somecommentersnotedalawsuitfiledagainstOneWestBankundertheFalseClaimsAct,31U.S.C. §3729etseq.,UnitedStatesexrel.Fisherv.OneWestBank,FSB,No.1:12-cv-09352-CM(S.D.N.Y.2015), allegingthatOneWestBankmadefalsecertificationsregardingconsumerdisclosuresinconnectionwiththe HAMPloanmodificationprogram.Thecasewasvoluntarilydismissedwithoutprejudicebytherelator. 71 Asnotedabove,anumberofcommentersallegedthattheproposalwouldnotprovideaclearorsignificant publicbenefit.Manyofthesecommenterssuggestedthattheinvolvedinstitutions’receiptofpublic assistance—i.e.,loss-shareagreementswiththeFDICinthecaseofOneWestBankandadefaultbyCIT GrouponfundsreceivedundertheTroubledAssetReliefProgramCapitalPurchaseProgram(“TARP CPP”)—indicatethattheproposalshouldresultahigherthatusualshowingofpublicbenefits.Inaddition,a numberofcommenterscriticizedCITGroup’splanstouseOneWestBank’staxattributestoreduceCIT Group’staxableincome.CommentersalsoallegedthatthetransferofOneWestBank’sloss-shareagreements fromIMBHoldcotoCITGroupservesnopublicpurpose. TheFDIC’sadministrationofitsauthoritiesasreceiveroffaileddepositoryinstitutions,includingitsdecisions toenterintoloss-shareagreementswithpurchasinginstitutionsandanytransferoftheseagreementsinsubsequentmergertransactions,isasubjectsolelywithinthepurviewoftheFDIC.Similarly,thedecisiontoprovide assistancetoabankingorganizationthroughtheTARPCPP,thepermissibleuseoftaxattributestoreduce taxableincome,andaBankruptcyCourt’sdecisiontoconfirmaplanofreorganizationthateliminatestheobligationtorepaytheTARPCPPassistance,aresolelywithinthepurviewoftheDepartmentoftheTreasuryand therelevantBankruptcyCourt,respectively.TheBoardbelievesthatthesemattersarenotwithintheBoard’s limitedjurisdictiontoadjudicateanddonotrelatetofactorsthattheBoardmayconsiderwhenreviewingan applicationundertheBHCAct.SeeWesternBancshares.

46 FederalReserveBulletin|January2016 combinedorganizationwouldbestrengthenedbythecomplementaryaspectsof thetwo entities’businesses—namely,CITGroup’snationwidesmallandmiddle-marketcommerciallendingandleasingplatformandOneWestBank’sregionalcommercialandconsumer branchbankingplatform—resultinginastrongerandmorestablefranchise. G.ConclusiononConvenienceandNeedsConsiderations TheBoardrecognizesthatthisproposalrepresentsasizeableexpansionbyCITGroup. Accordingly,animportantcomponentof theBoard’sreviewof theproposalhasbeenits considerationof theeffectsof theproposalontheconvenienceandneedsof allcommunitiesservedbyCITGroup,IMBHoldco,andOneWestBank. Inconductingitsreview,theBoardhasweighedtheconcernsexpressedbythecommenters inlightof allthefactsof record,includingtheoverallCRArecordsof CITBankand OneWestBank,andtheBoard’sconsultationswithOneWestBank’ssupervisors,theOCC andCFPB.Asignificantnumberof commentershaveexpressedsupportfortheproposal basedontherecordsof CITBankandOneWestBankinhelpingtoservethebanking needsof theirentirecommunities,includingLMIareas.Othercommentershaveexpressed concernsaboutspecificaspectsof CITBank’sandOneWestBank’srecordsof performanceundertheCRAintheircurrentserviceareasandhaveexpressedreservationsabout whetherthecombinedorganizationwouldberesponsivetothebankingandcreditneedsof allof itscommunities,especiallyinsouthernCalifornia.Commentersalsohaveexpressed concernsaboutOneWestBank’scompliancewiththelawanditstreatmentof borrowersin itsmortgageservicingandforeclosureactivities.TheBoardhasconsideredtheseconcerns andweighedthemagainsttheoverallCRArecordsof CITBankandOneWestBank;the institutions’recordsof compliancewithfairlendingandotherconsumerprotectionlaws; consultationswiththeCFPBandOCC;confidentialsupervisoryinformation;information providedbyCITGroup,includingitsresponsestocomments;andthepubliccomments ontheproposal. Basedonthatreview,theBoardbelievesthattheproposedacquisitionof OneWestBank byCITGroupwouldresultinpublicbenefitsandthattheconvenienceandneedsfactoris consistentwithapproval.TheBoardexpectstheCITGrouptoengageinactivitiesthat helptomeetthecreditneedsof thecommunitiesCITGroupservesatalevelcommensuratewiththeexpandedsizeandscopeof thecombinedorganization,consistentwithsafe andsoundlendingpractices.TheBoardalsoexpectsCITGrouptosupportthecombined bankindevelopingacomprehensivebusinessplanandprovidingamoredetailedCRA planrequiredbytheOCCinconnectionwithitsapprovalof themergerbetweenOneWest BankandCITBank.TheBoard,alongwithotherfederalsupervisors,willmonitorthese developmentsthroughtheexaminationprocess. FinancialStability TheDodd-FrankActamendedsection3of theBHCActtorequiretheBoardtoconsider “theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultin greaterormoreconcentratedrisktothestabilityof theUnitedStatesbankingorfinancial system.”72 Asdiscussedabove,anumberof commentersexpressedconcernsregardingtheeffectof theproposalonfinancialstability.Thesecommentersgenerallyassertedthattheproposal wouldresultinatoo-big-to-failinstitutiongiventhatthecombinedorganizationwould 72 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7).

LegalDevelopments:ThirdQuarter,2015 47 havemorethan$50billioninassets.CommentersalsoallegedthatCITGroupismaterially interconnectedwiththeeconomyandwithothercompaniesthatareimportanttothe stabilityof 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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.75 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Boththeacquirerandthetargetarepredominately engagedinretailcommercialbankingactivities.76Thecombinedorganizationwouldhave minimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complex interrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirm intheeventof financialdistress.77Inaddition,theorganizationwouldnotbeacritical servicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldpose significantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. RequestforAdditionalPublicMeetings SeveralcommentersrequestedthattheBoardholdpublicmeetingsontheproposalincities otherthanLosAngeles.Section3(b)of theBHCActdoesnotrequirethattheBoardhold apublichearingonanapplicationunlesstheappropriatesupervisoryauthoritiesforthe banktobeacquiredmakeatimelywrittenrecommendationof denialof theapplication.78 73 Commentersalsoraisedconcernsabouttheamountofassetswithoutobservablemarketpricesatthe combinedorganization. 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. 78 12U.S.C.§1842(b);12CFR225.16(e).

48 FederalReserveBulletin|January2016 TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingif appropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhen writtencommentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsidered therequestsinlightof allthefactsof record.IntheBoard’sview,thecommentershave hadampleopportunitytoprovidetestimonyandsubmitcommentsontheproposal.As notedabove,theBoardandtheOCCheldapublicmeetingontheapplication,atwhich 111personsgavetestimony.Personswhocouldnotattendinpersonwerepermittedtohave theirwrittencommentspresentedbyotherparticipantsatthemeeting.Commenters submittednumerouswrittencommentsthattheBoardhasconsideredinactingonthe 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’requestsforadditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionof thepubliccommentperiodforthis proposal.Accordingly,theBoardhasdeterminednottoextendfurtherthepubliccomment period.80 Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon 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 verifythatOneWestBankofferedloanmodificationstoallqualifiedborrowersbeforeforeclosingonthe borrower’spropertyandcollectingloss-sharepaymentsfromtheFDIC. TheBoardbelievesthattherecordinthiscasedoesnotwarrantpostponementofitsconsiderationofthe proposal.Duringtheapplicationprocess,theBoardhasaccumulatedasignificantrecord,includingreportsof examination,supervisoryinformation,publicreportsandinformation,andsignificantpubliccomment.The BoardbelievesthisrecordissufficienttoallowittoassessthefactorsitisrequiredtoconsiderundertheBHC Act.TheBHCActandtheBoard’srulesestablishtimeperiodsforconsiderationandactiononproposalssuch asthecurrentproposal.Moreover,asdiscussedmorefullyabove,theCRArequirestheBoardtoconsiderthe existingrecordofperformanceofanorganizationanddoesnotrequirethattheorganizationenterinto contractsoragreementswithotherstoimplementitsCRAprograms.Forthereasonsdiscussedabove,the Boardbelievesthatcommentershavehadampleopportunitytosubmittheirviewsand,infact,theyhave providedamplewrittensubmissionsandoraltestimonythathavebeenconsideredbytheBoardinactingonthe proposal.Basedonareviewofallthefactsofrecord,theBoardconcludesthatdelayingconsiderationofthe proposal,grantinganotherextensionofthecommentperiod,ordenyingtheproposalonthegroundsdiscussed above,includingforinformationalinsufficiency,isunwarranted. TheBoardreceivedmultiplecommentsallegingthattheBoard’sconsiderationoftheproposalisprecludedby theexistenceofalawsuitfiledagainstOneWestBankundertheFalseClaimsAct.UnitedStatesexrel. Beekmanv.IndyMacFederalBank,F.S.B.,No.9:12-cv-81138-JIC(S.D.Fla.2015).Thiscasehasbeen dismissedwithprejudiceforfailuretomeettheapplicablepleadingstandard.

LegalDevelopments:ThirdQuarter,2015 49 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

50 FederalReserveBulletin|January2016 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,andtheBoardhasconsideredtheproposalandall commentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Banner,withconsolidatedassetsof approximately$5.2billion,isthe201stlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$4.3billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.BannercontrolsBannerBank, whichoperatesinWashington,Idaho,andOregon.4Banneristhe11thlargestdepository organizationinWashington,controllingapproximately$2.9billionindeposits,the18th largestinsureddepositoryinstitutioninIdaho,controllingapproximately$234.5millionin deposits,andthe12thlargestinsureddepositoryinstitutioninOregon,controllingapproximately$849.0millionindeposits,whichrepresent2.3,1.1,and1.4percent,respectively,of thetotaldepositsof insureddepositoryinstitutionsinthosestates.5 Starbuck,withconsolidatedassetsof approximately$4.6billion,isthe213thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$3.6billion inconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.Starbuckcontrols AmericanWestBank,whichoperatesinWashington,California,Idaho,Oregon,andUtah. Starbuckisthe16thlargestdepositoryorganizationinWashington,controllingapproximately$1.2billionindeposits,the21stlargestinsureddepositoryinstitutioninIdaho, controllingapproximately$173.1millionindeposits,andthe15thlargestinsureddepositoryinstitutioninOregon,controllingapproximately$388.2millionindeposits,which 1 12U.S.C.§1842. 2 ThemergerofAmericanWestBankintoBannerBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)undertheBankMergerAct.12U.S.C.§1828(c). 3 12CFR262.3(b). 4 BanneralsocontrolsIslandersBank,FridayHarbor,Washington,whichoperatesthreebranchesin Washington. 5 NationwidedataandrankingsareasofJune30,2015.StatedataandrankingsareasofJune30,2014,unless otherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,and savingsandloanassociations.

LegalDevelopments:ThirdQuarter,2015 51 represent0.9,0.8,and0.6percent,respectively,of thetotaldepositsof insureddepository institutionsinthosestates. Onconsummationof theproposal,Bannerwouldbecomethe124thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$9.8billion, whichrepresentlessthan1percentof thetotalamountof assetsof insureddepository institutionsintheUnitedStates.BannerwouldbecometheeighthlargestdepositoryorganizationinWashington,controllingapproximately$4.0billionindeposits,the15thlargest insureddepositoryinstitutioninIdaho,controllingapproximately$407.6millionin deposits,andthe10thlargestinsureddepositoryinstitutioninOregon,controllingapproximately$1.2billionindeposits,whichrepresent3.3,2.0,and2.0percent,respectively,of the totalamountof 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 inthetargetbank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.8 Forpurposesof theBHCAct,thehomestateof BannerisWashingtonandAmericanWest Bank’shomestateisWashington.9AmericanWestBankisalsolocatedinCalifornia,Idaho, Oregon,andUtah.Banneriswellcapitalizedandwellmanagedunderapplicablelawand hasasatisfactoryCommunityReinvestmentActrating.10CaliforniaandUtahdonothave minimumagerequirementsthatwouldapplytothistransaction,11andIdahoandOregon donothaveminimumagerequirements.12 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. 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.

52 FederalReserveBulletin|January2016 Onconsummationof theproposedtransactions,Bannerwouldcontrollessthan1percent of thetotalamountof depositsininsureddepositoryinstitutionsintheUnitedStates.In addition,thecombinedorganizationwouldcontrolapproximately3.3percentof thetotal amountof depositsof insureddepositoryinstitutionsinAmericanWestBank’shomestate, Washington.BannerandAmericanWestBankalsohaveoverlappingbankingoperationsin IdahoandOregon,andthecombinedorganizationwouldcontrolapproximately 2.0percentof thetotalamountof depositsof insureddepositoryinstitutionsineachof thosestates.13Accordingly,inlightof allthefactsof record,theBoardisnotprohibited fromapprovingtheproposalundersection3(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. A.CompetitiveEffectsintheBankingMarkets TheBoardhasreviewedthecompetitiveeffectsof theproposalinthebankingmarketsin whichBannerBankandAmericanWestBankcompete.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarkets;therelative sharesof thetotaldepositsininsureddepositoryinstitutionsinthemarkets(“market deposits”)thatwouldbecontrolledbyBannerBankandAmericanWestBank;15the concentrationlevelsof marketdepositsandtheincreaseintheselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16othercharacteristicsof themarkets;and,asdiscussedbelow,commitmentsmadebyBannertodivestone 13 NeitherIdahonorOregonimposeadepositcaporconcentrationlimit. 14 12U.S.C.§1842(c)(1). 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(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontal MergerGuidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.PressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/2010 /August/10-at-938.html.

LegalDevelopments:ThirdQuarter,2015 53 AmericanWestBankbranchintheWallaWallabankingmarket. 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 detailedreviewbecausetheconcentrationlevelsonconsummationwouldexceedthe thresholdlevelsintheDOJBankMergerGuidelineswhenusinginitialcompetitive screeningdata. SunnysideBankingMarket.Usingtheinitialcompetitivescreeningdata,Banneristhe fourthlargestdepositoryorganizationintheSunnysidebankingmarket,controlling approximately$56.5millionindeposits,whichrepresent11.4percentof marketdeposits. Starbuckisthesecondlargestdepositoryorganizationinthemarket,controllingapproximately$87.0millionindeposits,whichrepresent17.5percentof marketdeposits.On consummation,thecombinedentitywouldbethesecondlargestdepositoryorganizationin theSunnysidebankingmarket,controllingapproximately$143.5millionindeposits,which wouldrepresentapproximately28.9percentof marketdeposits.TheHHIinthismarket wouldincreaseby399points,from1804to2203. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheSunnysidebankingmarket.19Factorsindicatethattheincreasein concentrationintheSunnysidebankingmarket,asmeasuredbytheaboveHHIand marketshare,overstatesthepotentialcompetitiveeffectsof theproposalinthemarket. Onethriftinstitutioninthemarkethasacommercialandindustrialloanportfoliosimilar tothoseof commercialbanksintheSunnysidebankingmarket,20asmeasuredintermsof 17 Thesesixbankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedinthe Appendix. 18 TheSunnysidebankingmarketisdefinedasthesoutheasterncornerofYakimaCountyandsouthwestern BentonCounty,includingGrandview,Granger,Mabton,Outlook,Prosser,andSunnyside,allofWashington. TheWallaWallabankingmarketisdefinedastheWallaWallametropolitanareainWallaWallaCountyand thesouthernportionofColumbiaCounty,includingCollegePlace,Dayton,Dixie,Garrett,Waitsburg,Walla Walla,andWallaWallaEast,allofWashington,andthenortheasterncornerofUmatillaCounty,including Milton-Freewater,bothofOregon. 19 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreaseandtheresultinglevelofconcentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998). 20 Thestandardtreatmentofthriftsinthecompetitiveanalysisistogivetheirdeposits50-percentweightingto reflecttheirlimitedlendingtosmallbusinessesrelativetobanks’lendinglevels.However,theBoardpreviously hasindicatedthatitmayconsiderthecompetitivenessofathriftinstitutionatalevelgreaterthan50percentof itsdepositswhenappropriateifcompetitionfromtheinstitutioncloselyapproximatescompetitionfroma commercialbank.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703(1989).Where,ashere,the factsandcircumstancesofabankingmarketindicatethataparticularthriftservesasasignificantsourceof commercialloansandprovidesabroadrangeofconsumer,mortgage,andotherbankingproducts,theBoard hasconcludedthatcompetitionfromsuchathriftcloselyapproximatescompetitionfromacommercialbank

54 FederalReserveBulletin|January2016 theratiosof thosetypesof loanstototalloansandassets.21TheBoardhasconcludedthat depositscontrolledbythisinstitutionshouldbeweightedat100percentinthemarketsharecalculations. Inaddition,twocommunitycreditunionsexertacompetitiveinfluenceintheSunnyside bankingmarket.Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmostallof the residentsintherelevantbankingmarket.22TheBoardfindsthatthesecircumstances warrantincludingthedepositsof thesecreditunionsata50-percentweightinestimating marketinfluence.Thisweightingtakesintoaccountthelimitedlendingdonebythesecredit unionstosmallbusinessesrelativetocommercialbanks’lendinglevels. Withthedepositsof thethriftweightedat100percentandthetwocreditunionsat 50percent,theSunnysidebankingmarketappearstobeonlymoderatelyconcentrated, bothbeforeandafterthetransaction.Uponconsummationof themerger,Bannerwould controlapproximately25.2percentof marketdeposits,theHHIwouldincreaseby302 pointstoalevelof 1743,alevelwhichwouldbewithintheDOJBankMergerGuidelines, and10depositoryorganizationswouldcontinuetooperateintheSunnysidebanking market,includingoneinsureddepositoryinstitutionwithamarketshareof morethan 25percent. WallaWallaBankingMarket.Usingtheinitialcompetitivescreeningdata,Banneristhe secondlargestdepositoryorganizationintheWallaWallabankingmarket,controlling approximately$382.5millionindeposits,whichrepresent31.1percentof marketdeposits. Starbuckisthethirdlargestdepositoryorganizationinthemarket,controllingapproximately$111.2millionindeposits,whichrepresent9.1percentof marketdeposits.On consummation,thecombinedentitywouldbethelargestdepositoryorganizationinthe WallaWallabankingmarket,controllingapproximately$493.7millionindeposits,which wouldrepresentapproximately40.2percentof marketdeposits.TheHHIinthismarket wouldincreaseby563points,from2401to2964.Tomitigatethepotentiallyadverse competitiveeffectsof theproposalintheWallaWallabankingmarket,Bannerhas committedtodivestonebranch,accountingforatotalof approximately$27.4millionin deposits,toacompetitivelysuitableinstitution.23 andthatdepositscontrolledbytheinstitutionshouldbeweightedat100percentinmarket-sharecalculations. See,e.g.,RiverValleyBancorp,FRBOrderNo.2012-10(October17,2012);RegionsFinancialCorporation,93 FederalReserveBulletinC16(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). 23 Asaconditionofconsummationoftheproposedmerger,Bannerhascommittedthatitwouldexecute,before consummationoftheproposedmerger,asalesagreementwithacompetitivelysuitablebankingorganization. Banneralsohascommittedtocompletethedivestiturewithin180daysafterconsummationoftheproposed merger.Inaddition,Bannerhascommittedthat,iftheproposeddivestitureisnotcompletedwithinthe 180-dayperiod,Bannerwouldtransfertheunsoldbranchtoanindependenttrustee,whowouldbeinstructed tosellthebranchtoanalternatepurchaserorpurchasersinaccordancewiththetermsofthisorderand withoutregardtoprice.BoththetrusteeandanyalternatepurchasermustbedeemedacceptabletotheBoard. See,e.g.,BankAmericaCorporation,78FederalReserveBulletin338(1992);andUnitedNewMexicoFinancial Corporation,77FederalReserveBulletin484(1991).

LegalDevelopments:ThirdQuarter,2015 55 TheBoardhasalsoconsideredwhetherotherfactorseithermitigatethecompetitiveeffects of theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffect oncompetitioninthemarket.IntheWallaWallabankingmarket,thecompetitiveeffects aremitigatedbyseveralfactors.Twocommunitycreditunionsexertacompetitiveinfluence inthebankingmarket.Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmost allof theresidentsintherelevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunionsata50-percentweightinestimatingmarketinfluence. Afteraccountingforthebranchdivestitureandweightingthedepositsof thetwocredit unionsat50percent,Bannerwouldcontrolapproximately34.6percentof marketdeposits andtheHHIwouldincreaseby327pointstoalevelof 2367.Inaddition,10other competitivelyactiveinsureddepositoryorganizationswouldremain,eightof whichhave morethanonebranchintheWallaWallamarket. 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 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.TheBoardevaluatesthefinancial conditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof thecombinedorganizationtoabsorbthecosts of theproposalandtheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant. TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalin lightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan.

56 FederalReserveBulletin|January2016 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 compliancewithapplicable consumerprotection,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 theexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafe andsoundmanner,andBannerplanstointegrateStarbuck’sexistingmanagementand personnelinamannerthataugmentsBanner’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 24 Theaggregateconsiderationtobepaidinconnectionwiththeproposalwouldbeafixedamountofcashand anaggregatenumberofsharesof(i)Bannercommonstockand(ii)anewclassofBannernon-votingcommon stockthatwouldbeauthorizedpriortothecompletionoftheacquisition.Bannerhassufficientresourcesto fundtheproposedtransaction. 25 Onconsummation,Bannerintendstoretaincertainmembersofmanagementandmostoftheemployeesof Starbuck,includingtwocurrentexecutiveofficersofStarbuck,whowouldserveinaconsultingcapacityat Banner,andthecurrentchieffinancialofficerofStarbuck,whowouldserveasthechieffinancialofficerof BannerBankforthreeyearsaftertheacquisition.

LegalDevelopments:ThirdQuarter,2015 57 needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublic benefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).26In addition,theBoardconsidersthebanks’overallcompliancerecord,theresultsof recent fairlendingexaminations,andothersupervisoryassessments;thesupervisoryviewsof examiners;andothersupervisoryinformation.TheBoardalsomayconsidertheapplicant organization’sbusinessmodel,marketingandoutreachplans,plansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,27andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.28Inaddition,fair lendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccessto credit,regardlessof 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 institutionprepareawrittenevaluationof theinstitution’srecordof meetingthecredit needsof itsentirecommunity,includingLMIneighborhoods.30Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sdatareportedundertheHomeMortgageDisclosureActof 1975,31inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollectedand reportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonthenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;the 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). 30 12U.S.C.§2906. 31 12U.S.C.§2801etseq.

58 FederalReserveBulletin|January2016 geographicdistributionof 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”ratingsforthe LendingTest,InvestmentTest,andServiceTest.33 ExaminersobservedthatBannerBank’soveralllevelof lendingreflectedgoodresponsivenesstoassessmentareacreditneeds.BannerBank’soveralldistributionof borrowers reflectedgoodpenetrationamongretailcustomersof differentincomelevelsandbusinesses andfarmsof differentrevenuesizes,anditsoverallgeographicdistributionof loans reflectedadequatepenetrationthroughouttheassessmentareas.Examinersnotedthat BannerBankexhibitedagoodrecordof servingthecreditneedsof themosteconomically disadvantagedgeographiesof itsassessmentareas,low-incomeindividuals,andverysmall businessesandsmallfarms,consistentwithsafeandsoundbankingpractices.Examiners alsonotedthatBannerBankhadarelativelyhighlevelof communitydevelopmentlending, whichwasfocusedonaffordablehousing,andthatitusedflexiblelendingpracticesin servingassessmentareacreditneeds. ExaminersfoundthatBannerBankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrants,particularlythosethatarenotroutinelyprovidedbyprivate investors.Examinersnotedthattotalinvestmentsdoubledinamountsincetheprevious evaluation.Examinersalsonotedthatthebankexhibitedgoodresponsivenesstoassessmentareacommunitydevelopmentneedsandusedinnovativeandcomplexinvestmentsto supportcommunitydevelopmentinitiatives. ExaminersconcludedthatBannerBankprovidedarelativelyhighlevelof community developmentservices.ExaminersnotedthatBannerBank’sdeliverysystemswereaccessible toallportionsof itsassessmentareasandthatitsrecordof openingandclosingbranches hadnotadverselyaffectedtheaccessibilityof itsdeliverysystems,particularlywithrespect tolow-andmoderate-incomegeographiesandindividuals. 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,andIdaho Non-MSA,Idaho.

LegalDevelopments:ThirdQuarter,2015 59 CRAPerformanceof AmericanWestBank.AmericanWestBankwasassignedanoverall “Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,in September2012(“AmericanWestBankEvaluation”).AmericanWestBankreceived“High Satisfactory”ratingsfortheLendingTestandInvestmentTestanda“LowSatisfactory” ratingfortheServiceTest.34 ExaminersobservedthatAmericanWestBank’soveralllevelof lendingreflectedgood responsivenesstoassessmentareacreditneeds.AmericanWestBankoriginatedasubstantialmajorityof loansinitsassessmentareasduringtheevaluationperiod.AmericanWest Bank’soveralldistributionof borrowersreflectedgoodpenetrationamongretailcustomers of differentincomelevelsandbusinessesandfarmsof differentrevenuesizes,andits overallgeographicdistributionof loansreflectedgoodpenetrationthroughouttheassessmentareas.ExaminersnotedthatAmericanWestBankexhibitedagoodrecordof serving thecreditneedsof themosteconomicallydisadvantagedgeographiesof itsassessment areas,low-incomeindividuals,andverysmallbusinessesandfarms,consistentwithsafe andsoundbankingpractices.ExaminersalsonotedthatAmericanWestBankhadan adequatelevelof communitydevelopmentlending. ExaminersfoundthatAmericanWestBankhadmadeasignificantlevelof qualified communitydevelopmentinvestmentsandgrants.ExaminersnotedthatAmericanWest Bank’svolumeof communitydevelopmentinvestmentsanddonationsshowedamarked increasefromthepreviousevaluation.Examinersalsonotedthatthebankexhibitedgood responsivenesstoassessmentareacommunitydevelopmentneeds. ExaminersconcludedthatAmericanWestBankprovidedanadequatelevelof community developmentservices.ExaminersnotedthatAmericanWestBank’sdeliverysystemswere 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. 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.

60 FederalReserveBulletin|January2016 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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.37 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,Bannerwouldhave approximately$9.8billioninconsolidatedassetsandwouldnotbelikelytoposesystemic risks.TheBoardgenerallypresumesthatamergerresultinginafirmwithlessthan $25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. 35 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 36 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 37 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:ThirdQuarter,2015 61 Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyApplicantswithalltheconditionsimposedinthisOrder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicable law. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof SanFrancisco,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveSeptember3,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

62 FederalReserveBulletin|January2016 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.

LegalDevelopments:ThirdQuarter,2015 63 First Horizon National Corporation Memphis, Tennessee OrderApprovingtheFormationof aBankHoldingCompanyandtheAcquisitionof aBank HoldingCompany FRBOrderNo.2015–24(September17,2015) FirstHorizonNationalCorporation(“FirstHorizon”)anditssubsidiaryholding company,FirstHorizonMergerSub,LLC,bothof Memphis,Tennessee(collectively, “Applicants”),haverequestedtheBoard’sapprovalundersection3of theBankHolding CompanyAct(“BHCAct”)1toacquireTrustAtlanticFinancialCorporation (“TrustAtlantic”)andtherebyindirectlyacquireitssubsidiarybank,TrustAtlanticBank, bothof Raleigh,NorthCarolina.Followingtheproposedacquisition,TrustAtlanticBank wouldbemergedintoFirstHorizon’ssubsidiarybank,FirstTennesseeBank,N.A. (“FirstTennesseeBank”),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 thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.4FirstHorizon controlsFirstTennesseeBank,whichoperatesinTennessee,Georgia,Mississippi,North Carolina,andSouthCarolina.FirstHorizonisthe59thlargestinsureddepositoryorganizationinNorthCarolina,controllingapproximately$179.2millionindeposits,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state.5 TrustAtlantic,withconsolidatedassetsof approximately$469.2million,isthe1,444th largestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $388.6millionindeposits,whichrepresentlessthan1percentof nationwidedeposits. TrustAtlanticcontrolsTrustAtlanticBank,whichoperatesonlyinNorthCarolina. TrustAtlanticisthe41stlargestinsureddepositoryorganizationinNorthCarolina, controlling$392.4millionindeposits,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,FirstHorizonwouldremainthe61stlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$26.2billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.FirstHorizonwouldcontroltotaldepositsof approximately $19.0billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.InNorthCarolina,FirstHorizonwould 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.

64 FederalReserveBulletin|January2016 becomethe33rdlargestdepositoryorganization,controllingdepositsof approximately $571.6million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. 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’shomestateorinanystateinwhichtheacquirerandtargethaveoverlapping bankingoperations.8 Forpurposesof theBHCAct,FirstHorizon’shomestateisTennessee,andTrustAtlantic’s homestateisNorthCarolina.9FirstHorizoniswellcapitalizedandwellmanagedunder applicablelawandhasasatisfactoryCommunityReinvestmentActrating.10NorthCarolinahasnominimumagerequirement,11andTrustAtlanticBankhasbeeninexistence formorethanfiveyears. 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 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.

LegalDevelopments:ThirdQuarter,2015 65 theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.13 FirstHorizonandTrustAtlantichavesubsidiarydepositoryinstitutionsthatcompete directlyinonlytheRaleigh,NorthCarolina,bankingmarket(the“Raleighbanking market”).14TheBoardhasconsideredthecompetitiveeffectsof theproposalinthismarket inlightof 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.On consummationof theproposal,theRaleighbankingmarketwouldremainmoderately concentrated,asmeasuredbytheHHI.TheHHIchangewouldbeminimal,andnumerous competitorswouldremaininthemarket.17 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheRaleighbankingmarketorinanyotherrelevantbankingmarket. Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. 13 12U.S.C.§1842(c)(1). 14 TheRaleighbankingmarketisdefinedastheRaleighRandMcNallyMarketingArea(“RMA”)andthe non-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(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/departmentjustice-and-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.TheHHIfortheRaleigh bankingmarketwouldincreasebyonepointto1439,and31othercompetitorswouldremaininthemarket.

66 FederalReserveBulletin|January2016 Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationonthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformationonthe financialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance.TheBoard evaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecosts of theproposalandtocompletefullytheproposedintegrationof theoperationsof the institutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolved intheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. 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.

LegalDevelopments:ThirdQuarter,2015 67 existingmanagementandpersonnelinamannerthataugmentsFirstHorizon’s management. TheBoardconsideredacommentontheapplicationcriticizingthedepartureof four commerciallendersfromTrustAtlanticshortlyaftertheproposedacquisitionbyFirst Horizonwasmadepublic.Thecommenterexpressedconcernthatthedepartureof four commerciallendersfromTrustAtlanticwouldhaveanegativeimpactonFirstHorizon’s futureprospects.FirstHorizonstatedthatitwasinformedof thedeparturesandanalyzed theimpactof suchdeparturesonTrustAtlantic’soperations.FirstHorizonalsonoted thatTrustAtlantichastakenstepstohirenewcommerciallendersandthatFirstTennessee andTrustAtlantictogetherhavedevelopedaplantoaddresstheemployeedepartures. Basedonallthefactsof record,includingFirstHorizon’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof FirstHorizonandTrustAtlanticincombattingmoneylaunderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublic benefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).19The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics. TheBoardalsoconsidersthesupervisoryassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans followingconsummation,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.Themortgage subsidiaryhasbeensoldbyFirstHorizon.

68 FederalReserveBulletin|January2016 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.The commenteralsoobjectstotheproposalonthebasisof TrustAtlanticBank’slendingrecord toLMIborrowersintheWakeCountyassessmentarea(“WakeCountyAA”)andthePitt Countyassessmentarea(“PittCountyAA”),asreflectedinTrustAtlanticBank’smost recentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation (“FDIC”),asof August22,2013(“TrustAtlanticBankEvaluation”).Inaddition,the commenternotesthatFirstTennesseeBankreceivedanoverall“LowSatisfactory”rating ontheInvestmentTestintheFirstTennesseeBankEvaluation. Acommenteralsoobjectstotheproposalonthebasisof FirstTennesseeBank’slending recordtominorityborrowersintheMemphisMSAandtheRaleigh,NorthCarolina, MetropolitanStatisticalArea(“RaleighMSA”),asreflectedindatareportedunderthe HomeMortgageDisclosureAct(“HMDA”)23for2013.Anothercommenterexpresses concernswithFirstTennesseeBank’srecordinlendingtominoritycommunitiesinthe ChattanoogaMSA,theKnoxvilleMetropolitanStatisticalArea(“KnoxvilleMSA”),the MemphisMSA,andtheNashvilleMSA,asreflectedinHMDAdata.Thiscommenteralso expressesconcernwithFirstTennesseeBank’slackof collectionof HMDA-mandated informationregardingtheraceof potentialborrowersintheChattanooga,Knoxville, Memphis,andNashvilleMSAs. FirstTennesseeBank’sBusinessandResponsetoComments.FirstTennesseeBank’sbusinessmodelhassignificantlychangedsince2008.Priorto2008,FirstTennesseeBankoperatedasamultistatebankwithnationallendingoperationsoutsideof itscurrentretail bankingfootprintinGeorgia,Mississippi,NorthCarolina,andTennessee.Thebank’s nationallendingoperationsincludedfinancialcentersinTexasandVirginia,andan expandedpresenceinGeorgia,aswellasanextensivenetworkof mortgageproduction officesdoingbusinessunderthenameFirstHorizonHomeLoans. In2008,FirstTennesseeBankdivestedamajorityof itsbankbranchesandexitedthe nationallendingbusinessthroughthesaletoanunaffiliatedthirdpartyof theFirst HorizonHomeLoansbusiness,includingapproximately250mortgageproductionoffices anditsloanoriginationandservicingplatforms.Theseplatformspreviouslyhadallowed FirstTennesseeBanktooriginategovernment-guaranteedandconventionalhome purchaseloansthatrequireescrowcapabilities.Concurrentwiththesaleof FirstHorizon HomeLoans,FirstTennesseeBankenteredintoanagreementwithathirdparty,PHH MortgageCorporation,topermitthebanktoprovidegovernment-guaranteedhome purchasemortgageloanswithescrowcapabilitiesinitslocalcommunities.Thoseloans 23 12U.S.C.§2801etseq.

LegalDevelopments:ThirdQuarter,2015 69 werereflectedinFirstTennesseeBank’sHMDAreportashomemortgageloansoriginated byFirstTennesseeBank.TheagreementwithPHHMortgageCorporationexpiredin 2012andwasnotrenewed.Subsequently,FirstTennesseeBankenteredintobrokerrelationshipswithQuickenLoans,underwhichthebank’sloanspecialistsassistmortgage applicantswhowishtoobtainagovernment-guaranteedloansincompletingapplications forgovernment-guaranteedandconventionalhomepurchaseloansthatrequireescrow capabilitiesandreferthoseapplicationstoQuickenLoansforreviewandprocessing.First TennesseeBankdoesnotreceivecreditundertheCRAforanyloansoriginatedbyQuicken Loanspursuanttothebrokerrelationship.FirstTennesseeBankrepresentsthat,pursuant tothisbrokerrelationship,itprovided7,922referralstoQuickenLoansfrom2012to2014, whicharenotreflectedinitsHMDAdata.FirstTennesseeBankrepresentsthatitisnegotiatingcorrespondentrelationshipswithQuickenLoansandtwootherthird-partylendersto beabletocloseloansforwhichitwouldreceiveCRAcredit.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-guaranteedhome purchasemortgageloansinitslocalcommunities.FirstHorizonemphasizesthatexaminers foundthebank’soverallhomeloanoriginationstobesatisfactoryintheFirstTennessee BankEvaluation,notwithstandingthechangeinFirstTennesseeBank’sbusinessoperationsandthatthenumberof homepurchaseloansoriginatedbyFirstTennesseeBank waslow. FirstHorizonassertsthatthepercentagesof homeloansinFirstTennesseeBank’sassessmentareas,asreflectedintheFirstTennesseeBankEvaluation,werelowerduetothe significantchangestothebank’sbusinessmodelthatoccurredin2008,asdescribedabove. Inaddition,FirstHorizonemphasizesthatthebank’soveralllevelof homeloanoriginationswasfoundtobesatisfactorybyexaminersintheFirstTennesseeBankEvaluation. FirstHorizonrepresentsthatitsaggregatelendingfigureswithinitsassessmentareas changedsignificantlysubsequenttotheperiodreviewedintheFirstTennesseeBankEvaluation,asthebankhadsignificantlychangeditsbusinessmodelatthattime.Specifically, FirstHorizonnotesthatduringtheperiodfrom2010through2014,mostof First TennesseeBank’shomeloanswereoriginatedwithinthebank’sassessmentareas,including 90percentof theloansoriginatedinitsassessmentareasin2014. Inresponsetoacommenter’sobservationthatexaminersfoundthebank’spercentageof loanstobusinesseswithrevenuesof $1millionorlesswaslowerthanthepercentageof smallbusinesseswithintheChattanoogaMSAintheFirstTennesseeBankEvaluation, FirstHorizonarguesthatthepercentageof FirstTennesseeBank’ssmallbusinessloansin bothlow-incomeandmoderate-incomegeographiessignificantlyexceededthepercentagesof businesseslocatedinthosesegmentsintheassessmentarea,andthatFirst TennesseeBank’smarketshareof smallloanstobusinessesinsuchcommunitiessignificantlyexceededitsoverallmarketshare.FirstHorizonfurtherassertsthatFirstTennessee Bankhasanumberof productsdesignedforsmallbusinessborrowers,includingsecured termloans,smallbusinesscreditcards,securedandunsecuredlinesof credit,andsmall

70 FederalReserveBulletin|January2016 businesscreditproductsthroughtheSmallBusinessAdministration’s504,7(a),and CAPLinesprogramsthatbenefitsmallfor-profitandnot-for-profitbusinesses.First Horizonassertsthat,tosupplementitseffortstoservetheneedsof smallbusiness borrowers,thebankhasamarketingalliancewithathird-partylenderthathelpshigherrisksmallbusinessborrowersobtaincreditproducts.Finally,FirstHorizonemphasizesthat examiners’overallassessmentof FirstTennesseeBank’srecordof smallbusinesslending was“Satisfactory.” FirstHorizonarguesthatTrustAtlanticBank’sdistributionof homemortgageloans amongvariouscensustractsintheWakeCountyAAin2011and2012reflectedanoverall excellentpenetrationrateinlow-andmoderate-incomeareas.FirstHorizonfurtherasserts thatTrustAtlanticBank’sdistributionof homemortgageloansinmoderate-income censustractsinthePittCountyAAreflectedexcellentpenetrationin2011and2012. AlthoughTrustAtlanticBankdidnotoriginateanyhomemortgageloansinthe low-incomecensustractsof thePittCountyAAin2011and2012,FirstHorizoncontends thatonly0.6percentof owner-occupiedhousinginthePittCountyAAislocatedinthe low-incometractsandthataggregatelendingconstitutedonly0.5percentinthosecensus tracts. FirstHorizonasserts,inresponsetothecommentonFirstTennessee’sperformanceonthe InvestmentTestintheFirstTennesseeBankEvaluation,thatitsprivatecharitablefoundation,establishedin1993,hasdonatedsubstantialamountstomeetcommunityneeds, includinggrantsduring2014tolocalorganizationsintheMid-Atlanticregioninvolvedin affordablehousing,healthcare,andfinancialliteracy.FirstHorizonfurtherassertsthatit hasenhanceditsinvestmentactivitiesandthoseof FirstTennesseeBanksincetheFirst TennesseeBankEvaluation,includingbyprovidingfinancingtoaTreasury-certified CommunityDevelopmentFinancialInstitutionthatprovidesaffordablefinancingand relateddevelopmentservices,investingintheFederalHomeLoanBankof Tennessee (whichoverseesagrantprogramfornonprofitagenciestodevelopaffordablehousing)and establishingtheFirstTennesseeHousingCorporationtodevelopaffordablemultifamily housing.FirstHorizonalsostatesthatFirstTennesseeBankmadecontributionsduring 2014tocommunityorganizationsthathaveadirectimpactonmeetingthelendingneedsof LMIpersonsintheRaleighandWinston-SalemcommunitiesinNorthCarolina. FirstHorizonassertsthatthebank’sabilitytocollectinformationontheethnicity,race, andsexof applicants,afocusof acomment,isimpactedbyitscurrentlendingstrategy,in whichittakesloanapplicationsonlythroughaprocessusingacentralizedcallcenter. FirstHorizonassertsthat,althoughthebankfollowsspecificprocessesthroughitsloan originationprocesstorequesttherequiredinformationontheethnicity,race,andsexof applicantsinitsloanapplicationprocess,itcannotrequireanapplicanttoprovidethe information. FirstHorizonstatesthatitsanalysisof applicationsbycensustractsindicatesaclosecorrelationbetweenitslendingactivitiesandtheownershipopportunitiesbasedonowneroccupiedhousingunitsandrentalhousinginsuchcensustracts,andthattheHMDAdata ratioscitedbythecommentersdonotaccuratelyreflectFirstTennesseeBank’scompliance withfairlendinglaws.Inthisrespect,FirstHorizonnotesthatthelackof informationon theethnicity,race,andsexof applicantsresultingfromitshomemortgageapplication processesmakescomparisonsbetweenracialorethnicgroupsunreliable.FirstHorizonalso notesthatitsbusinessmodel,inwhichitdoesnotcurrentlyoffergovernment-guaranteed homepurchaseloans,resultsinsignificantlyfewerhomepurchaseloansascomparedto competitorsandinsignificantlyfewerhomepurchaseloansbyfirst-timehomebuyers, bothof whichfactorscontributetothedisparitiesnotedbycommenters.Inaddition,First

LegalDevelopments:ThirdQuarter,2015 71 Horizoncontendsthatithasacomprehensivefairlendingcomplianceprogramtoensure compliancewithfairlendinglaws. 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 performanceevaluationisaparticularlyimportantconsiderationintheapplications processbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimary federalsupervisorof 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,includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;26theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other 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).

72 FederalReserveBulletin|January2016 informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.27 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 communitydevelopment servicesinthoseassessmentareasinwhichFirstTennesseeBankmaintainedanongoing 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,communityservices targetedtoLMIindividuals,economicdevelopment,andrevitalizationandstabilizationof LMIareasof thebank’sassessmentareas. FirstTennesseeBank’scommunitydevelopmentlendingactivitiesincludedproviding 27 Otherdatarelevanttoafairlendinganalysiscouldinclude,forexample,informationoncredithistoryproblems,debt-to-incomeratios,andloan-to-valueratios(thereasonsmostfrequentlycitedforacreditdenialor highercreditcost). 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.

LegalDevelopments:ThirdQuarter,2015 73 financingtosupportconstructionof studenthousingatahistoricallyblackcollegeand university,financingforabaseballstadiuminaformerlyblightedcommunity,makinga loantoconstructaworkforcetrainingcenterforpeoplewithspecialneeds,andhelping severalsmallcommunitiesrecoverfromdisastersbyextendingloansforinfrastructureand essentialequipment.Inaddition,FirstTennesseeBankworkedwithlocalorganizationsto meetuniquelendingneeds,forexample,bypartneringwiththeBusinessExpansion FundingCorporation,acommunitydevelopmentcorporationinNorthCarolina,toextend aloanundertheSmallBusinessAdministration’sSection504loanprogramtoasmall businessinWakeCounty,NorthCarolina,thatwasanticipatedtocreatemanynewjobsin thelocalcommunity. ExaminersfoundthatFirstTennesseeBankhadanadequatelevelof qualifiedcommunity developmentinvestmentsbasedontheinvestmentopportunitiesanddollarvolumeof investmentsmadeinFirstTennesseeBank’sassessmentareas.Duringtheevaluation period,FirstTennesseeBank’stotalinvestmentsconsistedprimarilyof LowIncome HousingTaxCreditinvestments,andexaminersfoundthattheseinvestmentswerevery responsivetoaffordablehousingneedsandrequiredconsiderablemanagementtimeand expertisetomonitorthebank’sinvestmentportfolio.ExaminersnotedthatFirstTennessee Bankhadanadequatevolumeof communitydevelopmentinvestmentsintheMemphis MSAthataddressedtheneedforaffordablehousingandcommunityservicesforLMI individuals. ExaminersobservedthatFirstTennesseeBank’sbranchlocationswereaccessibleinthe assessmentareasinwhichthebankmaintainedanongoingpresence.Examinersnotedthat thebankprovidedagoodlevelof communitydevelopmentservicesintheMemphisMSA andChattanoogaMSA,withagooddistributionof bankbranchesinbothlow-and moderate-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-partymortgage lenderstoestablishrelationshipsthatwouldpermitFirstTennesseeBanktooriginate government-guaranteedmortgageloansandconventionalhomemortgagepurchaseloans thatrequireescrowcapabilities.FirstTennesseeBankalsohaspartneredwithOperation Hopetoprovidecreditcounseling,budgeting,andotherfinancialempowermenttrainingto individualswhoearnlessthan$50,000peryearandhascommittedtoestablishingatleast tenlocationsinwhichsuchserviceswillbeprovidedoverthenexttwoyears.FirstHorizon furthercontendsthatitperiodicallyreviewsitsbranchstrategytoensurethatFirst TennesseeBank’sbranchdeliverysystemservesitscustomersthroughoutitslocalcommunities,includingLMIareas.Asdescribedabove,FirstTennesseeBankalsohascontinued developingitssmallbusinessproductofferingsundertheSmallBusinessAdministration’s

74 FederalReserveBulletin|January2016 504,7(a),andCAPLinesprograms,andthebankhasstatedthatitwillrecruitatargeted SmallBusinessAdministrationbusinessdevelopmentofficerbytheendof 2015tomarket itsSmallBusinessAdministrationprograms.TheBankalsohascommittedtooriginating 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 activitiesto promotefinancialliteracy.Inaddition,FirstHorizonassertsthatFirstTennesseeBank employeeshaveprovidedthousandsof hoursof volunteerservicestosupportconsumers andcivicorganizations. CRAPerformanceof TrustAtlanticBank.TheTrustAtlanticBankEvaluationwas conductedbytheFDICusingtheIntermediateSmallBankCRAExaminationProcedures.30TrustAtlanticBankwasassigneda“Satisfactory”ratingintheTrustAtlanticBank Evaluation,withratingsof “Satisfactory”fortheLendingTestand“Outstanding”forthe CommunityDevelopmentTest.31ExaminersnotedthatTrustAtlanticBankprovidedfor thecreditneedsandeconomicdevelopmentof 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,examinersconcluded 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.

LegalDevelopments:ThirdQuarter,2015 75 thatthebankhadroomtoimproveitsperformanceinhomemortgagelendingtoLMI borrowersintheWakeCountyAAandPittCountyAA. ExaminersnotedthatTrustAtlanticBank’scommunitydevelopmentperformancedemonstratedexcellentresponsivenesstothecommunity’sdevelopmentneedsinitsassessment areas.ExaminersalsofoundthatTrustAtlanticBankprovidedanadequatelevelof communitydevelopmentservicesthroughitsemployeeinvolvementincommunitydevelopmentorganizations. Viewsof OtherRegulatorsandOCCApprovalof theBankMerger.TheBoardhas consultedwiththeOCC,theprimarysupervisorof FirstTennesseeBank,inconnection withtheOCC’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,specificallywithrespecttoFirst TennesseeBank’sprovisionof productsandservicestoLMIindividualsandinLMIgeographies,tominorityindividualswithinitsassessmentareas,andinFirstTennesseeBank’s InvestmentTestperformance. 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.OnecommenterexpressedconcernthatFirstHorizonhasnotdemonstrated howtheproposalwouldresultinclearpublicbenefits. FirstHorizonrepresentedthattheproposalwouldimproveconvenienceforcustomersby providingthemwithabroaderrangeof financialproductsandservicesthroughan expandedbranchnetwork.FirstHorizonrepresentedthatcustomersof TrustAtlantic Bankwouldhaveaccesstoadditionaldepositproducts,includingwholesaleandretail lockboxandamoreadvancedremotedepositcaptureproduct;disbursementproductswith fraudprotection;purchaseandpayrollcards;electronicbillpay;moresophisticatedwire transferandACHsystems;mobilebanking;creditcardsanddebitcardsthatcanbereissuedwithinbranchoffices;financialplanningforindividualsandfamilies;investment management;afullservicetrustdepartment;andalargerlegallendinglimit.Accordingto FirstHorizon,TrustAtlanticBank’scustomersalsowouldbenefitfromFirstTennessee Bank’sbroaderexpertiseinspecializedsegmentsincludinglargercommercialsegmentsnot

76 FederalReserveBulletin|January2016 currentlyservedbyTrustAtlanticBankandindustrysegmentssuchashealthcare,transportation,consumerfinance,andasset-basedlending;governmentandmunicipalfinance; interestrateprotectionproducts;andancillaryservicesthatincludeafull-serviceinternationaldepartment. D.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA;theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws;consultationswiththeOCC,the FDIC,andtheCFPB;confidentialsupervisoryinformation;informationprovidedbyFirst Horizon;andthepubliccommentsontheproposal.Basedonthatreview,theBoard concludesthattheproposalwouldresultinpublicbenefitsandthattheconvenienceand needsfactorisconsistentwithapproval. TheBoardexpectsFirstHorizontocontinuemakingprogresstoaddressweaknessesinthe CRAperformanceof itsbanksandtoimplementaprogramforlending,investments,and servicesthatiscommensuratewiththesize,complexity,andexpandinggeographyof the combinedorganization.ThisincludesexecutingCRAplansthataddressanyweaknessesin theperformanceof thebanksbeforeFirstHorizonseekstoengageinfurtherexpansionaryactivity.TheBoardwillmonitorprogressbyFirstHorizonaspartof thesupervisoryprocess. 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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.35 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,FirstHorizonwouldhaveapproximately 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).

LegalDevelopments:ThirdQuarter,2015 77 $26.1billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,FirstHorizonwouldnotbelikelytoposesystemicrisks.TheBoardgenerally presumesthatamergerthatinvolvesanacquisitionof 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,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswithalltheconditionsimposedinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobe conditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision hereinand,assuch,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,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthe commenters’viewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublichearingontheproposalaredenied.

78 FederalReserveBulletin|January2016 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 TheBHCActsetsforththefactorsthattheBoardmustconsiderwhenreviewingthe formationof bankholdingcompaniesortheacquisitionof banks.Thesefactorsinclude 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.

LegalDevelopments:ThirdQuarter,2015 79 thecompetitiveeffectsof theproposalintherelevantgeographicmarkets;thefinancialand managerialresourcesandfutureprospectsof thecompaniesandbanksinvolvedinthe proposal;theavailabilityof informationtodetermineandenforcecompliancewiththe BHCActandotherapplicablefederalbankinglaws;theconvenienceandneedsof the communitiestobeserved,includingtherecordsof performanceof theinsureddepository institutionsinvolvedinthetransactionundertheCommunityReinvestmentAct(“CRA”);6 theeffectsof theacquisitiononfinancialstability;and,inthecaseof anapplication involvingaforeignbank,whethertheforeignbank,includingitsparentholdingcompany, issubjecttocomprehensivesupervisionandregulationonaconsolidatedbasisbyitshome countrysupervisor.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.10TheBoardalso considerswhetheranapplicanthasprovidedadequateassurancesthatitwillmakeavailable totheBoardsuchinformationonitsoperationsandactivitiesandthoseof itsaffiliatesthat theBoarddeemsappropriatetodetermineandenforcecompliancewiththeBHCAct. Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasthefinancial conditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significant nonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information, includingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluates thefinancialconditionof thecombinedorganizationonaproformabasis,includingits capitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposed fundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationto absorbthecostsof theproposalandtheproposedintegrationof theoperationsof the 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.

80 FederalReserveBulletin|January2016 institutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolved intheproposalinlightof 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 theApplicantsoperateandhascommunicatedwithrelevantgovernmentauthorities concerningaccesstoinformation.Inaddition,Applicantshavecommittedthattheywill makeavailabletotheBoardsuchinformationontheiroperationsandtheoperationsof theiraffiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewith theBHCAct,theInternationalBankingAct,andotherapplicablefederallaws. Basedonallthefactsof record,theBoardhasconcludedthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellasaccesstoinformationbytheBoard,areconsistentwithapproval. 11 TheBoardconsideredthetotalandtier1risk-basedcapitalratiosandtheratiooftier1capitaltototalconsolidatedassetsofEJYandBCI.Inaddition,EJYandBCIprovidedcommonequitytier1capitalratioscalculatedunderU.S.rulesaspartofthecapitalequivalencyassessment. 12 Atconsummation,BCIwouldbewellcapitalized.Inaddition,BCIwillincreaseitscapitalthroughanequity offeringofapproximately$360million.EJYwouldsubscribetoits55percent($198million)proratashareof theequityoffering,fundedthroughtheissuanceofapproximately$216millionindebttothirdparties.Upon completionofthecapitalraise,bothBCIandEJYwouldcontinuetohavecapitallevelsequivalenttothe capitallevelsthatwouldberequiredofaU.S.bankingorganization.

LegalDevelopments:ThirdQuarter,2015 81 SupervisionorRegulationonaConsolidatedBasis Inevaluatingthisapplication,andasrequiredbysection3of theBHCAct,theBoard consideredwhethertheApplicantsaresubjecttocomprehensivesupervisionorregulation onaconsolidatedbasisbyappropriateauthoritiesintheirhomecountry.13 BancodeCreditoeInversiones.Asnoted,theSBIFistheprimarysupervisorof Chilean banks,includingBCI.TheBoardpreviouslyhasdetermined,inconnectionwithanapplicationtoestablishanagency,thatBCIissubjecttocomprehensivesupervisionona consolidatedbasisbytheSBIF.14TheSBIFobtainsinformationonBCI’soperations throughannualon-siteexaminationsanditsreviewof auditandfinancialreports submittedbyBCI.BCI’sassetqualityandcapitalalsoarereviewedannually.Aspartof the examinations,theSBIFreviewsBCI’sinternalcontrols,andBCIprovidesreportstothe SBIFonthescopeof itsinternalaudits.TheSBIFrequiresBCItomeetminimumcapital ratiosandprohibitsBCIfromextendingcredittoaffiliatesontermsmorefavorablethan thoseofferedtothirdparties.TheSBIFhastheauthoritytoimposesanctionsonBCIand itsdirectors,officers,andmanagersif necessarytoenforcecompliancewithitsregulations. EmpresasJuanYarur.InassessingwhetherEJYmaybeconsideredsubjecttoconsolidatedsupervision,theBoardhasconsideredanumberof factors.TheBoardhaslongheld that“thelegalsystemsforsupervisionandregulationvaryfromcountrytocountry,and comprehensivesupervisionorregulationonaconsolidatedbasiscanbeachievedin differentways.”15Inaddition,theBoardmakescase-by-case,institution-specificdeterminationsunderthecomprehensivesupervisionstandard.16Inconsideringpreviouscasesin whichaforeignbankwasownedbyanonbankparentcompany,theBoardhasstatedthat thesystemof comprehensivesupervisionorregulationmayvary,dependingonthenature of theacquiringcompanyandtheproposedinvestment.17Inlightof thisbackground, theBoardhastakenthefollowingfactsintoaccount: Priortothisproposal,EJYwaspartof acomplexstructureof family-affiliatednonbank companiesthatownedacontrollinginterestinBCI.Noneof thesecompanieswassubject toconsolidatedregulationorsupervisionbygovernmentalauthorities.Inorderto 13 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankissubject toconsolidatedhomecountrysupervisionunderthestandardssetforthinRegulationK.See12CFR 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).

82 FederalReserveBulletin|January2016 addresstheissuesraisedbythisorganizationalstructure,thecontrollingshareholders committedtoasignificantrestructuringandsimplificationof theownershipof BCI. Underthisproposal,EJYwouldbecomethesoleparentcompanyof BCI.Noother companywouldowndirectlyorindirectlymorethan5percentof thevotingsharesof BCI orEJY.Uponcompletionof therestructuring,EJYwouldoperateasashellholding company.BCIwouldcompriseapproximately98percentof theassetsof EJY.EJYwould alsoownthreeregulatedinsurancecompaniesinChile,constitutingtheremaining 2percentof theassetsof EJY. EJYanditssubsidiariestogetherareafinancialgroupunderChileanlaw.Since2004,Chile hastakennumerousstepstoprovidegreatertransparencyforsuchgroupsbygivingfinancialregulatorstheabilitytoobtaininformationontheownersof regulatedfinancialinstitutions.InOctober2014,ChileadoptednewlegislationthatgivestheSBIFnewauthority withrespecttocontrollingshareholdersof Chileanbanks.18TheSBIFmayrequiresuch companiestomeetasolvencyratio.19TheSBIFmayalsoinspectthebooksandrecordsof anysuchcompanyinordertoassesstheeffectof theparentcompanyonthebank.20 Chileanlawalsolimitstheabilityof Chileanbankstoengageintransactionswithaffiliates, includingparentcompanies.21 Chileanlawalsoprovidesthatregulatorsof financialinstitutionsmayshareinformation witheachother.TheSBIF,astheregulatorof banks,andtheSuperintendenciadeValores ySeguros(“SVS”),astheregulatorof securitiesandinsurancecompanies,regularlymeet aspartof theFinancialStabilityCouncilandmayshareinformationatanytime.EJYis alsoregisteredwiththeSVS.Asaregisteredcompany,EJYisrequiredtopublishannual auditedfinancialstatements.TheSBIFhasconfirmeditsabilityandwillingnesstoshare informationasnecessarywiththeBoardconcerningoperationsof BCIandEJY. TheBoardhastakenintoaccountthatEJYisnotanoperatingcompanyandthatEJY’s proposedinvestmentinCMFloridaandCityNationalwouldbeindirectandmade throughaforeignbankthatissubjecttoconsolidatedsupervisionbytheSBIF.Moreover, asnoted,BCIanditsregulatedinsuranceaffiliatescomprisevirtually100percentof the assetsof EJY.EJYalsohasmadeanumberof commitmentsinconnectionwiththisapplication.Itwouldremainanon-operatingcompanyandwouldnotacquirecontrolof any companyotherthanaregulatedfinancialservicescompanyinChilewithouttheBoard’s approval.EJYwouldmakeitsbooksandrecordsavailabletotheSBIFandtheBoardto determinecompliancewiththesecommitments.TheSBIFhasconfirmedthatitiswilling andhastheauthoritytoaccessandmonitorthebooksandrecordsof EJYinorderto determineEJY’scontinuingcompliancewiththesecommitments.Inaddition,theSBIF maysharewiththeBoardallinformationgatheredthroughitsmonitoringof EJYandhas indicateditswillingnesstoassisttheBoardinobtaininganyadditionalinformationthe BoardmayrequirefromEJYanditsaffiliates.Thesecommitmentsandtheinvolvementof theSBIFinmonitoringthesecommitmentslimittheabilityof EJYtoundertakenew activities,tomakeunregulatedinvestments,ortoengageinoperationsoractivitiesoutside thescopeof appropriategovernmentaloversight.Moreover,CMFloridaandCity NationalwouldbeownedandoperatedbyBCI,whichisfullysubjecttosupervisionand regulationbytheSBIF. 18 LawNo.20.789,GazetteNo.9178-05(2014).ChileanGeneralBankingLaw(LeyGeneraldeBancos,“LGB”), Article16. 19 Article28,LGB. 20 Article16,LGB. 21 SeeArticles84–85,LGB.

LegalDevelopments:ThirdQuarter,2015 83 Basedonallthefactsof record,includingthestructureandlimitedactivitiesof EJY,the commitmentsmadebyBCIandEJY,andthecooperationofferedbytheSBIF,theBoard determinesthatEJYandBCIaresubjecttocomprehensivesupervisiononaconsolidated basisbytheirhomecountrysupervisorforpurposesof thisproposal. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublic benefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCRA.Inaddition,theBoardconsidersthe banks’overallcompliancerecords,theresultsof recentfairlendingexaminationsandother supervisoryassessments,thesupervisoryviewsof examiners,othersupervisoryinformation,andcommentsreceivedontheproposal.TheBoardmayalsoconsidertheinstitution’s businessmodel,itsmarketingandoutreachplans,theorganization’splansfollowing consummation,andanyotherinformationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,22andrequirestheappropriate federalfinancialsupervisoryagencytotakeintoaccountarelevantdepositoryinstitution’s recordof meetingthecreditneedsof itsentirecommunity,includinglow-andmoderateincome(“LMI”)neighborhoods.23Inaddition,fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,or certainothercharacteristics. TheBoardreceivedacommentfromacommenterwhoobjectedtotheproposalprincipally onthebasisof CityNational’srecordof extendinghomemortgagecredit,includingrefinancingcredit,tominorityindividualsintheFortLauderdale,Miami,andOrlandoMetropolitanStatisticalAreasasreflectedindatareportedundertheHomeMortgageDisclosureAct(“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 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.

84 FederalReserveBulletin|January2016 theComptrollerof theCurrency(“OCC”),confidentialsupervisoryinformation,informationprovidedbyApplicants,andthepubliccommentreceivedontheproposal. CityNational’sBusinessandApplicants’ResponsetoComment.CityNationalengages primarilyincommerciallending,corporatecashmanagement,andprivatebanking.Asof September30,2014,commercialrealestateloansandcommercialandindustrialloans accountedforapproximately57percentof theloanportfolio.Residentialrealestatelending representedapproximately26.1percentof theloanportfolio.Applicantsarguedthatthe commenter’sassessmentof CityNational’slendingperformancedidnotaccuratelyreflect thebank’sperformancewhenreviewedinthecontextof abroaderrangeof data. A.Recordof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationprovidedbytheappropriatefederalsupervisors.27 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.28Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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)inthe institution’sassessmentareas;thegeographicdistributionof suchloans—includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;29theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies.Consequently,theBoardconsiderstheoverallCRA ratingandtheratingonthelendingtesttobeimportantindicators,whentakeninto 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).

LegalDevelopments:ThirdQuarter,2015 85 considerationwithotherfactors,indeterminingwhetheradepositoryinstitutionishelping tomeetthecreditneedsof itscommunities. CRAPerformanceof CityNational.CityNationalwasassignedanoverall“Outstanding” ratingatitsmostrecentpubliclyavailableCRAexaminationasof May29,2012(“City NationalEvaluation”),30conductedbytheOCC,withratingsof “Outstanding”forthe Lending,Investment,andServicesTests. ExaminersfoundthatCityNationaldemonstratedgoodresponsivenesstoassessmentarea creditneedswithrespecttothebank’slendingactivity.ExaminersalsofoundthatCity Nationaloriginatedasubstantialmajorityof itsloanswithinitsassessmentareaandthat thebankhadanexcellentgeographicdistributionof itsloansthroughoutitsassessment area.Examinersfoundthatthebankhadanadequatedistributionof loansamong borrowersof differentincomelevelsandbusinessesof differentsizes.Homemortgage lendingactivitywasconsideredadequate.Examinersconsideredthebank’slendinginlight of itsprimarybusinessfocusandnotedthat,historically,thebankhasnotbeenatraditionalretail-focusedinstitutionanddoesnotactivelymarketavarietyof homemortgage products,unlikeotherinstitutionsinitsassessmentarea.Smallbusinesslendingactivity wasconsideredgoodandexaminersfoundthebanktohaveanexcellentlevelof communitydevelopmentloans. ExaminersfoundCityNationaltohaveanexcellentlevelof qualifiedcommunitydevelopmentinvestmentsinthebank’sMiami-FortLauderdale-PalmBeachassessmentarea. Examinersnotedthatthebankmadeasignificantinvestmentinaqualifiedinvestment fundbackedbymultiplemortgagesonpropertiesthatprovideaffordablerentalhousingto LMIresidents.Inaddition,examinersnotedthatthebank’scommunitydevelopment investmentshelpaddresstheneedforemploymentforLMIpersonsintheassessmentarea. InevaluatingtheServiceTest,examinersnotedthatCityNational’sretaildeliverysystems wereexcellentandreadilyaccessibletoallgeographiesandtoindividualsof different incomelevels.ExaminersfoundthatCityNationalprovidedarelativelyhighlevelof communitydevelopmentservicesthatwereresponsivetoassessmentareaneeds,particularlythoserelatedtofinancialliteracyandaffordablehousing. CityNational’sEffortssincetheCityNationalEvaluation.SincetheCityNationalEvaluation,CityNationalhasimplementedseveralprogramsforlendingtounderserved communitiesandindividualsinitsassessmentarea.Forexample,CityNationalhas engagedinapartnershipwithNeighborhoodHousingServicesof SouthFlorida (“NHSSF”).31Inaddition,CityNationalrecentlyapprovedtheestablishmentof adown paymentassistanceprogramthatwillprovidequalifiedapplicantswiththelesserof 2percentorupto$2,000foradownpayment.CityNationalalsocreatedaprogramin whichqualifiedborrowerscanrefinancetheirexistingmortgagetotakeadvantageof lower interestrates.TheprogramallowsforLMIfamiliestorefinancewithoutanycosts,asCity Nationalwillbeassumingthecostsof thenewloanaspartof theprogram. 30 TheCityNationalEvaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTest,includingcommunitydevelopmentloans,wasJanuary1,2009,through December31,2011.FortheInvestmentandServiceTests,theevaluationperiodwasMay18,2009(thedateof thepreviousCRAexamination),throughMay29,2012.Examinersconductedafull-scopereviewofthe Miami-Ft.Lauderdale-PalmBeach,Floridaassessmentarea,whichaccountedfor92percentofthebank’s depositsinthemarket.Thebankhasreceivedanoverall“Outstanding”CRAratingfromtheOCCateachof itsevaluationssince2003. 31 Asaresult,17seniorofficersfromCityNationalcommittedover100hoursofservicetocoordinate,structure, develop,andimplementtheNHSSFCitySmartAffordableHousingProgram.ThisprogramprovidesNHSSF withongoingexpertisefromCityNationalandaccesstocreditforLMIhomepurchasers.

86 FederalReserveBulletin|January2016 Viewsof OtherRegulators.TheBoardhasconsideredtherecordof CityNationalin complyingwithfairlendingandotherconsumerprotectionlaws.Inparticular,theBoard hasreviewedtheresultsof consumercomplianceexaminationsof CityNationalconducted bytheOCC.TheexaminationreportsdiscussCityNational’srecordof compliancewith fairlendingandotherconsumerprotectionlawsandregulationsandthebank’spolicies andprocedurestohelpensurecompliancewithfairlendingandotherconsumerprotection lawsandregulations. B.PublicBenefitsof theProposal Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits.Inthisregard,ApplicantshavestatedthattheyintendtomaintainCityNational’s existingfairlendingpoliciesandproceduresfollowingconsummationof thetransaction. Applicantshaveindicatedtheywillserveasasourceof strengthtoCityNationalfollowing theproposedacquisitionandwillprovideadditionalresourcestoCityNationaltoallowthe institutiontocontinuetoservetheneedsof itslocalcommunities.ApplicantsalsorepresentthatBCIintendstoleverageitsexperienceandcapabilitiestoworkwithexisting managementtoexplorethepossibilityof 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 the relativedegreeof difficultyof resolvingtheresultingfirm.Afinancialinstitutionthatcan 32 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 33 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

LegalDevelopments:ThirdQuarter,2015 87 beresolvedinanorderlymannerislesslikelytoinflictmaterialdamagetothebroader economy.34 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Applicantswouldhaveassetsof approximately $42.4billion,mostof whichwouldbeoutsidetheUnitedStates.Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizational structure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof BCIorCityNationalintheeventof financialdistress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthe marketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financial distress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theUnitedStates bankingorfinancialsystem.Basedontheseandalltheotherfactsof record,theBoard determinesthatconsiderationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardherebyapprovestheproposed transaction.35Inreachingitsconclusion,theBoardhasconsideredallthefactsof record inlightof thefactorsthatitisrequiredtoconsiderundertheBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswithallthecommitmentsmadetoandreliedonbytheBoardinconnectionwiththe applicationandonreceiptof allotherregulatoryapprovals.Forpurposesof thisaction, theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbythe Boardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorder,unlesssuch periodisextendedforgoodcausebytheBoardortheFederalReserveBankof Atlanta, actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveSeptember21,2015. 34 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 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,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthe commenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardconcludesthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

88 FederalReserveBulletin|January2016 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

LegalDevelopments:ThirdQuarter,2015 89 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 theBHCActand section225.24of theBoard’sRegulationY1toacquireHudsonCityBancorp,Inc. (“HudsonCity”),anditswhollyownedsubsidiary,HudsonCitySavingsBank(“HCB”), bothof Paramus,NewJersey.HCBisasavingsassociationforpurposesof theBHCAct. Inaddition,M&T’ssubsidiarystatememberbank,ManufacturersandTradersTrust Company(“M&TBank”),Buffalo,NewYork,hasrequestedtheBoard’sapprovalunder section18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)2tomergewith HCB,withM&TBankasthesurvivingentity.M&TBankalsohasappliedundersection9 of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthelocationsof HCB’smainofficeandbranches.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.

90 FederalReserveBulletin|January2016 $103.7million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. HudsonCity,withconsolidatedassetsof approximately$35.4billion,isthe49thlargest insureddepositoryorganizationintheUnitedStates,controllingdepositsof approximately $18.2billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.HudsonCitycontrolsHCB,which operatesinConnecticut,NewJersey,andNewYork.HCBisthefifthlargestinsured depositoryinstitutioninNewJerseywithapproximately$16.5billionindeposits,which represent5.8percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.In addition,HCBisthe35thlargestinsureddepositoryinstitutioninNewYorkwith approximately$3.1billionindeposits,andthe16thlargestinsureddepositoryinstitutionin Connecticutwithapproximately$1.0billionindeposits,whichrepresentlessthan1percent of thetotaldepositsof 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&Twouldbecomethefifth largestdepositoryorganizationinNewJersey,controllingdepositsof approximately $16.6billion,representing5.8percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.8TheBoardrequiresthatsavingsassociationsacquiredby bankholdingcompaniesconformtheirdirectandindirectactivitiestothosepermissiblefor bankholdingcompaniesundersection4of theBHCAct.M&Thascommittedthatallthe activitiesof HudsonCityanditssubsidiarieswillconformtothosepermissibleunder section4of theBHCActandRegulationYorbedivested. InterstateandDepositCapAnalyses TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”)9 amendedsection4of theBHCAct10andtheBankMergerAct11toprovidethat,in general,theBoardmaynotapproveanapplicationbyabankholdingcompanytoacquire aninsureddepositoryinstitution,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 91 of theproposalswouldresultinM&Tcontrollinglessthan1percentof thedepositsof U.S.insureddepositoryinstitutions.Theproposedacquisitionof HCBwouldnotbe prohibitedbythelawof 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 competitorsthatwouldremaininthe bankingmarkets,therelativesharesof thetotaldepositsininsureddepositoryinstitutionsinthe markets(“marketdeposits”)thatM&Twouldcontrol,18theconcentrationlevelsof market depositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“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&TBankissubjecttotheapprovaloftheNewYorkDepartmentofFinancial Services(“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,and Warrencounties,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(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionhaveissuedrevisedHorizontal

92 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 bothparent-onlyandconsolidatedbases,aswellasinformationaboutthefinancialcondi- MergerGuidelines,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.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’smarketdepositswouldbe1.8percentinMetroNewYorkCityand1.6percentin Philadelphia.ThecombinedorganizationwouldcompeteintheMetroNewYorkCityandPhiladelphia bankingmarketswith236and102otherbankingorganizations,respectively. 21 Section4(j)(2)(A)oftheBHCActrequirestheBoardtoconsiderwhethertheproposedacquisitionofHudson City“canreasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience,increased competition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsofinterests,unsoundbankingpractices,orrisktothe stabilityoftheUnitedStatesbankingorfinancialsystem.”12U.S.C.§1843(j)(2)(A).Aspartofitsevaluation ofthesefactors,theBoardreviewsthefinancialandmanagerialresourcesofthecompaniesinvolved,theeffect oftheproposaloncompetitionintherelevantmarkets,therisktothestabilityoftheUnitedStatesbankingor financialsystem,recordsofcompliancewithanti-money-launderinglaws,andthepublicbenefitsofthe proposal.12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrderNo.2012-2(February14, 2012)(“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletin C81(2008);WachoviaCorporation,92FederalReserveBulletinC138(2006);BancOneCorporation,83Federal ReserveBulletin602(1997).Inactingonanoticetoacquireasavingsassociation,theBoardreviewstherecords ofperformanceoftherelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct (“CRA”).12U.S.C.§2901etseq.

LegalDevelopments:ThirdQuarter,2015 93 tionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbanking operations.Inthisevaluation,theBoardconsidersavarietyof information,including publicandsupervisoryinformationregardingcapitaladequacy,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 theproposed combinedorganization.TheBoardhasreviewedtheexaminationrecordsof M&T,Hudson City,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementprograms,andoperations.Inaddition,theBoardhasconsidered informationprovidedbyM&T,thesupervisoryexperiencesthattheBoardandother relevantbanksupervisoryagencieshavehadwiththeorganizations,andtheorganizations’ recordsof compliancewithapplicablebanking,consumer,andantimoney-laundering laws,aswellasinformationprovidedbycommenters. Abank’srisk-managementprogramcomprises,amongotherfunctions,systemsandproceduresforensuringregulatorycompliance,whichincludesBankSecrecyAct/anti-moneylaundering(“BSA/AML”)compliance.24AsM&Thasacknowledged,followingthe submissionof 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 wouldbeastockexchangeinwhicheachshareofHudsonCitycommonstockwouldbeconvertedintoa righttoreceivesharesofM&Tcommonstock,basedonanexchangeratio.M&Twouldfundthecashportion ofthetransactionwithcashonhand.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,and FederalReserveBankofNewYork,DocketNos.13-013-WA/RBHCand13-013-WA/RB-SM(June17,2013), availableatwww.federalreserve.gov/newsevents/press/enforcement/enf20130617a1.pdf.

94 FederalReserveBulletin|January2016 Alsoduringthependencyof M&T’sapplication,supervisoryassessmentsidentifiedweaknessesinM&T’sconsumercomplianceprogram.Inlate2014,theConsumerFinancial ProtectionBureau(“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 the proposalstoaffordM&Tanopportunitytoaddresstheidentifiedweaknesses.Basedon thespecificfactsandcircumstancesof thiscase,particularlythattheweaknessesfirst surfacedafterconsiderationof M&T’sproposalswaswellinprogress,theBoardsuspended considerationof theproposals.28Thereafter,M&Tdedicatedsignificantfinancialand managerialresourcestoaddressingtheidentifiedweaknesses.29Theremedialactionstaken byM&Trequiredasignificantperiodof time,30andM&TandHudsonCityextendedthe termof theirmergeragreementmultipletimes.31 M&ThastakensignificantstepstoremediatetheidentifiedBSA/AMLandconsumer complianceweaknessesandtoimplementcomprehensiveprogramsrelatedtocombatting money-launderingandcomplyingwithconsumerprotectionlawsandregulations.M&T alsohasprovidedtheBoardwithnumeroussubmissionsrelatingtotheseefforts,andthe Boardhasconsideredsupervisoryreviewsrelatedtotheseefforts. M&ThasmadesignificantchangestoitsBSA/AMLcomplianceprogramasrequiredin M&T’sWrittenAgreementwiththeReserveBank.Inparticular,M&Thasinstituted importantenhancementstokeysystemsandprocessesinitsBSA/AMLcompliance program,including,forexample,processesforcollectinginformationtodeterminethe extenttowhichacustomerpresentsamoney-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-merger-t o-october-31-2015.htm.

LegalDevelopments:ThirdQuarter,2015 95 Similarly,M&Thasmadesignificantchangestoitsconsumercomplianceprogramto addresspreviouslyidentifiedweaknessesintheprogram.ThechangesM&Thasimplementedinclude,forexample,theestablishmentof aprocessformanagingconsumer complaintsandaprocessforratingtherisksof noncompliancerelatingtolaws.Wherethe riskof noncomplianceisdeemedtobemoderateorhigh,M&Thasestablishedaschedule fortestingcompliancemorefrequentlythanpeerinstitutions. TheBoardhasconsideredtheresultsof severalreviewsconductedbyReserveBankexaminersof theactionsM&ThastakentoaddresstheweaknessesinitsBSA/AMLand consumercomplianceprograms.TheBoardhasalsoconsultedwith,andconsideredthe viewsof,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,theBoard concludesthatconsiderationsrelatingtothefinancialandmanagerialresourcesandfuture 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).

96 FederalReserveBulletin|January2016 of theproposalontheconvenienceandneedsof thecommunitiestobeserved,theBoard considerswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof the communitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthis evaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepository institutionsundertheCRA.34TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocal communitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,35and requirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity,includinglowandmoderate-income(“LMI”)neighborhoods.36 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideloanapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,or certainothercharacteristics. TheBoardalsoconsidersthesupervisoryassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicants,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe applicantinstitution’sbusinessmodel,marketingandoutreachplans,plansfollowing consummation,andanyotherinformationtheBoarddeemsrelevant. A.PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfrom27commentersinsupportof theproposals. ThesecommentersdescribedfavorableexperienceswithM&Tandcommendedthe companyanditsmanagementforthebank’scommunityoutreacheffortsandsupportfor variouscommunitydevelopmentprogramsandinitiatives,suchasfinancialliteracycounseling,homebuyerworkshops,andhousingrehabilitation.Commentersalsopraisedthe levelof M&TBank’sCRA-eligiblegrants,statingthatthelevelisthehighestamong commercialbanksinNewYork,NewYork,asapercentageof deposits.Thesecommenters contendthattheproposalswouldbenefitconsumersandthecommunitiesservedbythe combinedorganization. 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,and customerswithdisabilities;andlendingprogramsforfirst-timehomebuyersandsmallbusinesses.One commenterallegesthatM&Trefusedtoprovideloansforthepurchaseofcondominiumunitsinaconverted Washington,D.C.,apartmentbuilding,duringtheperiodfollowingM&T’s2009acquisitionofProvident Bankshares.AlthoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsofcommunitiesbymakingcertainproductsorservicesavailableoncertaintermsoratcertainrates,theCRAdoesnot requireaninstitutiontoprovideanyspecifictypesofproductsorservicesnordoesitprescribethecoststobe chargedforthem.

LegalDevelopments:ThirdQuarter,2015 97 LMIneighborhoodsdidnotoperateonSaturday,unlikeHCB’sbranchesinmiddle-and upper-incomeneighborhoods,mostof whichoperateonSaturday.38Inaddition,a commenterallegesthatHCBdidnotestablishadequaterelationshipswithcommunity groupsinNewJersey. CommentersalsocriticizedM&TBank’sandHCB’srecordof mortgagelendingto minorityindividuals,basedondatareportedfor2011and2013undertheHomeMortgage DisclosureActof 1975(“HMDA”).39ThesecommentersallegethatM&TBankandHCB madedisproportionatelyfewerconventionalresidentialmortgageloanstoAfrican AmericanandHispanicborrowersthantowhiteborrowers,andthattheinstitutions deniedmoreapplicationsforconventionalhomepurchaseloansbyAfricanAmericanand Hispanicborrowerscomparedtowhiteborrowers.40Acommenteralsocontendedthat M&TBankmademorehigher-pricedHMDA-reportableloanstoAfricanAmerican borrowersthantowhiteborrowers,41anddenieddisproportionatelymoreHMDAreportableloanstoAfricanAmericanborrowersthantowhiteborrowers.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&TBankhad764domestic bankingoffices. 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”programconductedbythe commentershowedthatM&TBankengagedindisparatetreatmentofAfricanAmericanandHispanic borrowerscomparedtowhiteborrowersinhomeequityconversionmortgageloan(“reversemortgageloan”) originations.ThecommenterfiledacomplaintconcerningtheseallegationsagainstM&TwiththeDepartment ofHousingandUrbanDevelopment,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”);andthe NewYork,NewYork;Philadelphia,Pennsylvania;andWashington,D.C.,areas.WithrespecttoHCB,these allegationsrelatedtotheLongIslandMD;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).

98 FederalReserveBulletin|January2016 significantoriginatorof government-sponsoredmortgageloansandoffersitsownportfolioof affordablemortgages,whicharedesignedtoenhancetheopportunitiesfor borrowersacrossallsocioeconomicstratatoqualifyforhomepurchaseloans.44M&T arguesthattheseloansprovidemoreflexiblefeaturesthanconventionalhomepurchase mortgageloans,includingbelow-marketrates,lesscashrequiredout-of-pocketfrom borrowers,lendercreditsthatcanbeusedforclosing-costassistance,andreduceddown paymentandreserverequirements.Moreover,M&TcontendsthatM&TBankhas numerouslendingprogramswithfeaturesthatdonotqualifyasconventionalhome purchaseloansandthattheseprogramsgenerallyofferloanswithhigherrisklevelsand loan-to-valueratios,lowerdownpaymentrequirements,andrequiresmallercashoutlays whencomparedtoconventionalhomemortgageloans.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,andUSDAmortgageproducts provideLMIborrowersandthosepurchasinginLMIcensustractswithdiscountedratesandlendercredits thatcanbeusedforclosing-costassistance. 46 Forexample,M&Targuesthat,althoughHCBoriginatedonly10conventionalhomepurchaseloansto AfricanAmericanborrowersintheNewYork,NewYork,areain2011,HCBapproved24of25homepurchaseloanapplicationsbymixed-raceapplicantsand44of56ofsuchloanapplicationsbyHispanicapplicantsinthesameareain2011.Inaddition,HCBapproved50percentofapplicationsbyAfricanAmerican borrowersandapproximately65to70percentofapplicationsbyHispanicborrowersforrefinanceandhome improvementloansduring2011intheNewYork,NewYorkarea. 47 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 48 12U.S.C.§2906.

LegalDevelopments:ThirdQuarter,2015 99 cationsprocessbecauseitrepresentsadetailed,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’sHMDAdata,inadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulations,toassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)inthe institution’sassessmentareas;thegeographicdistributionof suchloans,includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;49theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies.TheBoardconsiderstheoverallCRAratingandthe ratingonthelendingtesttobeimportantindicators,whentakenintoconsiderationwith otherfactors,indeterminingwhetheradepositoryinstitutionishelpingtomeetthecredit needsof 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

100 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,andprovidingservicesto benefitLMIindividuals. 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;theNew York–NorthernNewJersey–LongIsland,NewYork–NewJersey–Pennsylvania,MSA(“NewYorkCity MSA”);thePhiladelphia–Camden–Wilmington,Pennsylvania–NewJersey–Delaware–Maryland,MSA (“PhiladelphiaMSA”);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;andadequate serviceperformanceinDelaware,Florida,andthePhiladelphiaMSA.

LegalDevelopments:ThirdQuarter,2015 101 ation”).56Examinersnotedthatthebankdemonstratedanadequatelevelof community developmentlending,qualifiedinvestmentactivity,andcommunitydevelopmentservices. Examinersalsonotedthatthebankdemonstratedoccasionaluseof innovativeorcomplex qualifiedinvestments,communitydevelopmentloans,orcommunitydevelopment services,andthatthebankdemonstratedexcellentresponsivenesstocreditandcommunity developmentneedsinitsassessmentareas. 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&Thasmadechangesandenhancementstoitsconsumercompliancesystemsand processesandhastakenstepstoaddressweaknessesthatwereidentifiedintheexamination 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.

102 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 deployedtwoinnovativeandflexibleloanproductswithreducedinterestratestomeet communitycreditneeds.TheexaminersassignedHCBa“LowSatisfactory”rating because,inexaminers’view,thelevelof communitydevelopmentlendingwaslow comparedtotheresourcesavailabletothebank,andexaminerssuggestedthatHCBcould improveitsmarketshareof communitydevelopmentlending. ExaminersassignedHCBa“HighSatisfactory”ratingontheInvestmentTestbasedonits levelof qualifiedcommunitydevelopmentinvestments.From2008through2010,the bankmadesignificantinvestmentsinsecuritiesbackedbymortgageloansmadetoLMI borrowers,withthemajorityof suchloanshavingbeenoriginatedinHCB’sassessment areas.Theseinvestmentsrepresentedasignificantincreasefromthepriorevaluation period.HCBalsodoubleditsinvestmentinanonprofitcommunitydevelopmentfinancial institutionthatprovidesinnovativefinancingandtechnicalassistancetofosterthecreation of qualityhomes,educationfacilities,andemploymentopportunitiesinunderserved communitiesinNewJersey.ExaminersnotedthatHCBmadequalifiedcommunitydevelopmentdonationsduringtheevaluationperiod,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 103 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,thecombinedbankwouldserveabroaderandmorediversifiedgeographicareathaneitherM&TBankorHCBonastandalonebasis.Uponconsummationof theproposalandthemergerof HCBintoM&TBank,M&Twillassumethe obligationsof HCB,includingHCB’sobligationsundertheConsentOrdertoopentwo newbranchesinmajority-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’scurrentapproachto promotingtheseaffordablemortgageproducts.M&TnotesthatM&TBankfocusesits 61 PressRelease,ConsumerFinancialProtectionBureau(September24,2015),availableatwww.consumerfinance .gov/newsroom/cfpb-and-doj-order-hudson-city-savings-bank-to-pay-27-million-to-increase-mortgagecredit-access-in-communities-illegally-redlined/;PressRelease,DepartmentofJustice(September24,2015), availableatwww.justice.gov/opa/pr/justice-department-and-consumer-financial-protection-bureau-reachsettlement-hudson-city. 62 15U.S.C.§1691etseq. 63 42U.S.C.§3601etseq. 64 ThesecommunitiesincludecommunitiesinNewJersey,whereaccordingtoonecommenter,HCBgenerallyhas apoorCRAperformancerecord.

104 FederalReserveBulletin|January2016 advertisingforsuchaffordablemortgageloanproductsinnewspapersthataretargetedto reachminorityand/orLMIresidentsandincommunity-basednewslettersthatservethose residents.M&TBankalsopromotesitsaffordablemortgageproductsthroughreferrals, loanofficerinteractionswithcustomers,andparticipationwithnonprofithousingcounselorsandcommunityreinvestmentorganizations.M&Tstatesthatithasfoundthat participationwithsuchorganizationsincommunityevents,suchashousingfairs,seminars, andsimilarevents,isaneffectivemeanstopromotethefeaturesandbenefitsof itsaffordablemortgageloanproducts. M&TalsoplanstocontinuetoprovidecommunitysponsorshipsthatbenefitLMIand minorityneighborhoods.M&T’sexistingcommunitysponsorshipsinclude,forexample, financialsupportfororganizationsliketheWestminsterCommunityCharterSchool,an elementaryschoolthatservesLMIandminorityneighborhoodsinBuffalo,NewYork. Followingconsummationof theproposal,theBoardexpectsthatM&Twillcooperatefully withtheDOJandtheCFPBandthatM&Twillensurethatthecombinedorganization commitstheappropriateresourcestointegratetheoperationsof HCBintothoseof M&T Bankandfulfillalloutstandingobligationsof HCBunderapplicablelawandthe ConsentOrder. 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,includingrenovationloansunder section203(k)of theNationalHousingAct;67andavarietyof CRAproductsfocusedon theneedsof LMIborrowers. 65 Inaddition,acommenterexpressedconcernsthatM&TBankwouldclosebranchesinNewYorkandthereby decreaseaccesstobankingservicesinLMIneighborhoods.M&Tdoesnotcurrentlyhaveanyplanstoclose anyHCBorM&TBankbranchesuponanacquisitionofHCBandisstillevaluatingpotentialbranchconsolidationopportunities.M&TBankhasidentifiedthreepotentialconsolidationopportunitieswhereM&TBank branchesareincloseproximitytoHCBbranchesandwherethecharacteristicsoftherespectivebranches—i.e., thefloorplans,customerservicingelements(e.g.,drive-up,tellerlines),branchcondition,andlocation— mightsupportaconsolidationdecision. Inthisregard,M&TBank’sbranchclosingrecordwillcontinuetobereviewedbyReserveBankexaminersin thecourseofconductingCRAperformanceevaluations.Moreover,federallawrequiresaninsureddepository institutiontoprovidenoticetothepublicandtotheappropriatefederalbankingagencybeforeclosinga branch.Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJoint PolicyStatementRegardingBranchClosings(64FederalRegister34844(June29,1999)),requiresthatabank providethepublicwithatleast30days’notice,andtheappropriatefederalbankingagencywithatleast 90days’notice,beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsand othersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings. 66 CommentersexpressedconcernsthatM&Twouldnotintroducenewproductsandservicestothecustomersof HudsonCity,especiallytoitsLMIcustomers. 67 12U.S.C.§1709(k).

LegalDevelopments:ThirdQuarter,2015 105 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&Ttocompleteitseffortstoimplementeffectiveconsumercomplianceand managementprogramsacrosstheentireenterpriseandexpectsthatM&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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.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.

106 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,andgeographicscopeto customersof HudsonCity.Inaddition,theacquisitionswouldensurecontinuityand strengthof servicetocustomersof HudsonCity. TheBoardconcludesthattheconductof theproposednonbankingactivitieswithinthe frameworkof RegulationY,Boardprecedent,andthisOrderisnotlikelytoresultin significantadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.Onthebasisof theentirerecord,including conditionsnotedinthisOrder,andforthereasonsdiscussedabove,theBoardbelievesthat thebalanceof 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 107 Establishmentof Branches Asnoted,M&TBankhasappliedundersection9of theFRAtoestablishbranchesatthe currentlocationsof HCB.74TheBoardhasassessedthefactorsitisrequiredtoconsider whenreviewinganapplicationunderthatsection.75ForthereasonsdiscussedinthisOrder, theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe proposalsshouldbe,andherebyare,approved.76Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsider undertheBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes. Approvalof theseproposalsisspecificallyconditionedoncompliancebyM&Twithall commitmentsmadeinconnectionwiththeseproposalsandtheconditionssetforthinthis Order.Thecommitmentsandconditionsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionswithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. 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 authorityforsavingsassociationsthatbecomebankstocontinuetooperatebranchesthattheyoperated immediatelybeforebecomingbanks.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.The commenters’requestsdonotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthat wouldbeclarifiedbyapublichearingormeeting.Inaddition,therequestsdonotdemonstratewhythewritten commentsdonotpresentthecommenters’viewsadequatelyorwhyameetingotherwisewouldbenecessaryor appropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublic hearingisnotrequiredorwarrantedinthiscase.Accordingly,therequestsforapublichearingormeetingon theproposalsaredenied. Inaddition,acommenterrequestedafurtherextensionofthecommentperiodfortheproposals.TheBoard’s RulesofProcedurecontemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.12CFR262.25(b)(2).The commenter’srequestsforadditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionofthe publiccommentperiodfortheseproposals.Accordingly,theBoardhasdeterminednottoextendfurtherthe publiccommentperiod.

108 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 1. West80CenturyRoad,Paramus,NewJersey 2. 532OceanAvenue,JerseyCity,NewJersey 3. 2530KennedyBoulevard,JerseyCity,NewJersey 4. 7533BergenlineAvenue,NorthBergen,NewJersey 5. 7EastProspectStreet,Waldwick,NewJersey 6. 249KinderkamackRoad,Oradell,NewJersey 7. 495ManilaAvenue,JerseyCity,NewJersey 8. 790QueenAnneRoad,Teaneck,NewJersey 9. 897ProspectStreet,GlenRock,NewJersey 10. 684AndersonAvenue,CliffsidePark,NewJersey 11. 304EssexStreet,Lodi,NewJersey 12. 330KinderkamackRoad,Emerson,NewJersey 13. 731BrickBoulevard,Brick,NewJersey 14. 887AllwoodRoad,Clifton,NewJersey 15. 119CentralAvenue,Westfield,NewJersey 16. 80UnionAvenue#86,Cresskill,NewJersey 17. 62-64MainStreet,Millburn,NewJersey 18. 767BloomfieldAvenue,WestCaldwell,NewJersey 19. 114-116KingsHighwayEast,Haddonfield,NewJersey 20. 365TuckerAvenue,Union,NewJersey 21. 167EastKennedyBoulevard#169,Lakewood,NewJersey 22. 2335ChurchRoad,CherryHill,NewJersey 23. 379RamapoValleyRoad,Oakland,NewJersey 24. 57WestMainStreet,Ramsey,NewJersey 25. 94NorthMapleAvenue,Ridgewood,NewJersey 26. 1070MainStreet,RiverEdge,NewJersey 27. 1002MantuaPike,WoodburyHeights,NewJersey 28. 303MainStreetandCenterAvenue,FortLee,NewJersey 29. 351WestMainStreet,Freehold,NewJersey 30. OnePaddockPlaza,WestLongBranch,NewJersey 31. 587SummitAvenue,JerseyCity,NewJersey 32. 715RiverRoad,NewMilford,NewJersey 33. 341SpringfieldAvenue,Summit,NewJersey 34. 1406Route130,Cinnaminson,NewJersey

LegalDevelopments:ThirdQuarter,2015 109 35. 632WestwoodAvenue,RiverVale,NewJersey 36. 128CenterGroveRoad,Randolph,NewJersey 37. 45OutwaterLane,Garfield,NewJersey 38. 10WestMainStreet,Denville,NewJersey 39. 355ApplegarthRoad,Monroe,NewJersey 40. 216PassaicAvenue,Kearny,NewJersey 41. 782LaceyRoad,ForkedRiver,NewJersey 42. 35aMarshallHillRoad,WestMilford,NewJersey 43. 157SeventhAvenue,Newark,NewJersey 44. 72MtVernonPlace,Newark,NewJersey 45. 187EagleRockAvenue,Roseland,NewJersey 46. 641ShunpikeRoad,Chatham,NewJersey 47. 18JamesStreet,FlorhamPark,NewJersey 48. 977ValleyRoad,Gillette,NewJersey 49. 90BarclayCenter,Route70,CherryHill,NewJersey 50. 55BrickBoulevard,Brick,NewJersey 51. 2100Route70,Manchester,NewJersey 52. 209Route206South,Chester,NewJersey 53. 75Route35,Middleton,NewJersey 54. 232SouthLivingstonAvenue,Livingston,NewJersey 55. 313HenryStreet,Orange,NewJersey 56. 150NewarkPomptonTurnpike,Pequannock,NewJersey 57. 200GrandAvenue,Hackettstown,NewJersey 58. 261GodwinAvenue,Wyckoff,NewJersey 59. 340MainStreet,Madison,NewJersey 60. 577LakehurstRoad,TomsRiver,NewJersey 61. 288MainStreet,Orange,NewJersey 62. 1965StateRoute57,Hackettstown,NewJersey 63. 50EastPalisadeAvenue,Englewood,NewJersey 64. 60ParkPlace,Newark,NewJersey 65. 1328RiverAvenue,Lakewood,NewJersey 66. 217BerdanAvenue,Wayne,NewJersey 67. 335AtlanticCityBoulevard,Bayville,NewJersey 68. 240BaldwinRoad,Parsippany,NewJersey 69. 1000Route70,Lakewood,NewJersey 70. 277EisenhowerParkway,Livingston,NewJersey 71. 408EastMadisonAvenue,Dumont,NewJersey 72. 89InterstateShoppingCenter,Ramsey,NewJersey 73. 455CountyRoad,Marlboro,NewJersey 74. 1018WashingtonStreet,Hoboken,NewJersey 75. 115FranklinTurnpike,Mahwah,NewJersey 76. 580NorthMainSt.,Barnegat,NewJersey 77. 601Route72East,Manahawkin,NewJersey 78. 45SouthNewYorkRoad,Galloway,NewJersey 79. 435LewandowskiStreet,Lyndhurst,NewJersey 80. 108LaceyRoad,Whiting,NewJersey 81. 85GodwinAvenue,MidlandPark,NewJersey 82. 547Broadway,Bayonne,NewJersey 83. 3495U.S.Highway1,Suite2,Princeton,NewJersey 84. 370Route130,EastWindsor,NewJersey 85. 2407StateRoute71,SpringLake,NewJersey 86. 523ShoppesBoulevard,NorthBrunswick,NewJersey 87. 1168Highway34,Aberdeen,NewJersey 88. 416SouthMainStreet,ForkedRiver,NewJersey

110 FederalReserveBulletin|January2016 89. 1620Route23North,Wayne,NewJersey 90. 210EnterpriseDrive,Rockaway,NewJersey 91. 51Route22East,GreenBrook,NewJersey 92. 3562Route27,Princeton,NewJersey 93. 3897Route9,OldBridge,NewJersey 94. 166StateRoute31,Flemington,NewJersey 95. 779FranklinAvenue,FranklinLakes,NewJersey 96. 3TreeFarmRoad,Pennington,NewJersey 97. 889FischerBoulevard,TomsRiver,NewJersey NewYorkBranchestoBeEstablished 1. 53345MainRoad,Southold,NewYork 2. 18EastMontaukHighway,HamptonBays,NewYork 3. 1591RichmondRoad,StatenIsland,NewYork 4. 2220ForestAvenue,StatenIsland,NewYork 5. 25HillStreet,Southampton,NewYork 6. 1430OldCountryRoad,Riverhead,NewYork 7. 2212HylanBoulevard,StatenIsland,NewYork 8. 133MainStreet,WesthamptonBeach,NewYork 9. 320MamaroneckAvenue,WhitePlains,NewYork 10. 389HalsteadAvenue,Harrison,NewYork 11. 115SouthRidgeStreet,PortChester,NewYork 12. 228SouthMainStreet,NewCity,NewYork 13. 1019ParkStreet,Peekskill,NewYork 14. 1961CommerceStreet,YorktownHeights,NewYork 15. 3031EastMainStreet,MoheganLake,NewYork 16. 88FourthStreet,NewRochelle,NewYork 17. 302SomersCommons,BaldwinPlace,NewYork 18. 4106HylanBoulevard,StatenIsland,NewYork 19. 248MainStreet,CenterMoriches,NewYork 20. 301Route25a,MillerPlace,NewYork 21. 2040BostonPostRoad,Larchmont,NewYork 22. 74825MainRoad,Greenport,NewYork 23. 126NorthMainStreet,EastHampton,NewYork 24. 300MamaroneckAvenue,Mamaroneck,NewYork 25. 190GleneidaAvenue,Carmel,NewYork 26. 2935VeteransRoadWest,SuiteF,StatenIsland,NewYork 27. 903MontaukHighway,Bayport,NewYork 28. 1320StonyBrookRoad,Suite140,StonyBrook,NewYork 29. 2102MontaukHighway,Bridgehampton,NewYork

LegalDevelopments:ThirdQuarter,2015 111 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 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. 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.

112 FederalReserveBulletin|January2016 Becausethistransactioninvolvestheacquisitionbyabankholdingcompanyof abank andnonbankcompanies,theBoardhasreviewedthetransactionunderbothsection3and section4of theBHCAct.Section3governstheacquisitionof abank;section4establishes thestandardsgoverningtheacquisitionof nonbankcompanies. InterstateandDepositCapAnalyses Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a bankinastateotherthanthehomestateof thebankholdingcompanywithoutregardto whetherthetransactionisprohibitedunderstatelaw.7Underthissection,theBoardmay notapproveanapplicationthatwouldpermitanout-of-statebankholdingcompanyto acquireabankinahoststateif thebankhasnotbeeninexistenceforthelesserof thestate statutoryminimumperiodof timeorfiveyears.8Inaddition,theBoardmaynotapprove aninterstateacquisitionif thebankholdingcompanycontrolsorwouldcontrolmorethan 10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStatesor 30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetarget bank’shomestateorinanystateinwhichtheacquirerandtargethaveoverlapping bankingoperations.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 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-depositratiotestestablishedunder section109isnotsatisfiedbyPWBoneyearafterconsummation,PWBwouldnotviolatesection109unlessit

LegalDevelopments:ThirdQuarter,2015 113 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby 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.TheBoardalso considerstheabilityof theapplicanttoabsorbthecostsof theproposalandtocomplete effectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoard considersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof the financialandmanagerialresourcesandtheproposedbusinessplan. PacWestandPWBarebothwellcapitalizedandwouldremainsoonconsummationof the proposedtransaction.Theproposedtransactionisabankholdingcompanymergerthatis structuredasanexchangeof shares.16Theassetquality,earnings,andliquidityof PWB andSquare1Bankareconsistentwithapproval,andPacWestappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstituisalsofoundbytheFDICnottobereasonablyhelpingtomeetthecreditneedsofthecommunitiesserved, includingthroughtheFDIC’sevaluationofthebank’sperformancerecordundertheCRA,whichiscurrently deemedtobe“Satisfactory.”See12U.S.C.§1835a. 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.

114 FederalReserveBulletin|January2016 tions’operations.17Inaddition,futureprospectsareconsideredconsistentwithapproval. 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-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandsenior executiveofficersof PacWesthavesubstantialknowledgeof andexperienceinthebanking andfinancialservicessectors. TheBoardalsohasconsideredPacWest’splansforimplementingtheproposal.PacWestis devotingsignificantresourcestoaddressallaspectsof thepost-acquisitionintegration processfortheseproposals.PacWesthasademonstratedrecordof successfullyintegrating organizationsintoitsoperationsandrisk-managementsystemsfollowingacquisitions. Since2000,PacWesthasacquiredandsuccessfullyintegratedintoitsoperationsmorethan 20bankingorganizations.Aspartof itsintegrationprocess,PacWestconductsacomprehensivereviewof thetarget’sactivitiesandthecompliance,policies,procedures,and internalmonitoringassociatedwiththeseactivities.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 17 OnecommenterexpressedconcernaboutthesafetyandsoundnessofPacWest,arguingthatthecompanyhasa highloan-to-depositratio,poorassetquality,andheavycoststructure.TheBoardhasconsideredthiscomment aswellasthefinancialresourcesofthecombinedorganization,includingassetqualityandothermeasuresof financialability. ThiscommenteralsonotedthatPacWesthaditscreditratingsbyFitchRatingswithdrawninApril2015. PacWestdoesnothaveanyoutstandingdebt,isnotissuinganydebt,andhasnoplanstoissuedebt.Asa result,PacWestaskedFitchnottoprovidearatingtothecompany,andPacWestdidnotrenewitscontract withFitch.Inaddition,inannouncingthewithdrawalofPacWest’srating,Fitchaffirmedtheratingand assignedPacWestastableoutlook. 18 Afterconsummation,thechiefexecutiveofficerandpresidentofSquare1Bankwillbecomethepresidentof theSquare1divisionofPWB,andonecurrentdirectorofSquare1Financialwillbeappointedtotheboardof directorsofPacWest.

LegalDevelopments:ThirdQuarter,2015 115 Basedonallthefactsof record,includingPacWest’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof PacWestandSquare1Financialincombattingmoneylaunderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublic benefits.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCRA.19TheCRArequiresthefederalfinancial supervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,20andrequirestheappropriatefederalfinancialsupervisoryagencytoassessa depositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloan applicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainother characteristics. TheBoardalsoconsidersthesupervisoryassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans followingconsummation,andanyotherinformationtheBoarddeemsrelevant. TheBoardconsultedwiththeFDICconcerningitsevaluationof theCRAperformanceof PWBandSquare1Bank,PWB’scompliancewithfairlendingandconsumerprotection lawsandregulations,andthecommentsreceivedontheproposal.TheFDICconsidered thecommentsopposingtheproposal,includingallegationsagainstPWBandSquare1 Bank,aspartof theFDIC’sreviewof theproposedmergerof thetwobanksandhas approvedthebankmerger. A.PublicCommentsRegardingtheProposal Inthiscase,theBoardreceived17commentsfrom13commentersobjectingtothe proposalonthebasisof PWB’sCRAperformancerecordandplansformeetingthecredit needsof thecommunitiesservedbythecombinedorganization.Of the13opposing commenters,10commenters,ledbyaCaliforniabasedcommunitygroup,submitted substantiallyidenticalcommentsraisingidenticalissuesandconcerns.22Thesecommenters raisedissuesandconcernsaboutPacWestanditsCRAactivitiessimilartothoseraisedin 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.

116 FederalReserveBulletin|January2016 connectionwiththeapplicationforBoardapprovalof PacWest’s2014acquisitionof CapitalSourceInc.,whichwasgrantedbytheBoard.23 Commentersarguedthatonly42percentof thebank’sbusinessloansweremadetobusinesseswithlessthan$1millioninannualrevenuesin2014,andthatthebankshould extendatleast50percentof itsbusinessloanstothosebusinessesannually.24Commenters alsoarguedthatPacWesthasnotmadesufficientreinvestments,includingthroughsmall businesslending,inruralareasandthatthecompanyhasahistoryof closingbranchesin ruralareas.25Inaddition,commentersarguedthatSquare1BankhasastrongerCRA performancerecordthanPacWestandtheproposalwilldiluteSquare1Bank’sCRA performancebecausedepositscollectedbySquare1BankinNorthCarolinamaybereinvestedinPacWest’sassessmentareasoutsidethatstate.Itwasalsoarguedthattheproposal wouldnotprovideapublicbenefittotheaffectedcommunities.Thesecommentersurged thatapprovalof PacWest’sproposalbeconditionedonthesubmissionof astronger,multiyearCRAplanthatismadeavailablepublicly,includingonPacWest’swebsite. PWB’sandSquare1Bank’sBusinessesandPacWest’sResponsestoComments.PWB focusesonservingsmall-tomedium-sizedbusinessesthroughabroadrangeof banking productsandservices,includingdepositproducts,moneymarketaccounts,commercial loans,realestateconstructionloans,andSBA-guaranteedloans.Asubstantialmajorityof PWB’sloansareoriginatedwithinitslocalcommunitiestobusinesscustomersof differentrevenuesizes.PWBhas81brancheslocatedthroughoutCalifornia. Square1Bankprimarilyservesventurecapitalandprivateequityfirmsandtheirportfolio companiesbyprovidingdepositproducts,termcommercialrevolvinglinesof credit, 23 SeePacWestBancorp,FRBOrderNo.2014-3(April1,2014).Asnotedbelow,PWB’sCRAperformance recordhasbeenevaluatedbytheFDICsincetheCapitalSourceacquisitionandhasimprovedsignificantly. 24 Commentersalsoexpressedconcernabout:(i)PacWest’sdecisiontodeveloptwonewsmallbusinessproducts ratherthanparticipateinCalifornia’sstateloanguaranteeprogramassuggestedbycommenters;(ii)PacWest’s failuretocommitatleast$50,000peryeartotechnicalassistanceforsmallbusinesses;(iii)theabsenceofa formalizedprogramunderwhichPacWestwouldrefertocommunitylendersatleast20percentofthesmall businessloanapplicantsdeclinedbyPacWest;(iv)PacWest’sfailuretodevelopabankaccountwithfeatures suggestedbyonecommenter;(v)PacWest’sfailuretocommitatleast50percentofitscharitablecontributions tohousingandeconomicdevelopment;(vi)thelevelofcharitableandphilanthropicactivitybySquare1Bank; (vii)theconcentrationofPacWestcommunitydevelopmentlendingandinvestmentsintaxcreditsand non-equityequivalentinvestments;and(viii)theconcentrationofSquare1BankCRAlendingandinvestments inCRA-qualifyingmortgagebackedsecurities. AlthoughtheBoardhasrecognizedthatbankscanhelptoservethebankingneedsofcommunitiesbymaking certainproductsorservicesavailableoncertaintermsoratcertainrates,theCRAneitherrequiresaninstitutiontoprovideanyspecifictypesofproductsorservicesnorauthorizesthefederalbankingagenciestodirecta bank’scommunitydevelopmentinvestmentorlendingactivitiestospecificgroups,individuals,projects,or typesofinvestmentssuchasthoserecommendedbycommenters.Moreover,neithertheCRAnortheagencies’ implementingrulesrequirethatinstitutionsengageinaspecificactivitysuchascharitablegivinginorderto meetcommunitycreditneedsofthecommunitiestheinstitutionsserve.Asexplainedbelow,theBoardhas consideredwhethertheproductsPacWestandSquare1Financialhavechosentoprovidehelpmeetthecredit needsoftheentirecommunity,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,althoughit commitsthatPWB’sCRAactivitieswillrepresentacertainpercentageofcoredeposits,theCRAplandefines “coredeposits”toexcluderoughly50percentofthebank’sdeposits.Theresult,incommenters’views,isthat PacWest’sCRAplanoverstatesthelevelofCRAactivitiesasapercentageofdeposits.NeithertheCRAnor thefederalbankingagencies’implementingrulesrequirethataninstitution’sCRAactivitiesrepresenta specificpercentageofitsdeposits.Rather,aninstitution’sCRAperformanceismeasuredbyperformancetests andstandardsoutlinedinthefederalbankingagencies’CRAregulations.See12CFR228.21etseq.

LegalDevelopments:ThirdQuarter,2015 117 asset-basedloans,creditcards,foreignexchange,cashmanagement,andlettersof credit. Square1Bankalsohasarecentlyformedassetmanagementsubsidiarythatprovides investmentadvisoryservicestoclientsof Square1Bank.Square1Bankoperatesone branchinDurham,NorthCarolina. PacWestcontendsthatPWB’sloanstobusinesseswithannualrevenuesof $1millionor lessgrewfromapproximately34percentof itssmallbusinessloansin2012to42percentof 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,itis committedtoincreasingthedollaramountof PWB’sCRAactivitiesbyatleast10percent overthepreviousyear’sresultsif PWBhaspositivenetincomeateachyearend.PacWest statesthatinnocasewouldthedollaramountof PWB’soverallcommitmentbelessthan thepreviousyear’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’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitu- 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 27 12U.S.C.§2906.

118 FederalReserveBulletin|January2016 tion’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—includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;28theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies.Consequently,theBoardconsiderstheoverallCRA ratingandtheratingonthelendingtesttobeimportantindicators,whentakeninto considerationwithotherfactors,indeterminingwhetheradepositoryinstitutionishelping tomeetthecreditneedsof itscommunities. CRAPerformanceof PWB.PWBwasassignedanoverall“Satisfactory”ratingatitsmost recentCRAperformanceevaluationbytheFDIC,asof October27,2014(“PWBEvaluation”).29PWBreceiveda“HighSatisfactory”ratingontheLendingTestandtheInvestmentTestandan“Outstanding”ratingontheServiceTest.Theseratingsreflectsignificant improvementsinthebank’sCRAperformancerecordsinceitspreviousCRApublic evaluation,datedOctober2010.Inparticular,PWB’sratingsontheLendingTestandthe InvestmentTestimprovedfrom“LowSatisfactory”to“HighSatisfactory,”anditsrating ontheServiceTestimprovedfrom“LowSatisfactory”to“Outstanding.” ExaminersfoundthatPWB’sresponsivenesstothecreditneedsof itsassessmentareaswas good.Examinersnotedthatasubstantialmajorityof thebank’sloanswereoriginated withinthebank’sassessmentareasandthedistributionof borrowersreflectedadequate penetrationamongbusinesscustomersof differentrevenuesizes,giventhebank’sprimary lendingfocusonsmall-andmedium-sizedbusinesses.Examinersalsonotedthatthe geographicdistributionof loansreflectedgoodpenetrationthroughouttheassessment areas.PWBalsoexhibitedadequatepenetrationamongbusinesscustomersof different revenuesizes,andPWB’soriginationof smallbusinessloanstobusinesseswithannual revenueunder$1millionwassimilartoorbetterthanpeerbanksservingthesameassessmentareas.FDICexaminersalsonotedthatwhilePWBmadelimiteduseof innovative and/orflexiblelendingpractices,thebankmadearelativelyhighlevelof communitydevelopmentloansandhadarecordof servingthecreditneedsof themosteconomically disadvantagedareas,low-incomeindividuals,and/orverysmallbusinesses.Moreover, 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 119 examinersfoundthattherelativelyhighlevelof communitydevelopmentloansmadeby PWBaddressedaffordablehousing,communityservices,economicdevelopment,andrevitalizationaspectsof communitydevelopmentlending. ExaminersfoundthatPWBhadasignificantlevelof qualifiedcommunitydevelopment investmentsandgrants,andparticularlythosethatarenotroutinelyprovidedbyprivate investors.ExaminersfoundthatPWBwasaleaderforcommunitydevelopmentinvestmentsandgrants.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,and2012understrategicplansapprovedbytheFDICin December2008andDecember2011. 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. 30 TheFDICwillcontinuetoreviewPWB’sbranchclosingrecordinthecourseofconductingCRAperformance evaluations.Moreover,federallawrequiresaninsureddepositoryinstitutiontoprovidenoticetothepublic andtotheappropriatefederalbankingagencybeforeclosingabranch.Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicyStatementRegardingBranchClosings(64 Fed.Reg.34,844(June29,1999)),requiresthatabankprovidethepublicwithatleast30days’notice,andthe appropriatefederalbankingagencywithatleast90days’notice,beforethedateofaproposedbranchclosing. Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings. 31 TheCRAregulationsprovidethattheappropriatefederalbankingagencywillassessabank’srecordof meetingthecreditneedsofitsassessmentareasunderastrategicplanif,amongotherthings,thebankinvites publiccommentontheplanandtheplanisapprovedbysuchagency.TheFDICapprovedSquare1Bank’s currentstrategicplaninDecember2011,pursuantto12CFR345.27.

120 FederalReserveBulletin|January2016 TheFDIChasconductedannualupdatesonSquare1Bank’scompliancewithitsCRA StrategicPlanfor2013and2014.ExaminersconcludedthatSquare1Bankexceededits goalfor“Satisfactory”forCRAloansandinvestmentsandexceededitsgoalfor “Outstanding”forbothCRAgrantsandCRAserviceactivityineachof theyears2013 and2014.32 PWB’sEffortsSincethePWBEvaluationandPlansfortheCombinedBank.PacWesthas representedthat,sincethePWBEvaluationwasconducted,communityreinvestmenthas remainedafocusof theorganization’sbankingactivities.Forexample,sincethetime periodcoveredbythePWBEvaluation,PWBhasincreasedthepercentageof itssmall businessloansmadetobusinesseswithlessthan$1millioningrossannualrevenues. PacWestrepresentsthatmarketingeffortsduringthefirstandsecondquartersof 2015have resultedinimprovedsmallbusinessactivityinthebank’sruralmarkets.PacWestalso representsthatitscurrentlevelof communitydevelopmentlendingisonpacetoexceedits performanceduringthetimeperiodcoveredbythePWBEvaluationandthatPWBhas significantlyincreaseditsinvestmentsanddonationswithinitscommunities.Further, PacWestrepresentsthatthebank’sinvestmentsanddonationsthroughthefirstsixmonths of 2015alreadyexceed,byawidemargin,theannualizedamountof thebank’sinvestments anddonationsduringthetimeperiodcoveredbythePWBEvaluation.PacWestalsorepresentsthatitisonpaceforits2015communitydevelopmentservicehourstoexceeditsprior yearbyasubstantialamount. 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,upon consummationof theproposal,PacWestwilldedicateafull-timeofficerforcommunity reinvestmentmattersinNorthCarolinareinforcedbyPWB’sCRAresourcesinCalifornia. Thetransactionisintendedtocombinethestrengthsof thetwoorganizationstocreatea morediversifiedbankwithgreatergeographicandproductreach.Thecurrentsuiteof productsandservicesofferedbyeachof PWBandSquare1Bankwillcontinuetobe offeredbythecombinedorganization. 32 Acommenterarguedthat,althoughSquare1BankhasprovidedgrantstocommunitygroupsinNorthCarolinaandhassatisfiedtherequirementsoftheCRA,thebank’sgrantmakinginitscommunitydoesnotbenefit thosemostinneedofreinvestmentfrombankinginstitutionsanddoesnotmeetthespiritoftheCRA requirements.

LegalDevelopments:ThirdQuarter,2015 121 Followingconsummation,Square1Bankwouldoperateasadivisionof PWB.Givenits businessfocusonlendingtoventurecapitalfirms,Square1Bankhistoricallyhasnot 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,as wellassimplerapplicationprocessesandunderwritingrequirements,thantraditionalbusinesslinesof 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 33 Sections604(d)and(e)oftheDodd-FrankAct,amending12U.S.C.§§1842(c)(7)and1843(j)(2)(A).

122 FederalReserveBulletin|January2016 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.34These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.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,unsound 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 36 12CFR225.28(b)(6).

LegalDevelopments:ThirdQuarter,2015 123 bankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancial system.”37 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,theBoardhasdeterminedthatthe proposalsshouldbe,andherebyare,approved.38Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsider undertheBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecifically conditionedoncompliancebyPacWestwithalltheconditionsimposedinthisOrder, includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetothe Boardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsand commitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnection withitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunder applicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardorFederalReserveBankof SanFrancisco,actingunderdelegated authority. 37 12U.S.C.§1843(j)(2)(A). 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’ requestsdonotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthatwouldbeclarified byapublichearing.Inaddition,therequestsdonotdemonstratewhythewrittencommentsdonotpresentthe commenters’viewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoarddeterminesthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublichearingontheproposalaredenied. Inaddition,commentersrequestedanadditionalextensionofthecommentperiodfortheproposal.The Board’sRulesofProcedurecontemplatethatthepubliccommentperiodwillnotbeextendedabsentaclear demonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.12CFR262.25(b)(2).The commenters’requestsforadditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionofthe publiccommentperiodforthisproposal.Accordingly,theBoardhasdeterminednottoextendthepublic commentperiod.

124 FederalReserveBulletin|January2016 Byorderof theBoardof Governors,effectiveSeptember21,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

LegalDevelopments:ThirdQuarter,2015 125 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 themergerwasrequestedfromtheUnitedStates AttorneyGeneral.TheBoardhasconsideredtheproposalandallcommentsreceivedin lightof 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. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anattempttomonopolizethe 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.Inthis context,insureddepositoryinstitutionsincludeinsuredcommercialbanks,savingsbanks,andsavingsandloan associations.

126 FederalReserveBulletin|January2016 businessof bankinginanyrelevantmarket.6TheBankMergerActalsoprohibitsthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitionortendto createamonopolyinanyrelevantmarket,unlesstheBoardfindsthattheanticompetitive effectsof theproposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunitytobeserved.7 AuburnBankandCarsonBankcompeteintheNemahaCountybankingmarket,whichis definedasNemahaCounty,Nebraska.Inassessingthecompetitiveeffectsof aproposed bankmerger,theBoardandtheDepartmentof Justice(“DOJ”)reviewmarketsharesand marketconcentrationinbankingmarketsinwhichthecombinedorganizationwould operateafterconsummationof theproposal,asmeasuredbytheHerfindahl-Hirschman Index(“HHI”),undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”).8UndertheDOJBankMergerGuidelines,affiliatesaretreatedasasingleentity.Underthisanalysis,amergerof affiliatedbankinginstitutionsdoesnotresultinachangetothecalculationof marketshareormarketconcentrationasmeasuredbytheHHI. 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,theoriginalaffiliationdidnotrepresentanattempttoevadetheantitrustlawsortheBankMergerAct.In1946,AuburnBankcontrolledapproximately $2.2millionindeposits,whileCarsonBankcontrolledapproximately$2.9millionin 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.,64 FederalReserveBulletin589(1978),aff’d,627F.2d266(D.C.Cir.1980);MahaskaInvestmentCo.,63Federal ReserveBulletin579(1977). 10 TheClaytonAntitrustActwasfirstappliedtobankmergerswithenactmentoftheCeller-Kefauver AntimergerActof1950.SeeLawofDecember29,1950,ch.1184,64Stat.11251126(currentversionat 15U.S.C.§18)(subjectingmergerstoscrutinyundertheClaytonAntitrustAct).Thelawswereextendedwith enactmentoftheBankMergerActof1960.SeeBankMergerAct,Pub.L.No.86-463,74Stat.129(1960) (requiringtheBoardtoconsiderthecompetitiveeffectsofproposedbankmergers). 11 SeeVictoriaBankshares,Inc.,70FederalReserveBulletin229,230(1984)(“VictoriaOrder”);ShickleyState Company,70FederalReserveBulletin360(1984);FirstMoncoBancshares,Inc.,69FederalReserveBulletin293 (1983);TexasEastBanCorp,69FederalReserveBulletin636(1983)(“TexasOrder”).

LegalDevelopments:ThirdQuarter,2015 127 deposits,whichwerebothwellbelowthemeansizeforallcommercialbanksintheUnited Statesatthattime.12 TheDOJhasconductedareviewof thecompetitiveeffectsof theproposalandhasadvised theBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverse effectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebanking agencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtothe proposal.Basedonallthefactsof record,includingthelongstandingaffiliationof Auburn BankandCarsonBank,thefactthattheaffiliationwasestablishedpriortotheapplicationof theantitrustlawstobankmergers,thelackof anypreviouschallengetotheaffiliationof AuburnBankandCarsonBankoncompetitivegrounds,andthesmallabsolutesize of bothinstitutions,bothatthetimeof theiraffiliationin1946andnow,theBoard concludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffect oncompetitionorontheconcentrationof resourcesintheNemahabankingmarketorin anyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitive considerationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingthisproposalundertheBankMergerAct,theBoardhasconsideredthefinancialandmanagerialresourcesandfutureprospectsof theinstitutionsinvolved.Inits evaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,asset quality,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,and liquidityof AuburnBankareconsistentwithapproval,andAuburnBankappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof AuburnBank’sandCarsonBank’soperations.Futureprospectsareconsideredconsistent withapproval.Basedonitsreviewof therecord,theBoardfindsthattheorganization hassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof AuburnBankandhasreviewed theexaminationrecordsof AuburnBank,includingassessmentsof itsmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory experienceswithAuburnBankandtheorganization’srecordof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws.TheBoardalsohas consideredAuburnBank’splansforimplementingtheproposal.AuburnBankisconsideredtobewellmanaged,anditsboardof directorsandseniormanagementhavesubstantialbankingexperience.AuburnBankwouldoperatetheacquiredbranchof CarsonBank 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.

128 FederalReserveBulletin|January2016 underitsexistingpoliciesandprocedures,whichareconsideredtobesatisfactory.Inaddition,AuburnBank’smanagementhastheexperienceandresourcesthatshouldallowthe combinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof AuburnBank,aswellasthe recordsof effectivenessof AuburnBankandCarsonBankincombattingmoneylaunderingactivities,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,its marketingandoutreachplans,theorganization’splansfollowingconsummation,andany otherinformationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,14andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.15Inaddition,fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics. 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 mostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationinthe 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.

LegalDevelopments:ThirdQuarter,2015 129 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 lendingtoandengaginginother lending-relatedactivitiesforborrowersof differentincomelevelsandbusinessesandfarms of 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 differentincome levelsandtofarmsof 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,AuburnBankhasrepresentedthattheproposalwouldprovide customersof thecombinedorganizationwithaccesstoanexpandedbranchnetworkand wouldofferadditionalproductsandservicesnotcurrentlyofferedtoCarsoncustomers. Theseproductsandservicesincludeinternetbillpay,mobilebanking,andremotedeposit 18 TheAuburnBankEvaluationwasconductedusingtheSmallInstitutionCRAExaminationProcedures.Examinersreviewedthebank’saverageloan-to-depositratiosincethepriorCRAexaminationdatedFebruary4, 2008;astatisticalsampleofagriculturallendingactivityfromSeptember2011throughMarch2012;anda statisticalsampleofthebank’sresidentialrealestatelendingactivityfromMarch2011throughMarch2012. TheAuburnBankEvaluationreviewedthebank’sNemahaCountyassessmentarea. 19 TheCarsonBankEvaluationwasalsoconductedusingtheSmallInstitutionCRAExaminationProcedures. Examinersreviewedthebank’sagriculturallendingactivityfromMay27,2008,throughDecember2,2013. TheCarsonBankEvaluationreviewedthebank’sNemahaCountyassessmentarea.

130 FederalReserveBulletin|January2016 capture.AuburnBankhasalsorepresentedthatcustomersof thecombinedorganization wouldbenefitfromahigherlegallendinglimitfollowingthemerger. C.ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,andinformationprovidedbyAuburnBank.Basedonthatreview,theBoard concludesthattheproposalwouldresultinpublicbenefitsandthattheconvenienceand needsfactorisconsistentwithapproval. 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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.22 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,AuburnBankwouldhaveapproximately $171.5millioninconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.The Boardgenerallypresumesthataproposalthatinvolvesanacquisitionof lessthan $2billioninassets,orthatresultsinafirmwithlessthan$25billionintotalconsolidated assets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsent evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness, complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenot presentinthistransaction. 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).

LegalDevelopments:ThirdQuarter,2015 131 Establishmentof aBranch AuburnBankhasappliedundersection9of theFRAtoestablishabranchatthecurrent locationof CarsonBank,23andtheBoardhasconsideredthefactorsitisrequiredto considerwhenreviewinganapplicationunderthatsection.24Specifically,theBoardhas consideredAuburnBank’sfinancialcondition,management,capital,actionsinmeetingthe convenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfindsthose factorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditioned oncompliancebyAuburnBankwithallthecommitmentsmadeinconnectionwiththis proposalandtheconditionssetforthinthisorder.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.

133 Federal Reserve BULLETIN March 2016 Vol. 102, No. 2 Legal Developments: Fourth Quarter, 2015 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Royal Bank of Canada Montreal, Canada OrderApprovingtheFormationof aBankHoldingCompany,theAcquisitionof aBank HoldingCompany,andDeterminationonaFinancialHoldingCompanyElection FRBOrderNo.2015–28(October7,2015) RoyalBankof Canada(“RBC”),Montreal,Canada,aforeignbankingorganizationand bankholdingcompanythathaselectedtobeafinancialholdingcompanywithinthe meaningof theBankHoldingCompanyActof 1956(“BHCAct”),1anditssubsidiary, RBCUSAHoldcoCorporation(“RBCUSAHoldco,”andtogetherwithRBC,“Applicants”),NewYork,NewYork,haverequestedtheBoard’sapprovalundersection3of the BHCAct2toacquireCityNationalCorporation(“CityNational”)andtherebyindirectly acquireitssubsidiarybank,CityNationalBank,bothof LosAngeles,California.Aspart of theproposal,RBCUSAHoldcowillbecomeabankholdingcompany.RBCUSA HoldcoalsohasfiledwiththeBoardanelectiontobecomeafinancialholdingcompany pursuanttosections4(k)and(l)of theBHCActandsection225.82of theBoard’sRegulationY.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister16010(March26,2015)).4Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. RBC,withconsolidatedassetsof approximately$832billion,isthesecondlargestbankin Canadabyassetsize.5RBCprovidesretailandcommercialbanking,wealthmanagement,insurance,investmentbanking,andtransaction-processingservicesonaglobalbasis. Internationally,RBCoperatesonsixcontinents.IntheUnitedStates,RBCcontrolsRBC Bank(Georgia),NationalAssociation(“RBCBankGeorgia”),Atlanta,Georgia.RBC BankGeorgiaoperatesonlyinGeorgia.RBCBankGeorgiaistheeighthlargestdepositoryinstitutioninGeorgia,controllingdepositsof approximately$2.7billion,whichrepre- 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§§1843(k)and(l);12CFR225.82. 4 12CFR262.3(b). 5 Assetdataandnationwidedeposit-rankingdataareasofJune30,2015,unlessotherwisenoted.Assetandranking dataforRBConaconsolidatedbasisareasofJuly31,2015,andarebasedontheexchangerateasofthatdate.

134 FederalReserveBulletin|March2016 sent1.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6RBC operatesbranchesinNewYork;astate-licensedagencyinTexas;andrepresentativeoffices inCalifornia,Delaware,Texas,andWashington.RBCisaqualifyingforeignbanking organizationand,uponconsummationof theproposal,wouldcontinuetomeetthe requirementsforaqualifyingforeignbankingorganizationundertheBoard’sRegulationK.7 CityNational,withconsolidatedassetsof approximately$33.8billion,isthe52ndlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $28.5billionindeposits.CityNationalcontrolsCityNationalBank,whichoperatesin California,Georgia,Nevada,NewYork,andTennessee.CityNationalBankisthe214th largestinsureddepositoryinstitutioninGeorgia,controllingdepositsof approximately $47million,whichrepresentlessthan1percentof thetotaldepositsof insureddepository institutionsinthatstate. Onconsummationof thisproposal,RBC’sU.S.operationswouldhaveapproximately $172billioninconsolidatedassets,whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnitedStates.RBCUSAHoldcowouldcontrol totaldepositsof approximately$28.1billion,whichrepresentlessthan1percentof the totalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.In Georgia,RBCwouldremaintheeighthlargestdepositoryorganization,controlling depositsof approximately$2.8billion,whichrepresent1.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.8Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.9Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates,or30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateorin anystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.10 Forpurposesof theBHCAct,thehomestateof RBCisNorthCarolina,andCity NationalBank’shomestateisCalifornia.11CityNationalBankalsoislocatedinGeorgia, 6 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations. 7 12CFR211.23(a). 8 12U.S.C.§1842(d)(1)(A). 9 12U.S.C.§1842(d)(1)(B). 10 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). 11 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Anationalbank’shomestateisthestateinwhichthemain officeofthebankislocated.

LegalDevelopments:FourthQuarter,2015 135 Nevada,NewYork,andTennessee.RBCiswellcapitalizedandwellmanagedunderapplicablelaw,andRBCBankGeorgiahasasatisfactoryCommunityReinvestmentAct (“CRA”)12rating.Therearenominimumagerequirementsunderthelawsof California, Georgia,Nevada,NewYork,orTennesseethatapplytoRBC’sacquisitionof City NationalandCityNationalBank.13 Onconsummationof theproposedtransaction,Applicantswouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Inaddition,thecombinedorganizationwouldcontrollessthan 30percentof thetotalamountof depositsof insureddepositoryinstitutionsinGeorgia, theonlystateinwhichRBCandCityNationalBankhaveoverlappingbankingoperations. Accordingly,inlightof allthefactsof record,theBoardmayapprovetheproposalunder section3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.14 RBCandCityNationalhavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Atlanta,Georgia,bankingmarket(“Atlantamarket”).15TheBoardhasconsideredthe competitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record. Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremainin thebankingmarket;therelativeshareof totaldepositsininsureddepositoryinstitutionsin themarket(“marketdeposits”)thatRBCwouldcontrol;16theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-Hirschman Index(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReview guidelines(“DOJBankMergerGuidelines”);17andothercharacteristicsof themarket. 12 12U.S.C.§2901etseq. 13 SeeCal.Fin.Code§1685(a);Ga.CodeAnn.§7-1-622;Nev.Rev.Stat.§666.405;N.Y.BankingLaw§142-a; Tenn.CodeAnn.§45-2-1403. 14 12U.S.C.§1842(c)(1). 15 TheAtlantamarketisdefinedasBartow,Cherokee,Clayton,Cobb,Coweta,DeKalb,Douglas,Fayette, Forsyth,Fulton,Gwinnett,Henry,Newton,Paulding,Rockdale,andWaltoncounties;HallCounty(excluding thetownofClermont);thetownsofAuburnandWinderinBarrowCounty;andLuthersvilleinMeriwether County,allinGeorgia. 16 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50-percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 17 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html.

136 FederalReserveBulletin|March2016 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheAtlantamarket.Onconsummation of theproposal,theAtlantamarketwouldremainmoderatelyconcentrated,asmeasured bytheHHI.ThechangeintheHHIwouldbesmall,andnumerouscompetitorswould remaininthemarket.18 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheAtlantamarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof the organizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformation regardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof publicandsupervisoryinformationregardingcapitaladequacy,assetquality, andearningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition, assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof the transaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtocompleteeffectivelytheproposedintegrationof theoperationsof the institutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolved intheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan.TheBoardalsohasconsultedwiththeOfficeof theSuperintendentof Financial Institutions(“OSFI”),theagencywithprimaryresponsibilityforthesupervisionand regulationof federallyregisteredCanadianbankingorganizations,includingRBC. Thecapitallevelsof RBCexceedtheminimumlevelsthatwouldberequiredunderthe BaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldbe requiredof aU.S.bankingorganization.19Theproposedtransactionisamergerthatis structuredasacashandshareexchange.20Theassetquality,earnings,andliquidityof 18 RBCoperatestheseventhlargestdepositoryinstitutionintheAtlantamarket,controllingapproximately $2.7billionindeposits,whichrepresent2.1percentofmarketdeposits.CityNationaloperatesthe73rdlargest depositoryinstitutioninthesamemarket,controllingdepositsofapproximately$47million,whichrepresent lessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,RBCwouldremainthe seventhlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$2.7billion,which represent2.1percentofmarketdeposits.TheHHIfortheAtlantamarketwouldincreaseby1pointto1562, and79competitorswouldremaininthemarket. 19 TheBoardconsideredthetotalrisk-basedcapitalratio,tier1risk-basedcapitalratio,commonequitytier1 risk-basedcapitalratio,andtheratiooftier1tototalassetsofRBC,RBCUSAHoldco,andRBCBank Georgia. 20 ApplicantswouldeffecttheacquisitionbymergingCityNationalwithandintoRBCUSAHoldco(withRBC USAHoldcoasthesurvivor).Atthetimeofthemerger,eachshareofCityNationalcommonstockwouldbe convertedintoarighttoreceiveRBCcommonstockandcash,basedonanexchangeratio.RBChasthefinancialresourcestofundthecashportionoftheexchange.

LegalDevelopments:FourthQuarter,2015 137 RBCandCityNationalareconsistentwithapproval,andRBCappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of RBC’sU.S.operations,CityNational,andtheirsubsidiarydepositoryinstitutions, includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.In addition,theBoardhasconsideredinformationprovidedbyRBC,theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicablebanking,consumer protection,andanti-money-launderinglaws,aswellasinformationprovidedby commenters.Asnoted,theBoardalsohasconsultedwithOSFI. RBC,CityNational,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobe wellmanaged.RBC’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof RBChavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors.21 TheBoardalsohasconsideredRBC’splansforimplementingtheproposal.RBChas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.RBC wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,whichareconsideredacceptablefromasupervisoryperspective.Inaddition, RBCandCityNational’smanagementhastheexperienceandresourcestoensurethatthe combinedorganizationoperatesinasafeandsoundmanner,andRBCplanstointegrate CityNational’sexistingmanagementandpersonnelinamannerthataugmentsRBC’s management.22 Section3of theBHCActalsoprohibitstheBoardfromapprovingaproposalunlessthe applicantprovidesadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseof itsaffiliatesthattheBoarddeems appropriatetodetermineandenforcecompliancewiththeBHCAct.23TheBoardhas reviewedtherestrictionsondisclosureof informationintherelevantjurisdictionsinwhich RBCoperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerning accesstoinformation.Inaddition,RBChascommittedthat,totheextentnotprohibited byapplicablelaw,itwillmakeavailabletotheBoardsuchinformationonitsoperations andtheoperationsof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeBHCAct,theInternationalBankingActof 1978,24andotherapplicablefederallaws.RBCalsohascommittedtocooperatewiththeBoardtoobtainany waiversorexemptionsthatmaybenecessarytoenableitoritsaffiliatestomakesuchinformationavailabletotheBoard. Basedonallthefactsof record,includingRBC’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, 21 AcommenterallegedthatRBCpreviouslyhadunsuccessfuloperationsintheUnitedStates.Notwithstanding anypreviousdifficultiesinthesemarkets,RBCisconsideredwellcapitalizedandwellmanaged. 22 AcommenterexpressedconcernsthatRBC’smanagement“maybetoofaraway”togoverneffectivelyinthe LosAngeles,California,area.Asmentionedabove,RBCintendstointegrateCityNational’sexistingmanagementandpersonnelinamannerthataugmentsRBC’smanagementandcapacityconsistentwiththecombined organization’sscopeofactivities.RBChassuccessfullymanageditsoperationsintheUnitedStates. 23 12U.S.C.§1842(c)(3)(A). 24 12U.S.C.§3101etseq.

138 FederalReserveBulletin|March2016 andcommentsreceivedontheproposal,25theBoardconcludesthatconsiderationsrelating tothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellasaccesstoinformationbytheBoardandtherecordsof effectivenessof RBCandCityNationalincombattingmoney-launderingactivities,are consistentwithapproval. Supervisionof RegulationonaConsolidatedBasis Asrequiredbysection3of theBHCAct,theBoardconsiderswhetherRBCissubjectto comprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthorities initshomecountry.26TheBoardpreviouslyhasdeterminedthatRBCissubjectto comprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisor,the OSFI.27RBCremainssupervisedbytheOSFIonsubstantiallythesametermsandconditions.Basedonthisfindingandallthefactsof record,theBoardconcludesthatRBC continuestobesubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshome countrysupervisor. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.28Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe 25 AcommenterallegedthatRBCandCityNationalcollaboratedtoextendcredittoacustomerduringthe pendencyoftheseapplications.TheBHCActprohibitsanapplicantfromexercising,orattemptingtoexercise, acontrollinginfluenceoverthemanagementorpoliciesofabankorbankholdingcompany,withoutprior approvaloftheBoard.CBG,Inc.,91FederalReserveBulletin421,421–22(2005).RBCrepresentsthatafter announcingRBC’sproposedacquisitionofCityNational,RBCandCityNationalestablishedinternalcontrols andprocessesdesignedtoensurecompliancewiththeapplicablelimitationsoftheBHCActandsentnotificationsandremindersofsuchcontrolstotheirrespectiveemployees.RBCalsorepresentsthatitdidnotextend credittothecustomeratissueinviewoftheBHCAct’slimitations. SomecommentersexpressedconcernsaboutthelevelofracialandethnicdiversityamongCityNational Bank’semployees,officers,anddirectorsandaboutCityNationalBank’seffortstodobusinesswithminorityownedsuppliers.TheseconcernsareoutsidethescopeofthelimitedstatutoryfactorsthattheBoardisauthorizedtoconsiderwhenreviewinganapplicationundertheBHCAct.SeeBankofAmericaCorporation,90 FederalReserveBulletin217,223n.31(2004);seealsoWesternBancshares,Inc.v.BoardofGovernors,480F.2d 749(10thCir.1973).Separately,theBoard,togetherwiththeotherfederalfinancialsupervisoryagencies,monitorstheeffortsofregulatedentitiestopromotediversityandinclusion.FinalInteragencyPolicyStatement EstablishingJointStandardsforAssessingtheDiversityPoliciesandPracticesofEntitiesRegulatedbythe Agencies,80FederalRegister33016(June10,2015).Thispolicystatementimplementssection342ofthe Dodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”),Pub.L.No.111-203,124 Stat.1376,1541–44(2010),codifiedat12U.S.C.§5452. 26 12U.S.C.§1842(c)(3)(B).AsprovidedinRegulationY,theBoarddetermineswhetheraforeignbankingorganizationissubjecttoconsolidatedhomecountrysupervisionunderthestandardssetforthforforeignbanks andparentforeignbanksintheBoard’sRegulationK.See12CFR225.13(a)(4).RegulationKprovidesthata foreignbankissubjecttoconsolidatedhomecountrysupervisioniftheforeignbankissupervisedorregulatedinsuchamannerthatitshomecountrysupervisorreceivessufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanyaffiliate)toassesstheforeignbank’s overallfinancialconditionandcompliancewithlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthis standardundersection211.24ofRegulationK,theBoardconsiders,amongotherindiciaofcomprehensive, consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensurethatthebankhas adequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformationonthe conditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,or otherwise;(iii)obtaininformationonthedealingsandrelationshipbetweenthebankanditsaffiliates,both foreignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwidebasis,or comparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwide,consolidated basis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwide basis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 27 RoyalBankofCanada,87FederalReserveBulletin467(2001);RoyalBankofCanada,83FederalReserve Bulletin442(1997).Inaddition,in2013itwasdeterminedthatRBCissubjecttocomprehensivesupervisionon aconsolidatedbasisbyOSFI.RBCInvestorServicesBankS.A.,FRBOrderNo.2013-15(December17,2013). 28 12U.S.C.§1842(c)(2).

LegalDevelopments:FourthQuarter,2015 139 served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,29andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.30 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof RBCBank GeorgiaandCityNationalBank,thefairlendingandcompliancerecordsof bothbanks, thesupervisoryviewsof theOfficeof theComptrollerof theCurrency(“OCC”)andthe ConsumerFinancialProtectionBureau(“CFPB”),confidentialsupervisoryinformation, informationprovidedbyRBC,andthepubliccommentsreceivedontheproposal. Inthiscase,theBoardalsoconsideredthebusinessmodelsof theinstitutionsinvolvedand theorganization’splansafterconsummation.Inaddition,althoughRBCcurrently provideslimitedretailbankingservicesintheUnitedStates,ithadasubstantiallylarger retailbankingpresenceintheUnitedStatespriortothesaleof itswhollyownedsubsidiary, RBCBank(USA),Raleigh,NorthCarolina,toThePNCFinancialGroup,Inc.(“PNC”) in2012.31TobetterassessRBC’srecordof meetingthecreditneedsof thecommunitiesit serves,theBoardconsideredtheCRArecordof RBCBank(USA)duringthetimethatthe bankwasawhollyownedsubsidiaryof RBC. TheBoardplacedadditionalemphasisonCityNationalBank’srecordinmeetingthe convenienceandneedsof thecommunitiesitserves,becauseCityNationalBankwill remainaseparateentityandcontinueitsexistingCRAprogramafterconsummationof the proposedtransaction.Moreover,CityNationalBank’sretailbankingbusinessissignificantlylargerthanRBC’scurrentU.S.retailbankingbusiness. PublicCommentsRegardingtheProposal.Inthiscase,theBoardreceivedcommentsfrom 32commenterssupportingtheproposal.Commentersdescribefavorableexperienceswith thecommunitydevelopmentlendingandinvestmentprogramsof CityNational.These commenterscommendCityNationalBankanditsmanagementforthebank’scommunity outreacheffortsandsupportforvariouscommunitydevelopmentprogramsandinitiatives,includingboardserviceandcontributionstocharitableorganizations,someof which areaimedatbenefittingminorityandLMIindividuals.CommentersalsopraiseCity 29 12U.S.C.§2901(b). 30 12U.S.C.§2903. 31 RBCBank(USA)hadtotalassetsofapproximately$27billionasofJune30,2011.

140 FederalReserveBulletin|March2016 NationalBank’sprobonolegalservice,supportforprogramsforat-riskyouthandneighborhoodimprovement,andaffordablehousinginitiatives.Further,commenterspraiseCity NationalBankforadoptingafive-year,$11billioncommunitydevelopmentplan,emphasizingincreasedmarketingandcommunityoutreach,financialeducation,improved accesstocreditforsmallbusinesses,andincreasedcharitablegivingwithinCityNational’s assessmentareas.Commenters,someof whichconsultedwithCityNationalBankinthe developmentof thecommunitydevelopmentplan,arguethatthebankwouldprovideeven greaterbenefittothecommunitiesservedbythecombinedorganizationasaresultof the plan. Severalcommentersopposetheproposal,requestthattheBoardapprovetheproposalonly subjecttocertainconditions,orexpressconcernsabouttheproposal.32Somecommenters expressconcernsregardingtheeffortsof RBCandCityNationaltoserveminoritycommunities.Forexample,acommenterallegesracialdisparitiesinCityNationalBank’sand RBCBankGeorgia’slendingactivitiesbasedondatareportedfor2013undertheHome MortgageDisclosureActof 1975(“HMDA”).33Inaddition,commentersallegethatCity NationalBankmadeadisproportionatelysmallnumberof SmallBusinessAdministration loanstoAfricanAmerican–ownedbusinesses,and“redlines”AfricanAmerican–owned businesses.34 SeveralcommentersallegethatCityNationalBankandRBCBankGeorgiapredominately serveaffluentcustomersanddonothelpmeettheneedsof LMIcommunities.One commenterallegesdisparitiesbyincomeinCityNationalBank’slendingactivitiesbased on2013HMDAdata. Businessesof theInvolvedInstitutionsandResponsetoComments.RBCprovidesretailand commercialbanking,wealthmanagement,insurance,investmentbanking,andtransactionprocessingservicesonaglobalbasis.IntheUnitedStates,manyof RBC’sactivitiesare conductedthroughRBCCapitalMarkets,LLC,NewYork,NewYork,aregisteredbrokerdealerprovidingcapitalmarkets,wealthmanagement,insurance,andtreasuryservices.35 RBC’sretailbankingpresenceintheUnitedStatesislimitedtoRBCBankGeorgia,which hasonephysicallocationandprovidesretailandbusinessbankingservicesprimarilyto Canadiancross-bordercustomersintheUnitedStatesandtoRBC’sU.S.wealthmanagementcustomersthroughonlineandmobilechannels.RBCBankGeorgia’sabilityto engageinretailbankingandsmallbusinessbankingactivitiesintheUnitedStateshasbeen restrictedbyanoncompeteagreementwithPNC,enteredintoinconnectionwithRBC’s saleof RBCBank(USA)toPNC,whichtheBoardapprovedin2011.36Pursuanttothat noncompeteagreement,RBCwasgenerallyprohibitedfromengaginginretailbankingand smallbusinessbankingactivitiesinAlabama,Florida,Georgia,NorthCarolina,South Carolina,andVirginiaforthethreeyearsfollowingconsummationof thesaleof RBC Bank(USA)toPNC.37OnlyexistingRBCcustomerswerepermittedtoopenanew bankingrelationshipwithRBCBankGeorgia,impedingthebank’sabilitytooriginate 32 Initially,15commentersopposedtheproposal.Manyofthesecommenterssubsequentlywithdreworamended theircommentstosupporttheproposal. 33 12U.S.C.§2801etseq. 34 SomecommentersquestionedwhetherCityNationalBankandRBCBankGeorgiawereincompliancewith HMDAreportingrequirements,basedonthenumberofHMDA-reportableloanslistedbyCityNationalBank andRBCBankGeorgiaas“racenotavailable.”OCCexaminerstestedtheaccuracyofHMDAdatain connectionwiththeCRAevaluationsofbothinstitutions.Inbothevaluations,theOCCconcludedthatthe HMDAdatareportedbybothinstitutionscouldberelieduponintheevaluation. 35 AsofJune30,2015,RBCCapitalMarkets,LLChadtotalassetsof$81.4billion. 36 SeePNCFinancialServicesGroup,Inc.(orderdatedDecember23,2011),98FederalReserveBulletin16(2d Quar.2012). 37 RBC’ssaleofRBCBank(USA)toPNCwasconsummatedonMarch2,2012.

LegalDevelopments:FourthQuarter,2015 141 loansorprovidedepositservicestonewcustomers.Underthenoncompeteagreement, RBCBankGeorgiaalsowasprecludedfromopeningadditionalbranchesbeyonditsone Atlantalocation. CityNationalBank’sprimaryfocusisbusinesslending,consistentwiththebank’sgoalof providingfinancialsolutionstoindividualswith$1millionormoreininvestableassetsand tosmall-andmedium-sizedcompanieswithannualrevenuesbetween$1millionand $250million.CityNationalBankalsoprovidesprivatebanking,wealthmanagement,and advisoryandbrokerageservicestoitscustomers.Inparticular,CityNationalBank providesbankingservicestocustomersintheentertainmentandrealestateindustriesand toprofessionalservicesfirmsandtheirexecutives.CityNationalBankdoesnotactively markethomemortgageloanproductsbutrathermakeshomemortgageloansasanaccommodationtoexistingcommercial,entertainment,andtrustcustomers. RBCassertsthatitandCityNationalBankarehelpingtomeetthecreditneedsof LMI individualsandcommunitiesinotherways.Inparticular,RBCcontendsthatCityNational Bankengagesinsubstantialcommunitydevelopmentlending,services,andinvestments. RBCmaintainsthat,asdemonstratedintheoverallCRAratings,bothinstitutionsexhibit satisfactoryperformanceundertheCRA.Moreover,RBCcontendsthatbothinstitutionshavemadeeffortstoidentifyandrespondtocommunityneedssincetheirmostrecent CRAperformanceevaluations.Morespecifically,RBCrepresentsthatithasengagedin continuedcommunityoutreacheffortswithseveralCaliforniacommunitydevelopment organizations.Further,RBCrepresentsthatCityNationalBank,alongwiththreeSouthern Californiautilitycompanies,hasdevelopedplanstoimplementeducationalprogramsand smallbusinesslendingprograms,thelatterof whichareexpectedtoprovidesmallbusiness loanstoqualifiedutilitycompanysuppliersownedbywomenandminoritiesandby lesbian,gay,bisexual,andtransgenderpersons.RBCalsorepresentsthatitandCity NationalhaveengagedorganizationsinCaliforniacommunitiestodeterminethecredit needsof thosecommunitiesandhowthoseneedscanbemetbythecombinedorganization.Asaresultof thisoutreach,CityNationalannouncedafive-year,$11billioncommunitydevelopmentplan,whichisdiscussedinmoredetailbelow. Recordsof PerformanceundertheCRA.Asindicatedabove,inevaluatingtheconvenience andneedsfactorandCRAperformance,theBoardconsiderssubstantialinformationin additiontoinformationprovidedbypubliccommentersandtheresponsetocommentsby theapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationandinformationandviewsprovidedby theappropriatefederalsupervisors.38 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.39Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto 38 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 39 12U.S.C.§2906.

142 FederalReserveBulletin|March2016 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,includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;40theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.41 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution.Inassessingtheconvenienceandneeds factorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof RBCBankGeorgiaandof CityNational Bank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof the OCCandtheCFPB,confidentialsupervisoryinformation,informationprovidedbyRBC, andthepubliccommentsreceivedontheproposal. CRAPerformanceof RBCBankGeorgia.RBCBankGeorgiawasassignedanoverall ratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheOCC,asof July8,2013(“RBCBankGeorgiaEvaluation”).42Thebankreceived“HighSatisfactory” ratingsforboththeLendingTestandtheInvestmentTestanda“LowSatisfactory”rating fortheServiceTest.43Examinersfoundthatthebank’sgeographicdistributionof loans reflectedgoodpenetrationthroughoutitsassessmentareaandthatthebank’srecordof lendingtoborrowersof differentincomeswasgood.Asdiscussedaboveandasnotedby examiners,RBCBankGeorgiawassubjecttoathree-yearnoncompeteagreementbeginningin2011thatimpededthebank’sabilitytooriginateloansorprovidedepositservices tonewcustomers. 40 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 41 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 42 TheRBCBankGeorgiaEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2012,throughJune30,2013,exceptforcommunitydevelopmentloans,whichhadanevaluationperiodfromJanuary1,2012,throughJuly8,2013.ConclusionsregardingRBCBankGeorgia’sHMDAlendingwerebasedonloanspurchasedbythebank.TheevaluationperiodfortheInvestmentTestandtheServiceTestwasfromJanuary1,2012,throughJuly8,2013. 43 TheRBCBankGeorgiaEvaluationincludedafull-scopeevaluationofthebank’ssoleassessmentarea,the Atlanta–SandySprings–Marietta,Georgia,MetropolitanStatisticalArea(“AtlantaMSA”).

LegalDevelopments:FourthQuarter,2015 143 ExaminersfoundthatRBCBankGeorgia’slendinglevelsreflectedgoodresponsivenessto thecreditneedsof theAtlantaMSA.Examinersnotedthattheoveralldistributionof loansreflectedgoodpenetrationamongborrowersof differentincomesandthattheoverall distributionof loansreflectedgoodpenetrationthroughouttheAtlantaMSA.The geographicdistributionof homemortgageloanswasconsideredgood.Examinersfound thatthebank’sgeographicdistributionof homerefinanceloanswasexcellent.Thebank’s distributionof homerefinanceloanstoborrowersof differentincomesalsowasconsidered excellentandexceededthepercentageof LMIfamiliesinthebank’sassessmentarea.The bank’sgeographicdistributionof homepurchaseloansinthebank’sassessmentarea reflectedadequatepenetration.Althoughexaminersfoundthebank’slendingto low-incomeborrowerstobepoor,lendingtomoderate-incomeborrowerswasexcellent, andthedistributionof homepurchaseloanstoborrowersof differentincomeswasgood comparedtoareademographics. InevaluatingtheInvestmentTest,examinersfoundthatRBCBankGeorgiademonstrated goodresponsivenesstocommunitydevelopmentneedswithintheAtlantaMSA.Examinersnotedthatthebankhadasignificantlevelof qualifiedinvestments.Duringtheevaluationperiod,thebankmadeinvestmentsinaffordablehousingmortgage-backedsecuritiesandmadefinancialcontributionstoorganizationsprovidingaffordablehousingor servicestoLMIindividuals.Examinersalsonotedthatthebank’spriorperiodinvestments hadacontinuingimpactonthecommunitydevelopmentneedsinthebank’sassessment area. ExaminersfoundthatRBCBankGeorgia’sperformanceontheServiceTestwasadequate inrelationshiptothebank’sresourcesandcommunitydevelopmentopportunities.Bank personnelservedashome-ownershipcounselorsandasboardmemberstocommunity developmentorganizations,andprovidedtechnicalassistancetotwoaffordablehousing communitydevelopmentorganizations. Asdiscussedabove,theBoardalsoconsideredtheCRAperformanceof RBCBank (USA),whichwasawhollyownedsubsidiaryof RBCuntilitssaletoPNCin2012.RBC Bank(USA)wasafull-serviceretailbankandoperated434branchesthroughthesoutheasternUnitedStates.44RBCBank(USA)wasassignedanoverallratingof “Satisfactory” atthelastCRAperformanceevaluationbytheFederalReserveBankof Richmondbefore thesaletoPNC,asof June21,2010(“RBCBankUSAEvaluation”).45Thebankreceived “HighSatisfactory”ratingsfortheLendingTest,InvestmentTest,andServiceTest.46 Examinersnotedthebank’sratingontheLendingTestreflectedthebank’soveralllending activity,distributionof lendingamongborrowersandgeographiesof differentincome levels,aswellastheamountandresponsivenessof communitydevelopmentlendinginthe bank’sassessmentareas.Further,examinersnotedthatthelendingactivitywasconsid- 44 AtthetimeofitssaletoPNC,RBCBank(USA)operatedinAlabama,Florida,Georgia,NorthCarolina, SouthCarolina,andVirginia. 45 TheRBCBankUSAEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2008,throughDecember31,2009,exceptfor communitydevelopmentloans,whichhadanevaluationperiodfromApril22,2008,throughDecember31, 2009.TheevaluationperiodfortheServiceTestwasfromApril22,2008,throughJune21,2010.Withrespect totheInvestmentTest,allqualifiedinvestmentsthatwereoutstandingasofJune21,2010,wereconsidered. 46 TheRBCBankUSAEvaluationincludedfull-scopeevaluationsofthefollowingassessmentareas:the Charlotte–Gastonia–RockHill,NorthCarolina–SouthCarolina,MSA;theRaleigh–Durham–Cary,North Carolina,CombinedStatisticalArea(“CSA”);theWilmington,NorthCarolina,MSA;theGreensboro– WinstonSalem–HighPoint,NorthCarolina,CSA;theCarteret,NorthCarolina,assessmentarea;the Huntsville–Decatur,Alabama,CSA;theBirmingham–Hoover,Alabama,MSA;theAtlantaMSA;the Orlando–Deltona–DaytonaBeach,Florida,CSA;theMiami–FortLauderdale–PompanoBeach,Florida, MSA;thePalmBay–Melbourne–Titusville,Florida,MSA;theCharleston–NorthCharleston,SouthCarolina, MSA;theMyrtleBeach–Conway–NorthMyrtleBeach,SouthCarolina,MSA;theColumbia,SouthCarolina,MSA;andtheVirginiaBeach–Norfolk–NewportNews,Virginia,MSA.

144 FederalReserveBulletin|March2016 eredgoodrelativetothebank’scapacitytolendandtheeconomicconditionswithinthe bank’smarket.InevaluatingtheInvestmentTest,examinersfoundthatthebankmade investmentsinequityhousingfunds,LowIncomeHousingTaxCredits,andotherqualified investmentsimpactingmultiplebankmarkets.InevaluatingtheServiceTest,examiners foundthatthebankactivelysupportedcommunitydevelopmentorganizationsthat providedcommunitydevelopmentservicesthroughoutitsvariousmarketareasandthat theseactivitiesshowedarelativelyhighlevelof communityservice,aswellassupportfor affordablehousingeffortswithinthemarketsservedbythebank. RBCBankGeorgia’sEffortsSincethe2013CRAEvaluation.RBCrepresentsthat,sincethe RBCBankGeorgiaEvaluation,thebankhasmadecommunitydevelopmentloansand investmentsfocusedonsupportingtheconstructionorfinancingof affordablehousing withinitsassessmentarea.RBCBankGeorgiahaspartneredwithcommunitygroupsthat providehomeowner-relatedservicesinLMIcommunitiesinAtlantaandprovidedfunding forthedevelopmentandpreservationof affordablehousinginAtlanta.Inaddition,the bankhasimplementedanaffordablehousingprogramandparticipatesintheFederal HomeLoanBankof Atlanta’sdown-paymentassistanceprogram.RBCBankGeorgia alsohashostedorcontributedtoanumberof financialseminarsonhomeownershipin LMIareaswithinitsassessmentarea,includingseminarsonfinancialliteracy,homeownershipcounseling,andfirst-timehomebuying.Thebankalsohasmadecharitable donationstononprofitcommunitygroupswithintheAtlantaareaandhasprovidedgrants focusingonfinancialliteracyandaffordablehousing. CRAPerformanceof CityNationalBank.CityNationalBankwasassignedanoverall ratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheOCC,asof December31,2012(“CityNationalBankEvaluation”).47CityNationalBankreceived overallratingsof “HighSatisfactory”forboththeLendingTestandtheServiceTestand an“Outstanding”ratingfortheInvestmentTest.48ExaminersfoundthatCityNational Bankmadeanexcellentlevelof communitydevelopmentloansandinvestments,andthat thebankprovidedanoverallgoodlevelof communitydevelopmentservices. ExaminersfoundthatCityNationalBankexhibitedanoverallexcellentlevelof community developmentlendingthathadasignificantlypositiveimpactonlendingperformance overall.Examinersalsonotedanoverallexcellentlevelof lendingactivityof homemortgageloansandsmallloanstobusinesses.Nevertheless,examinersfoundthatthebank couldimproveitspenetrationamongbusinessesof differentrevenuesizesandborrowersof differentincomelevels,giventhedemographicsof thebank’sassessmentareas. InCalifornia,wheremanycommentersfocusedandthestatethataccountsforapproximately90percentof CityNationalBank’stotaldeposits,examinersratedthebank’s LendingTestperformance“HighSatisfactory,”notingthatthebank’slendingactivityin 47 TheCityNationalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2009,throughDecember31,2012,exceptfor communitydevelopmentloans,whichhadanevaluationperiodfromJuly8,2009,throughDecember31,2012. TheevaluationperiodfortheInvestmentTestandtheServiceTestwasfromJuly8,2009,through December31,2012. 48 TheCityNationalBankEvaluationincludedafull-scopereviewofthefollowingassessmentareas:theLos Angeles–LongBeach–Glendale,California,MetropolitanDivision;theassessmentareacomprisingSanFranciscoandSanMateocounties,bothinCalifornia;theSantaAna–Anaheim–Irvine,California,MD;theNew YorkCounty,NewYork,assessmentarea;theLasVegas–Paradise,Nevada,MSA;theCarsonCity,Nevada, MSA;theDavidsonCounty,Tennessee,assessmentarea;andtheassessmentareacomprisingDeKalband Fultoncounties,bothinGeorgia.Alimited-scopereviewwasconductedintheOakland–Fremont–Hayward, California,MD;theOxnard–ThousandOaks–Ventura,California,MSA;theRiverside–SanBernardino– Ontario,California,MSA;theSanDiego–Carlsbad–SanMarcos,California,MSA;theSantaClaraCounty, California,assessmentarea;theWashoeCounty,Nevada,assessmentarea;andtheDouglasCounty,Nevada, assessmentarea.

LegalDevelopments:FourthQuarter,2015 145 theLosAngeles,SantaAna,andSanFranciscoassessmentareaswasexcellent.Examiners foundthatCityNationalBank’soverallgeographicdistributionof loans,includinghome mortgageloansandsmallbusinessloans,reflectedgoodpenetrationthroughoutCalifornia. Examinersnotedthatthebank’spenetrationof loansamongborrowersof different incomelevelsandbusinessesof differentsizeswaspoor;however,examinersalsofound thatCityNationalBankmadearelativelyhighlevelof smallbusinessloansandcommunitydevelopmentloansforavarietyof purposes,includingtheconstructionanddevelopmentof affordablehousingunitsforLMIindividualsandthepromotionof economic development.ExaminersnotedthatCityNationalBankexhibitedanexcellentlevelof communitydevelopmentlendinginCalifornia. ExaminersfoundCityNationalBanktohaveanoutstandinglevelof qualifiedcommunity developmentinvestmentsandgrants,reflectingexcellentresponsivenesstocreditand communityeconomicdevelopmentneeds.Examinersnotedthatthebankmade,or continuedtohold,investmentsandgrantstocommunitydevelopmentorganizations; investmentsinlow-incomehousingprojects;andinvestmentsinabusiness-expansionloan programthatsupportsjobcreationforLMIindividuals.Examinersalsonotedthatthe banksupportedanonprofitorganizationprovidinglife-skillprogramstoat-riskyouthand homelesspopulations. Examinersfoundthatthebank’soveralldeliverysystems,alternatedeliverysystems, bankingproductsandservices,andbusinesshourswithinitsassessmentareaswerereasonablyaccessibletoallportionsof thebank’sassessmentareas,includingLMIindividuals andgeographies.CityNationalBankparticipatedinanumberof communitydevelopment services.Examinersnotedthatthebankprovideddirectlendingproductsandparticipated withfederalgovernmentagenciesinvariousguaranteeprogramsaimedatprovidingdownpaymentassistancetofirst-timehomebuyersandatfacilitatingaffordablehousing construction,rehabilitation,anddevelopment.ExaminersnotedthatCityNationalBank’s directors,officers,andstaff contributedtimetoqualifiedcommunitydevelopmentservices duringthereviewperiod,amajorityof whichweretargetedtowardLMIindividualsor smallbusinesses. CityNationalBank’sEffortsSincethe2012CRAEvaluation.AftertheCityNationalBank Evaluation,RBCrepresentsthatCityNationalBankhastakenstepstoimproveitsidentificationof andresponsivenesstocommunityneeds.CityNationalBankhasengagedin variousoutreacheffortswithintheLosAngelesarea,includingmarketingefforts,engagementwithcommunitygroups,andeffortstooffereducationalprogrammingtoLMI communities.Inparticular,CityNationalBankhascommunicatedwithandreceivedinput fromanumberof communityorganizationstoascertainhowtheproposedcombinedorganizationmightbettermeetcommunityneeds. Inaddition,in2007CityNationalBankannounceda10-year,$17.5billionCRAcommitment(“2007CRACommitment”)focusedonCRA-relatedactivities,includingsmall businessloans,communitydevelopmentloans,CRA-qualifiedinvestments,mortgageloans tominorityborrowers,andcharitablecontributions.RBCrepresentsthatintheeightyears sinceadoptingthe2007CRACommitment,CityNationalBankhasmetandcontinuesto meettheactivitygoalssetforthinthatcommitment.FromthetimeCityNationalBank implementedthe2007CRACommitmentin2008untilyear-end2014,thebankrepresents thatitinvestedapproximately$11.54billioninCRA-relatedactivities,whichaccountsfor approximately66percentof the10-yearcommitment. CRAEffortsof theCombinedOrganization.CityNationalBankwillremainaseparate entityand,exceptasdiscussedbelow,willsubstantiallycontinueitscurrentCRAprogram followingconsummationof theproposedtransaction.RBCrepresentsthatCityNational

146 FederalReserveBulletin|March2016 Bankhasadoptedanewcommunitydevelopmentplantohelpmeetthecreditneedsof the communitiesitserves.Undertheplan,CityNationalBankintendstoachieveaminimum of $11billioninqualifiedlending,investment,andcharitablecontributions,including $4.2billioninsmallbusinessloans,$4.4billioninqualifiedCRAcommunitydevelopment loans,and$1.6billioninqualifiedCRAinvestments.Theplanoutlinesspecificactivitiesin CityNationalBank’sassessmentareasonwhichthebankplanstofocus,including increasedmarketingandcommunityoutreach,financialseminars,smallbusinesslending, andservicesandcharitablecontributions.Forexample,CityNationalBankplanstocreate, market,andadministeranaccountdesignedtoservetheneedsof unbankedand underbankedindividuals.49CityNationalBankintendstoimproveaccesstocreditfor smallbusinessesbyprovidingtechnicalassistanceandbydesignatingaportionof total smallbusinesslendingforLMIcommunitiesandminority-ownedsmallbusinesses.City NationalBankintendstopurchasebetween$50millionand$100millioninLMIresidentialloansannuallyandplanstoincreasetheamountof communitydevelopmentlending foraffordablehousinginLMIcommunities.RBCrepresentsthattheplanwouldsubstantiallyincreaseCityNationalBank’scommitmentsinlending,investments,services,and charitablecontributionsrelativetothe2007CRACommitment.Anumberof community groups,includingsomeof thecommenterswhoinitiallyopposedtheproposal,discussed thedevelopmentof theplanwithCityNationaland,aftertheadoptionof theplan,many commenterssubsequentlywithdrewtheircomments. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.RBC representsthattheproposalwouldprovidecustomersof thecombinedorganizationaccess toadditionalorexpandedservices,includingcapitalmarketsproductsandservicesandan expandedrangeof wealthmanagementandadvisoryproductsandservicesnotofferedto currentCityNationalBankcustomers.RBCassertsthatthecombinedorganizationwould bebetterabletoserveitsclients,particularlythoseinsmall-andmiddle-marketsegments. Inaddition,RBCstatesthatthecombinedorganizationwillbestrengthenedbythe complementaryaspectsof thetwoentities’businesses,includingcustomerfocus, geographiccoverage,businessorientation,andcompatibilityof thecompanies’managementandoperatingstyles,aswellasthecombinedexperienceandexpertiseof theirrespectivemanagementandemployees,whichwillresultinastrongerandmorestablefranchise. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingtherecordsof therelevantdepositoryinstitutionsinvolvedunder theCRA,theinstitutions’recordsof compliancewithfairlendingandotherconsumer protectionlaws,consultationswiththeOCCandtheCFPB,confidentialsupervisoryinformation,informationprovidedbyRBC,thepubliccommentsontheproposal,andother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactoris consistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha 49 TheaccountwillincludesavingsandcheckingservicesandwillbedoneinaccordancewiththeModelSafe AccountsTemplatedevelopedbytheFederalDepositInsuranceCorporation.SeeFederalDepositInsurance Corporation,FDICModelSafeAccountsPilotFinalReport10(April2012),availableathttps://www.fdic.gov/ consumers/template/SafeAccountsFinalReport.pdf.

LegalDevelopments:FourthQuarter,2015 147 proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”50 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.51These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.52 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem,includingthepubliccomments.53IntheUnitedStates, RBCprimarilyengagesinsecuritiesbrokerageandinvestmentmanagementthrough variousentitiesunderRBCUSAHoldcoand,onasmallerscale,inretailandbusiness bankingthroughRBCBankGeorgia.CityNationalprimarilyengagesincommercial bankingandwealthmanagement.Ineachof itsactivities,RBChas,andasaresultof the proposalwouldcontinuetohave,asmallshareonanationwidebasis,andnumerous competitorswouldremain.Thecombinedorganizationwouldnotexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldposea significantrisktothefinancialsystemintheeventof financialdistress.Inaddition,the organizationwouldnotbeacriticalservicesproviderorbesointerconnectedwithother firmsorthemarketsthatitwouldposesignificantrisktothefinancialsystemintheevent of financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. FinancialHoldingCompanyElection Asnotedabove,RBCUSAHoldcohaselectedtobecomeafinancialholdingcompanyin connectionwiththeproposal.RBCUSAHoldcohascertifiedthat,uponconsummationof theproposal,RBCUSAHoldcoandalldepositoryinstitutionsitcontrolswouldbewell capitalizedandwellmanagedandhasprovidedalltheinformationrequiredunderthe Board’sRegulationY.54Basedonallthefactsof record,theBoarddeterminesthatRBC USAHoldco’selectionwillbecomeeffectiveuponconsummationof theproposalif,on 50 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 51 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 52 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 53 OnecommenterallegedthatRBCis“toobigtofail,”andanothercommenterallegedthattheproposalisthe “priciestdeal”sincethe2008–09financialcrisis. 54 SeeDodd-FrankAct§606(a),124Stat.at1607,amending12U.S.C.§1843(l)(1);12CFR225.82(f).

148 FederalReserveBulletin|March2016 thatdate,RBCUSAHoldcoiswellcapitalizedandwellmanagedandalldepositoryinstitutionsitcontrolsarewellcapitalized,wellmanaged,andhaveCRAratingsof atleast “Satisfactory.” Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.55Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditioned oncompliancebyApplicantswithalltheconditionsimposedinthisorder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplications.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwith itsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof NewYork,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveOctober7,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard 55 SeveralcommentersrequestedthattheBoardholdpublichearingsormeetingsontheproposal.Section3(b)of theBHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfrom theappropriatesupervisoryauthorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublic hearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwritten commentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenters’requestsin lightofallthefactsofrecord.IntheBoard’sview,commentershavehadampleopportunitytosubmit commentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenters’requestsdonotidentifydisputedissuesoffactmaterialtotheBoard’sdecision andthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestsdonotdemonstratewhywritten commentsdonotpresentthecommenters’viewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestsforapublic hearingormeetingontheproposalaredenied. Inaddition,commentersrequestedafurtherextensionofthecommentperiodfortheproposal.TheBoard’s RulesofProcedurecontemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.12CFR262.25(b)(2).The commenters’requestsforadditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionofthe publiccommentperiodforthisproposal.Accordingly,therequestsforextensionofthecommentperiodare denied.

LegalDevelopments:FourthQuarter,2015 149 Baylake Corp. Sturgeon Bay, Wisconsin OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2015–33(November16,2015) BaylakeCorp.(“Baylake”),SturgeonBay,Wisconsin,abankholdingcompanywithinthe meaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2tomergewithNEWBancshares,Inc. (“NewBancshares”),andtherebyindirectlyacquireitssubsidiarybank,UnionStateBank, bothof Kewaunee,Wisconsin. Inaddition,Baylake’ssubsidiarystatememberbank,BaylakeBank,alsoof SturgeonBay, hasrequestedtheBoard’sapprovaltomergewithUnionStateBankpursuantto section18(c)of theFederalDepositInsuranceAct(“BankMergerAct”),withBaylake Bankasthesurvivingentity.3BaylakeBankalsohasappliedundersection9of theFederal ReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeandbranchesof UnionStateBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister35,358(2015)).5Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct,theBankMergerAct,andtheFRA. AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwas requestedfromtheUnitedStatesAttorneyGeneralandacopyof therequesthasbeen providedtotheFederalDepositInsuranceCorporation(“FDIC”). Baylake,withconsolidatedassetsof approximately$981.1million,isthe717thlargest depositoryorganizationintheUnitedStates.6BaylakecontrolsBaylakeBank,whichoperatesonlyinWisconsin.Baylakeisthe22ndlargestinsureddepositoryorganizationin Wisconsin,controllingdepositsof approximately$737.9million,whichrepresentlessthan 1percentof thetotaldepositsininsureddepositoryinstitutionsinthatstate.7 NEWBancshares,withconsolidatedassetsof approximately$86.7million,isthe4,806th largestdepositoryorganizationintheUnitedStates.NEWBancsharescontrolsUnion StateBank,anonmemberbankthatoperatesonlyinWisconsin.NEWBancsharesisthe 193rdlargestinsureddepositoryorganizationinWisconsin,controllingapproximately $79.0millionindeposits,whichrepresentlessthan1percentof thetotaldepositsheldby insureddepositoryinstitutionsinWisconsin. Onconsummationof thisproposal,Baylakewouldbecomethe657thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$1.1billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedinAppendixA.BaylakewillconsolidateonebranchofUnionState BankwithaneighboringbranchofBaylakeBank. 5 12CFR262.3(b). 6 Nationwidedeposit,asset,andrankingdataareasofJune30,2015.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,savingsassociations,andnon-deposittrustcompanies. 7 Statedeposit,marketshare,andrankingdataareasofJune30,2014.

150 FederalReserveBulletin|March2016 theUnitedStates.Baylakewouldcontroltotaldepositsof approximately$816.9million, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.InWisconsin,Baylakewouldbecomethe20thlargest depositoryinstitution,controllingdepositsof approximately$816.9million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.8 BaylakeandNEWBancshareshavesubsidiarydepositoryinstitutionsthatcompete directlyintheGreenBay,Wisconsin,bankingmarket(the“GreenBaybankingmarket”).9 TheBoardreceivedtwocommentsobjectingtotheproposalonthegroundsthatconsummationof theproposalwouldresultindecreasedcompetitioninKewaunee,Wisconsin. Thesecommentersexpressedconcernthatconsummationof theproposalwouldhavean adverseimpactonfeesandloanratesinKewaunee,Wisconsin. Therelevantbankingmarketmustreflectcommercialandbankingrealitiesandshould consistof thelocalareawherebanksoffertheirservicesandwherelocalcustomerscan practicablyfindalternatives.Thekeyquestiontobeconsideredinmakingthisselectionis “where,withintheareaof competitiveoverlap,theeffectof themergeroncompetitionwill bedirectorimmediate.”10Indeterminingtherelevantgeographicmarket,theBoard reviewsanumberof factorsthatidentifythegeographicareainwhichcompetitiveforces acttoaffectthepricingandavailabilityof bankingproductsandservices.Theseinclude dataonworkercommutingpatterns,asindicatedbycensusdata;populationdensity; degreeof economicintegration;andothersimilarfactorsthatindicatethegeographic scopeof competition.11 Inthiscase,theBoardhasconsideredthatasignificantnumberof KewauneeCountyand Cityof KewauneeresidentscommutetoBrownCounty,thecentralcountyof theGreen BayMetropolitanStatisticalArea(“GreenBayMSA”).Whiletherearenumerousbanking optionsinBrownCounty,theBoardalsonotesthatresidentsof KewauneeCountyhave closerbankingalternativesavailableinthetownsof Casco,Luxemburg,andAlgoma,for whichthetraveltimefromKewauneeCountyisapproximately20minutes.Basedonthe proximityandeconomicintegrationof KewauneeCountywiththeseotherareas,andall thefactsof record,theBoardconcludesthattherelevantbankingmarkettoconsiderin reviewingthecompetitiveeffectsof thisproposalistheGreenBaybankingmarket. 8 12U.S.C.§§1842(c)(1)and1828(c)(5). 9 TheGreenBaybankingmarketisdefinedasBrownandKewauneecounties;Morgan,Abrams,Pensaukee, Chase,andLittleSuamicotownshipsinOcontoCounty;AngelicaandMapleGrovetownshipsinShawano County;OneidatownshipinOutagamieCounty;andCooperstowntownshipinManitowocCounty,allin Wisconsin. 10 St.JosephValleyBank,68FederalReserveBulletin673(1982)(quotingUnitedStatesv.PhiladelphiaNational Bank,374U.S.321,357(1963). 11 SeeCrestarBank,81FederalReserveBulletin200,201n.5(1995);Pennbancorp,69FederalReserveBulletin548 (1983);St.JosephValleyBank,68FederalReserveBulletin673(1982);andU.S.Bancorp,67FederalReserve Bulletin60,61n.2(1981).

LegalDevelopments:FourthQuarter,2015 151 TheBoardhasconsideredthecompetitiveeffectsof theproposalintheGreenBaybanking marketinlightof allthefactsof record.Inparticular,theBoardhasconsideredthe numberof competitorsthatwouldremaininthebankingmarket;therelativeshareof total depositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatBaylake wouldcontrol;12theconcentrationlevelof marketdepositsandtheincreaseinthatlevel,as measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);13the commentsreceivedontheproposal;andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheGreenBaybankingmarket.On consummationof theproposal,theGreenBaybankingmarketwouldremainmoderately concentrated,asmeasuredbytheHHI.TheHHIchangewouldbeminimal,andnumerous competitorswouldremaininthemarket.14 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheGreenBaybankingmarketorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBankMergerAct,andtheFRA,the Boardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof the institutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformation regardingthefinancialconditionof theorganizationsinvolvedonbothparent-onlyand consolidatedbases,aswellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof publicandsupervisoryinformation 12 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50-percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin53(1991). 13 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html. 14 BaylakeoperatestheseventhlargestdepositoryinstitutionintheGreenBaybankingmarket,controlling approximately$288.2millionindeposits,whichrepresent4.9percentofmarketdeposits.NEWBancshares operatesthe14thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately $75.1million,whichrepresent1.3percentofmarketdeposits.Uponconsummationoftheproposedtransaction,Baylakewouldbecomethefifthlargestdepositoryinstitutioninthemarket,controllingdepositsof approximately$363.3million,whichrepresent6.2percentofmarketdeposits.TheHHIfortheGreenBay bankingmarketwouldincreaseby12pointstoalevelof1426,and19competitorswouldremaininthemarket.

152 FederalReserveBulletin|March2016 regardingcapitaladequacy,assetquality,andearningsperformance,aswellaspublic commentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombined organization,includingitscapitalposition,assetquality,liquidity,earningsprospects,and theimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheability of theorganizationtoabsorbthecostsof theproposalandtocompleteeffectivelythe proposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,the Boardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthe futureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialand managerialresourcesandtheproposedbusinessplan. BaylakeandBaylakeBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisabankholdingcompanymergerthatis structuredasacashandstockpurchase,withasubsequentmergerof thesubsidiary depositoryinstitutions.15Theassetquality,earnings,andliquidityof BaylakeandNEW Bancsharesareconsistentwithapproval,andBaylakeappearstohaveadequateresources toabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Baylake,NEWBancshares,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyBaylake;theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;the organizations’recordsof compliancewithapplicablebanking,consumerprotection,and anti-money-launderinglaws;aswellasinformationprovidedbycommenters. Baylake,NEWBancshares,andtheirsubsidiarydepositoryinstitutionsareeachconsidered tobewellmanaged.Baylake’sexistingrisk-managementprogramanditsdirectorateand seniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutive officersof Baylakehavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredBaylake’splansforimplementingtheproposal.Baylakehas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.Baylake wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,Baylake’sandNEWBancshares’managementhavetheexperienceandresourcesto ensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andBaylake planstointegrateNEWBancshares’existingmanagementandpersonnelinamannerthat augmentsBaylake’smanagement. Basedonallthefactsof record,includingBaylake’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andcommentsreceivedontheproposal,theBoardconcludesthatconsiderationsrelating tothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof BaylakeandNEW Bancsharesincombattingmoney-launderingactivities,areconsistentwithapproval. 15 Toeffecttheholdingcompanymerger,eachshareofNEWBancsharescommonstockwouldbeconvertedinto arighttoreceiveBaylakecommonstockandcash,basedonanexchangeratio.Baylakeexpectstofundthe cashportionoftheexchangewithfinancingfromathird-partylender.Baylakehasthefinancialresourcesto supportthisobligation.

LegalDevelopments:FourthQuarter,2015 153 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.16Initsevaluationof theeffectof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).17The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,18andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods.19 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheapplicant institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans followingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Baylake BankandUnionStateBank,thefairlendingandcompliancerecordsof bothbanks,the supervisoryviewsof theFDIC,confidentialsupervisoryinformation,information providedbyBaylake,andthepubliccommentsreceivedontheproposal. Recordsof PerformanceundertheCRA.Asindicatedabove,inevaluatingtheconvenience andneedsfactorandCRAperformance,theBoardevaluatesaninstitution’sperformance inlightof examinationsandothersupervisoryinformationandinformationandviews providedbytheappropriatefederalsupervisors.20 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.21Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe 16 12U.S.C.§1842(c)(2). 17 12U.S.C.§2901etseq. 18 12U.S.C.§2901(b). 19 12U.S.C.§2903. 20 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642,11,665 (March11,2010). 21 12U.S.C.§2906.

154 FederalReserveBulletin|March2016 creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sdatareportedundertheHomeMortgageDisclosureAct(“HMDA”),in additiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollected andreportedundertheCRAregulationstoassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonthenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;the geographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberandamountof loansinlow-, moderate-,middle-,andupper-incomegeographies;thedistributionof suchloansbasedon borrowercharacteristics,includingthenumberandamountof homemortgageloansto low-,moderate-,middle-,andupper-incomeindividuals;22theinstitution’scommunity developmentlending,includingthenumberandamountof communitydevelopmentloans andtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexible lendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof BaylakeBank.BaylakeBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Chicago,asof August26,2013(“BaylakeBankEvaluation”).23Thebankreceived“High Satisfactory”ratingsfortheLendingTest,theInvestmentTest,andtheServiceTest.24 Examinersfoundthatthebankoriginatedahighpercentageof loanswithinitsassessment areasandthatthegeographicdistributionof loansreflectedgoodpenetrationthroughout itsassessmentareas.Examinersnotedthatthebank’slendinglevelsreflectedagood responsivenesstothecreditneedsof itsassessmentareas.Examinersfoundthatthebank’s distributionof loansreflectedagoodpenetrationamongborrowersof differentincome levels,aswellassmallbusinessesandsmallfarmsof differentsizes.Finally,examiners notedthatthebankmadeanadequatelevelof communitydevelopmentloans,andmade extensiveuseof innovativeandflexiblelendingpracticestoservethecreditneedsof borrowersinitsassessmentareas. ExaminersfoundBaylakeBanktohaveagoodlevelof qualifiedcommunitydevelopment investments,particularlythosethatarenotroutinelyprovidedbyprivateinvestors.Examinersnotedthatthebank’sinvestmentswerefocusedonaffordablehousingthroughthe purchaseof mortgage-backedsecurities,revitalizationandstabilizationthroughthe purchaseof bondsthatfundimprovementsintargetedareas,andcommunityserviceactivitiesthatsupporteducation.Examinersfoundthatthebankexhibitedgoodresponsiveness tocreditandcommunitydevelopmentneeds. 22 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 23 TheBaylakeBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The BaylakeBankEvaluationreviewedHMDAandCRAreportablelendingfromJanuary1,2011,through December31,2012.Theevaluationperiodforcommunitydevelopmentloans,investments,andserviceswas January1,2011,throughAugust26,2013. 24 TheBaylakeBankEvaluationincludedafull-scopereviewofthreeassessmentareas:theGreenBayMSA;the DoorCountyNon-MetropolitanArea;andtheWaupaca-Waushara-GreenLakeCountyNon-Metropolitan Area.Alimited-scopereviewwasperformedintheAppletonMSAandtheManitowicCounty Non-MetropolitanArea.

LegalDevelopments:FourthQuarter,2015 155 ExaminersnotedthatBaylakeBank’sdeliverysystemswerereasonablyaccessibletothe bank’sgeographiesandindividualsof differentincomelevelsinitsassessmentareas.Examinersfoundthatthebank’sbusinesshoursandbankingservicesdidnotvaryinawaythat inconvenienceditsassessmentareas,particularlyLMIgeographiesorLMIindividuals,and thatthebank’srecordof openingandclosingbranchofficeshadnotadverselyimpacted LMIgeographiesorindividuals.Finally,examinersnotedthatthebankprovidesarelativelyhighlevelof communitydevelopmentservices. CRAPerformanceof UnionStateBank.UnionStateBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof March23,2015(the“UnionStateBankEvaluation”),25witharatingof “Satisfactory”for theLendingTest.26 Examinersfoundthatthebank’sloan-to-depositratiowasreasonablegiventhebank’ssize, financialcondition,andcreditneedswithinthebank’sassessmentareas.Examinersnoted thatthebankoriginatedamajorityof homemortgageloansandsmallbusinessloans withinitsassessmentareas.27Examinersalsonotedthatthebank’sgeographicdistribution of homemortgageloansandsmallbusinessloansreflectedreasonablepenetrationamong borrowersof differentincomelevelsandbusinessesof differentsizesandthathomemortgageloansandsmallbusinessloansreflectedareasonabledistributionthroughoutthe bank’sassessmentareas. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. Baylakerepresentsthatcustomersof thecombinedorganizationwouldbenefitfrom increasedlendingcapabilitiesuponconsummationof theproposalandthattheproposal wouldprovidesuchcustomerswithaccesstoanexpandedATMnetwork.Inaddition, UnionStateBank’scustomerswouldbenefitfromexpandedavailabilityof productsand servicesthatarenotcurrentlyofferedbyUnionStateBank,includingawiderarrayof depositproducts,onlinebanking,andmobilebanking. TheBoardreceivedacommentfromamemberof thelocalschoolboardinKewaunee County,objectingtotheproposalonthebasisthatitwouldhaveanadverseimpactonthe availabilityof low-costproductsandservicesofferedbytheresultinginstitutionto municipalorganizationsandthat,asaresult,theschoolboardmayberequiredtolook outsideof theKewauneeCountycommunityforbankingalternatives.Basedonconsultationswithmembersof schoolboardsinotherschooldistricts,thiscommenterassertsthat otherschooldistrictsdonothaveaccesstothesamelow-costproductsandservices currentlyofferedbyUnionStateBank. 25 TheUnionStateBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures.The LendingTestincludedareviewofHMDAreportablelendingfor2013and2014andarandomselectionof smallbusinessloansoriginatedsinceJanuary1,2014.Thelendingactivitieswithineachcategoryweregiven equalweightintheUnionStateBankEvaluation,asbothcategoriesrepresenttheprimarylendingfocusofthe institution. 26 Thelendingtestapplicabletosmallbanksspecificallyevaluatestheinstitution’sloan-to-depositratioandother lending-relatedactivities,suchasloanoriginationsforsaletothesecondarymarkets,communitydevelopment loans,orqualifiedinvestments;thepercentageofloansandotherlending-relatedactivitieslocatedinthebank’s assessmentareas;thebank’srecordoflendingtoandengaginginotherlending-relatedactivitiesforborrowers ofdifferentincomelevelsandbusinessesandfarmsofdifferentsizes;thegeographicdistributionofthebank’s loans;andthebank’srecordoftakingactioninresponsetowrittencomplaintsaboutitsperformancein helpingtomeetcreditneedsinitsassessmentareas.See,e.g.,12CFR228.26(b). 27 TheUnionStateBankEvaluationincludedareviewofthebank’sassessmentareasconsistingofBrown County,KewauneeCounty,andManitowocCounty.

156 FederalReserveBulletin|March2016 Baylakerepresentsthatithasnoplanstoeliminateanyproductsorservicesinthisbanking marketuponconsummationof theproposalandthatBaylakeBankwouldcontinueto offerthesameproductsandservicescurrentlyprovidedbyUnionStateBank,aswellas additionalproductsandservicesthatBaylakeBankcurrentlymakesavailabletoits customers.Moreover,asdescribedabove,19competitorswouldremainintheGreenBay bankingmarket,therelevantbankingmarketinwhichthecommenterislocated,ensuring thatalternativebankingoptionsareavailableatcompetitivepriceswithintherelevant bankingmarketuponconsummationof theproposal. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingtherecordsof therelevantdepositoryinstitutionsinvolvedunder theCRA,theinstitutions’recordsof compliancewithfairlendingandotherconsumer protectionlaws,consultationswiththeFDIC,confidentialsupervisoryinformation,informationprovidedbyBaylake,thepubliccommentsreceivedontheproposal,andother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactoris consistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBHCActandtheBankMergerActtorequiretheBoardtoconsiderthe extenttowhichaproposedacquisition,merger,orconsolidationwouldresultingreateror moreconcentratedriskstothe“stabilityof theUnitedStatesbankingorfinancial system.”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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.30 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummationof theproposedtransaction, Baylakewouldhaveapproximately$1.1billioninconsolidatedassetsandwouldnotbe likelytoposesystemicrisks.TheBoardgenerallypresumesthataproposalthatinvolvesan acquisitionof lessthan$2billioninassets,orresultsinafirmwithlessthan$25billionin totalconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof the 28 Dodd-FrankAct§604(d)and(f),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C. §§1828(c)(5)and1842(c)(7). 29 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 30 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

LegalDevelopments:FourthQuarter,2015 157 UnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches BaylakeBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof UnionStateBank.TheBoardhasassessedthefactorsitisrequiredto considerwhenreviewinganapplicationunderthatsection.31Specifically,theBoardhas consideredBaylakeBank’sfinancialcondition,management,capital,actionsinhelpingto meettheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,and investmentsinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfindsthose factorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyBaylakeandBaylakeBankwithall theconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals, andonthecommitmentsmadetotheBoardinconnectionwiththeapplications.For purposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,as such,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Chicagoactingunderdelegated authority. Byorderof theBoardof Governors,effectiveNovember16,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 31 12U.S.C.§322;12CFR208.6.

158 FederalReserveBulletin|March2016 BB&T Corporation Winston-Salem, North Carolina OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2015–35(December23,2015) BB&TCorporation(“BB&T”),Winston-Salem,NorthCarolina,afinancialholding companywithinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1 hasrequestedtheBoard’sapprovalundersection3of theBHCAct2tomergewith NationalPennBancshares,Inc.(“NationalPenn”),andtherebyindirectlyacquireNational PennBank,bothof Allentown,Pennsylvania.Followingtheproposedacquisition, NationalPennBankwouldbemergedintoBB&T’ssubsidiarybank,BranchBankingand TrustCompany(“BranchBank”),alsoof Winston-Salem.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister58731(September30,2015)).4Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. BB&T,withconsolidatedassetsof approximately$209.7billion,isthe17thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$146.8billionin consolidateddeposits,whichrepresentapproximately1.1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.5BB&TcontrolsBranch Bank,whichoperatesinAlabama,Florida,Georgia,Indiana,Kentucky,Maryland,New Jersey,NorthCarolina,Ohio,Pennsylvania,SouthCarolina,Tennessee,Texas,Virginia, WestVirginia,andtheDistrictof Columbia.BranchBankisthe10thlargestdepository institutioninPennsylvania,controllingdepositsof approximately$9.7billion,whichrepresent2.7percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6 BranchBankisthefifthlargestdepositoryinstitutioninMaryland,controllingdepositsof approximately$10.1billion,whichrepresent7.7percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.BranchBankisthe25thlargestdepositoryinstitution inNewJersey,controllingdepositsof approximately$1.7billion,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. NationalPenn,withconsolidatedassetsof approximately$9.6billion,isthe120thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$6.7billion inconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.NationalPenncontrols NationalPennBank,whichoperatesinMaryland,NewJersey,andPennsylvania.National PennBankisthe12thlargestdepositoryinstitutioninPennsylvania,controllingdeposits of approximately$6.7billion,whichrepresent1.9percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.Inaddition,NationalPennBankisthe89thand95th largestdepositoryinstitutioninNewJerseyandinMaryland,respectively,controlling 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 ThemergerofNationalPennBankintoBranchBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct. 4 12CFR262.3(b). 5 NationalassetanddepositdataareasofJune30,2015,unlessotherwisenotedandreflecttheacquisitionof SusquehannaBancshares,Inc. 6 StatedepositdataareasofJune30,2015,unlessotherwisenotedandreflecttheacquisitionofSusquehanna Bancshares,Inc.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsandloan associations,andsavingsbanks.

LegalDevelopments:FourthQuarter,2015 159 depositsof approximately$207.5millionand$28.9million,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthosestates. Onconsummationof thisproposal,BB&Twouldremainthe17thlargestinsureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $219.3billion,whichrepresent1.0percentof thetotalamountof assetsof insureddepositoryinstitutionsintheUnitedStates.BB&Twouldcontrolconsolidateddepositsof approximately$153.5billion,whichrepresent1.2percentof thetotaldepositsof insured depositoryinstitutionsintheUnitedStates.BB&TwouldbecomethefifthlargestdepositoryorganizationinPennsylvania,controllingdepositsof approximately$16.4billion, whichrepresent4.6percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.BB&TwouldremainthefifthlargestdepositoryorganizationinMaryland,controllingdepositsof approximately$10.1billion,whichrepresent7.7percentof the totalamountof depositsof insureddepositoryinstitutionsinthatstate.Inaddition,BB&T wouldbecomethe23rdlargestdepositoryorganizationinNewJersey,controllingdeposits of approximately$1.9billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.7Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.8Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates,or30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateorin anystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof BB&TisNorthCarolina,andNational PennBank’shomestateisPennsylvania.10NationalPennBankalsooperatesinMaryland andNewJersey.BB&Tiswellcapitalizedandwellmanagedunderapplicablelawandhasa satisfactoryCommunityReinvestmentAct(“CRA”)11rating.Maryland,NewJersey,and Pennsylvaniadonothaveminimumagerequirements,12andNationalPennBankhasbeen inexistenceformorethanfiveyears. 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).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.§2901etseq. 12 SeeMd.CodeAnn.,Fin.Inst.§§5-901to5-910;N.J.Stat.Ann.§17:9A-133.1;7Pa.Stat.Ann.§§1601–1610.

160 FederalReserveBulletin|March2016 Onconsummationof theproposedtransaction,BB&Twouldcontrol1.2percentof the totalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.MarylandandNewJerseyimposea30percentlimitonthetotalamountof in-state depositsthatasinglebankingorganizationmaycontrol.13Thecombinedorganization wouldcontrolapproximately7.7percentandlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinMarylandandNewJersey,respectively. Accordingly,inlightof allthefactsof record,theBoardmayapprovetheproposalunder section3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitiestobeserved.14 BB&TandNationalPennhavesubsidiarybanksthatcompetedirectlyinsevenbanking marketsinMaryland,NewJersey,andPennsylvania.TheBoardhasconsideredthe competitiveeffectsof theproposalinthelightof allthefactsof record.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthebanking markets;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthe markets(“marketdeposits”)thatBB&Twouldcontrol;15theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsasmeasuredbytheHerfindahlHirschman Index(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesinallrelevantbankingmarkets.On consummation,theLancaster,Pennsylvania,bankingmarketwouldbecomehighlyconcentrated;thePhiladelphia,Pennsylvania,bankingmarketwouldbecomemoderatelyconcentrated;andallotheroverlappingbankingmarketswouldremainmoderatelyconcentrated, asmeasuredbytheHHI.ThechangeintheHHIinthesemarketsgenerallywouldbesmall, consistentwithBoardprecedent,andwithinthethresholdsintheDOJBankMerger 13 Md.CodeAnn.,Fin.Inst.§5-905(b);N.J.Stat.Ann.§17:9A-133.1(b).Pennsylvaniadoesnotimposealimit onthetotalamountofin-statedepositsthatasinglebankingorganizationmaycontrol. 14 12U.S.C.§1842(c)(1). 15 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50-percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 16 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1,000and1,800,andhighlyconcentratedifthepost-mergerHHIexceeds1,800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthat abankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1,800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html.

LegalDevelopments:FourthQuarter,2015 161 Guidelines.Inaddition,numerouscompetitorswouldremaininallrelevantbanking markets.17 TheDepartmentof JusticehasadvisedtheBoardthatconsummationof thetransaction wouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantmarket. Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunityto commentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthesevenbankingmarketsinwhichBB&TandNationalPenncompete directlyorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthat competitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof publicandsupervisoryinformationregardingcapital adequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancial conditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions. Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. BB&TandBranchBankarebothwellcapitalizedandwouldremainsoonconsummation of theproposedacquisition.Theproposedtransactionisabankholdingcompanymerger thatisstructuredasacashandshareexchange.18Theassetquality,earnings,andliquidity of bothBB&TandNationalPennareconsistentwithapproval,andBB&Tappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BB&T,NationalPenn,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyBB&T,theBoard’ssupervisoryexperiences andthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorga- 17 Thesesevenbankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedinthe appendix. 18 Aspartoftheproposedtransaction,eachshareofNationalPenncommonstockwouldbeconvertedintoa righttoreceivecashandBB&Tcommonstockbasedonanexchangeratio.BB&Thasthefinancialresources tofundthetransaction.

162 FederalReserveBulletin|March2016 nizations’recordsof compliancewithapplicablebanking,consumerprotection,andantimoney-launderinglaws. BB&T,NationalPenn,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.BB&T’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficers of BB&Thavesubstantialknowledgeof andexperienceinthebankingandfinancial servicessectors. TheBoardalsohasconsideredBB&T’splansforimplementingtheproposal.BB&Thasa demonstratedrecordof successfullyintegratingorganizationsintoitsoperationsand risk-managementsystemsfollowingacquisitions.BB&Thasconductedcomprehensivedue diligenceandisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.BB&Twouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,BB&T’sandNational Penn’smanagementhavetheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andBB&TplanstointegrateNationalPenn’s existingmanagementandpersonnelinamannerthataugmentsBB&T’smanagement.19 Basedonallthefactsof record,includingBB&T’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof BB&TandNationalPennincombattingmoney-laundering activities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.20Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,21andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.22 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharac- 19 BB&Trepresentsthatitwillestablishanewcommunitybankingregion,whichwillhaveitsheadquartersin Allentown,Pennsylvania,andbeledbyacurrentNationalPennexecutive.Inaddition,BB&Twillinvitethe membersoftheboardsofdirectorsofNationalPennandNationalPennBanktoserveforthreeyearsas membersofoneormoreregionaladvisoryboardsestablishedbyBB&T. 20 12U.S.C.§1842(c)(2). 21 12U.S.C.§2901(b). 22 12U.S.C.§2903.

LegalDevelopments:FourthQuarter,2015 163 teristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,andinformationprovidedbythe applicant.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingand outreachplans,theorganization’splansafterconsummation,andanyotherinformation theBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Branch BankandNationalPennBank;thefairlendingandcompliancerecordsof bothbanks;the supervisoryviewsof theFDIC,theOfficeof theComptrollerof theCurrency(“OCC”), theConsumerFinancialProtectionBureau(“CFPB”);confidentialsupervisoryinformation;andinformationprovidedbyBB&T.23 Recordsof PerformanceundertheCRA.Asindicatedabove,inevaluatingtheconvenience andneedsfactorandCRAperformance,theBoardevaluatesaninstitution’sperformance inlightof examinationsandothersupervisoryinformationandinformationandviews providedbytheappropriatefederalsupervisors.24 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.25Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sdatareportedundertheHomeMortgageDisclosureActof 1975 (“HMDA”),26inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloan datacollectedandreportedundertheCRAregulations,toassessaninstitution’slending activitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonthenumberandamountof homemortgage,small business,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessment areas;thegeographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberandamountof loansin low-,moderate-,middle-,andupper-incomegeographies;thedistributionof suchloans basedonborrowercharacteristics,includingthenumberandamountof homemortgage loanstolow-,moderate-,middle-,andupper-incomeindividuals;27theinstitution’s 23 TheBoardrecentlyreviewedtheCRAandfairlendingrecordsofBranchBankinconnectionwithits approvalsofBB&T’sacquisitionsofTheBankofKentuckyFinancialCorporationandSusquehanna Bancshares,Inc.SeeBB&TCorporation,FRBOrderNo.201515(June3,2015);BB&TCorporation,FRB OrderNo.2015-18(July7,2015). 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642, 11665(March11,2010). 25 12U.S.C.§2906. 26 12U.S.C.§2801etseq. 27 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3).

164 FederalReserveBulletin|March2016 communitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. CRAPerformanceof BranchBank.BranchBankwasassignedanoverall“Outstanding” ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof May19,2014 (“BranchBankEvaluation”).28BranchBankreceiveda“HighSatisfactory”ratingforthe LendingTestand“Outstanding”ratingsfortheInvestmentTestandServiceTest.ExaminersfoundthatBranchBankmadeanexcellentlevelof qualifiedinvestmentsandmade extensiveuseof innovativeinvestmentstosupportcommunitydevelopmentinitiatives.The BoardhasconsultedwiththeFDICregardingtheBranchBankEvaluation. ExaminersfoundthatBranchBank’soveralllendinglevelsreflectedgoodresponsivenessto assessmentareacreditneedsandthatBranchBankmadeahighpercentageof itsloans withinitsassessmentareas.Accordingtoexaminers,thebank’sgeographicdistributionof loansreflectedadequatepenetrationthroughoutthebank’sassessmentareas.Examiners alsofoundthatthebank’sdistributionof borrowersreflectedgoodpenetrationamong retailcustomersof differentincomelevelsandbusinesscustomersof differentsizes.ExaminersnotedthatBranchBankexhibitedagoodrecordof servingthecreditneedsof the mosteconomicallydisadvantagedareasof itsassessmentareas,low-incomeindividuals, andverysmallbusinesses.Examinersalsonotedthatthebankwasaleaderinmaking communitydevelopmentloansduringthereviewperiod.BranchBank’scommunitydevelopmentloansweremadeforavarietyof purposes,includingfinancingaffordablehousing forLMIindividuals,promotingeconomicdevelopmentbypartneringwithcommunity developmentorganizations,andsupportingvariousstate-widelendingconsortiums.In addition,examinersnotedthatBranchBankofferedaffordablehousingloansthrough severalfederalandstategovernmentprograms. ExaminersfoundthatBranchBankhadanexcellentlevelof qualifiedcommunitydevelopmentloaninvestmentsandgrants,anditsvolumeof qualifiedinvestmentswassignificant. Thebankextendedqualifiedinvestments,ofteninaleadershippositionandnotroutinely providedbyprivateinvestors,atahighlevelthroughoutitsassessmentareas.Examiners notedthatBranchBank’sinvestmenttestperformancewas“Outstanding”throughouta significantnumberof statesandmultistateMSAs,anditsperformancewasrated“High Satisfactory”inseveralothers.29Examinersalsofoundthebanktobealeaderinaffordable 28 TheBranchBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examiners reviewedloansreported,pursuanttoHMDAandCRAdatacollectionrequirements(geographicdistribution andborrowerdistribution)in2011,2012,and2013.Theevaluationperiodforcommunitydevelopment lending,innovativeandflexiblepractices,qualifiedinvestments,andcommunitydevelopmentserviceswas January1,2011,throughDecember31,2013.ThebranchofficedistributionevaluationwasasofDecember31, 2013.TheBranchBankEvaluationcoveredBranchBank’s108assessmentareaslocatedin11statesandfive multistatemetropolitanstatisticalareas(“MSAs”):Alabama;Florida;Georgia;Kentucky;Maryland;North Carolina;SouthCarolina;Tennessee;Texas;Virginia;WestVirginia;theCharlotte,NorthCarolina–South Carolina,MSA(“CharlotteMSA”);theColumbus,Georgia–Alabama,MSA(“ColumbusMSA”);the Kingsport–Bristol–Bristol,Tennessee–Virginia,MSA(“KingsportMSA”);theLouisville,Kentucky–Indiana, MSA(“LouisvilleMSA”);andtheWashington,D.C.–Maryland–Virginia–WestVirginia,MSA(“Washington D.C.MSA”).TheBranchBankEvaluationincludedafull-scopereviewof48oftheseassessmentareas, includingallfivemultistateMSAs,whichcapturedapproximately70percentormoreofthetotallendingand depositactivityforeachstate. 29 Examinersfoundthatthebank’sperformanceundertheInvestmentTestwas“Outstanding”inAlabama, Florida,Georgia,NorthCarolina,SouthCarolina,Texas,Virginia,andWestVirginia,aswellasinthe ColumbusandKingsportMSAs.ExaminersalsonotedBranchBank’sinvestmenttestperformancewas“High Satisfactory”inKentucky,Maryland,andTennessee,aswellasintheCharlotte,Louisville,andWashington D.C.MSAs.

LegalDevelopments:FourthQuarter,2015 165 housingtaxcreditinvestmentsandthatthebankprovidedinnovativeinvestmentsthat exhibitedexcellentresponsivenesstoassessmentareaneeds. ExaminersnotedthatBranchBank’soverallbranchdistributioninFlorida,Georgia, NorthCarolina,Tennessee,andVirginiaprovidedagoodlevelof accessibilitytoLMIindividualsandareasandthatitsbranchdistributioninWestVirginiaprovidedexcellent accessibilitytoLMIareas.30Examinersfurthernotedthatinthesubstantialmajorityof theremainingassessmentareas,thebranchdistribution,bygeography,wasatleast adequate.Examinersalsofoundthatthebankofferedseveralservicesdesignedtomeetthe convenienceandneedsof theassessmentareas,particularlyforLMIgeographiesand individuals.Examinersindicatedthatthebankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutitsassessmentareas.Examinersnotedthatbankmanagementandemployeesprovidedfinancialadviceandassistancetomanycommunitydevelopmentorganizations. BB&T’sEffortsSincethe2014CRAEvaluation.Inthefirstquarterof 2015,theFDIC approvedaproposalbyBranchBanktoacquire41branchesinTexasfromCitibank, NationalAssociation.Inconnectionwiththatproposal,theFDICdirectedBranchBank todevelopastrategicplan.BranchBankdevelopedtheplaninthecontextof available aggregateandpeerdataanddemographics,safeandsoundlendingconsiderations,andthe bank’sevaluatedperformanceinmajority-minoritycensustracts,aswellasitsperformance amongindividualracialandethnicgroups.BranchBanksubmitteditsstrategicplan,which providedforasemi-annualreviewof BranchBank’senterprise-widebranchingstrategy, lendingdistributions,andmarketingefforts,totheFDIC.TheFDICdeemedtheplan acceptableonFebruary3,2015. In2015,BranchBankopenedbranchesincertainmoderate-incomeandmajorityAfrican Americancensustractsandhasmadeenhancedinvestmentsinmortgageandsmallbusinessadvertisinginminoritycommunities.ThebankalsoisworkingtocompletetwoadditionalbranchesinBaltimoreandhasidentifiedlocationsfortheestablishmentof new branchesinLMIandminorityareasinMiami,Florida,andinAustin,Dallas,and Houston,allinTexas.BranchBankcontinuedtoworkwithagenciesinvolvedin homebuyereducationandfinancialliteracyandwithorganizationsaddressingaffordable housinginitsassessmentareas.Inaddition,thebankhashostedorparticipatedinseveral communityoutreachactivitiescenteredonfirst-timehomebuying,financialliteracy,credit awarenessandcounseling,budgetplanning,andbusinessdevelopmentinminorityand LMIcommunities.BranchBankhasincreaseditsmarketingeffortsinAfricanAmerican andHispaniccensustractsintheAtlanta,Baltimore,Dallas,andHoustonmarkets.Similarly,BranchBankhastakenstepstoenhanceitscommunityoutreachtominority-owned businesseswithinitsAtlanta,Baltimore,Dallas,andHoustonmarkets. CRAPerformanceof NationalPennBank.NationalPennBankwasassignedanoverall “Outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof June3,2013(“NationalPennBankEvaluation”).31NationalPennBankreceived “Outstanding”ratingsfortheLendingTestandServiceTestanda“HighSatisfactory” 30 ExaminersnotedthatBranchBankdemonstratedan“Outstanding”recordregardingtheServiceTestin Florida,Georgia,NorthCarolina,Virginia,andWestVirginia,andinseveralmultistateMSAs.Asof December31,2013,thebankoperated870branchesinFlorida,NorthCarolina,andVirginia,whichtogether accountedforapproximately48percentofthebank’sbranches.Consequently,examinersplacedmoreweight ontheinstitution’sperformanceinFlorida,NorthCarolina,andVirginia. 31 TheNationalPennBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.The evaluationperiodfortheLendingTestwasfromJanuary1,2010,toDecember31,2012,exceptforcommunity developmentloans,whichhadanevaluationperiodfromApril6,2010,toJune3,2013.Theevaluationperiod

166 FederalReserveBulletin|March2016 ratingfortheInvestmentTest.32ExaminersnotedthatNationalPennBank’slendinglevels reflectedexcellentresponsivenesstocommunitycreditneeds,andthedistributionof loans toborrowersreflectedexcellentpenetrationamongretailcustomersof differentincome levelsandbusinesscustomersof differentsizes.ExaminersalsonotedthatNationalPenn Bankwasaleaderinprovidingcommunitydevelopmentservices. ExaminersnotedthatNationalPennBank’soveralllendinglevelsreflectedexcellent responsivenesstoassessmentareacreditneedsinPennsylvaniaandgoodresponsivenessin thePhiladelphia–Camden–Wilmington,Pennsylvania–NewJersey–Delaware–Maryland, MSA.Examinersfoundthatasubstantialmajorityof homemortgageloansandsmall businessloanswereoriginatedwithinthebank’scombinedassessmentareas.Examiners alsofoundthatthebank’sgeographicdistributionof loansreflectedgoodpenetration throughoutthebank’sassessmentareasandexcellentpenetrationamongretailcustomers of differentincomelevelsandbusinessesof differentsizesinPennsylvania.Examiners notedthatthebank’scommunitydevelopmentlendinghadapositiveimpactonthe LendingTestrating. Examinersobservedthatthebankhadasignificantlevelof qualifiedcommunitydevelopmentinvestments,donations,andgrantsthroughoutitsassessmentareas.Thebank’s investmentssupportedcommunitydevelopmentfinancialinstitutionsandwerealsousedto purchaseGovernmentNationalMortgageAssociationissuedmortgage-backedsecurities withtheunderlyingcollateralconsistingof loanstoLMIborrowers. Examinersfoundthatthebankwasaleaderinprovidingcommunitydevelopmentservices. Examinersalsofoundthatthebank’sdeliverysystemswerereadilyaccessibletoindividualsof differentincomelevelsintheassessmentareas. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. BranchBankrepresentsthatitwillapplythebank’sCRAlending,investment,andservice programstotheoperationsandactivitiesof NationalPennBankinthecommunitiesit serves.BB&Trepresentsthatasaresultof theproposal,existingcustomersof National Pennwouldhaveaccesstoacomplementof productsandservicesthatismoreexpansive thanthatcurrentlyavailableatNationalPenn,includingSmallBusinessAdministration products,prepaidaccountswithdebitcards,overdraftlinesof credit,creditcards,securities brokerageservices,fee-basedfinancialplanningandinvestmentmanagementservices, retirementandinstitutionalservices,andcorporatetrustservices.Moreover,BB&Tasserts thatcustomersof bothinstitutionswouldbenefitfromamoreexpansivebranchand ATMnetwork. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingtherecordsof therelevantdepositoryinstitutionsinvolvedunder theCRA,theinstitutions’recordsof compliancewithfairlendingandotherconsumer protectionlaws,consultationswiththeFDIC,OCC,andCFPB,confidentialsupervisory fortheInvestmentTestandtheServiceTestwasfromApril6,2010,throughJune3,2013.Examinersalso consideredinvestmentsmadebyNationalPennInvestmentCompany,awhollyownedsubsidiaryofNational Penn. 32 TheNationalPennBankEvaluationincludedafull-scopereviewofthefollowingassessmentareas:thePhiladelphia,Pennsylvania,MetropolitanDivision(“MD”);theAllentown–Bethlehem–Easton,Pennsylvania–New Jersey,MSA;andtheReading,Pennsylvania,MSA.Alimited-scopereviewwasperformedinthe Wilmington,Delaware–Maryland–NewJersey,MD;theLancaster,Pennsylvania,MSA;theScranton–Wilkes- Barre,Pennsylvania,MSA;theStateCollege,Pennsylvania,MSA;andtheSchuylkillCountyandMonroe Countyassessmentareas,bothinPennsylvania.TheYork–Hanover,Pennsylvania,MSAwasonlyreviewed duringtheevaluationperiodusing2000censusdata.NationalPennBank’ssoleofficeinthisMSAwasclosed in2012,eliminatingitasanassessmentarea.

LegalDevelopments:FourthQuarter,2015 167 information,informationprovidedbyBB&T,andotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,the Boardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof 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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.35 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Boththeacquirerandthetargetarepredominately engagedinretailcommercialbankingactivities.36Theproformaorganizationwouldhave minimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complex interrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirm intheeventof financialdistress.Inaddition,theorganizationwouldnotbeacritical servicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldposea significantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. 33 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 36 BB&Tprimarilyacceptsretaildepositsandengagesinmortgagelending,loanservicing,smallbusinesslending, otherconsumerlending,wealthmanagement,assetmanagement,andcapitalmarketsservices.Toamuchlesser extent,BB&Tengagesininsuranceagencyandwholesaleinsurancebrokerageactivities,andsecurities brokerageservices.NationalPennacceptsretaildepositsandengagesinmortgagelending,otherconsumer lending,andbusinessloans.Toamuchlesserextent,NationalPennoffersfiduciary,investmentadvisory,asset management,andretirementplanservices,aswellassecuritiesandinsurancebrokerage,riskmanagement,and realestatetitleandsettlementservices.Ineachofitsactivities,BB&Thas,andasaresultoftheproposalwould continuetohave,asmallshareonanationwidebasis,andnumerouscompetitorswouldremain.

168 FederalReserveBulletin|March2016 Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyBB&Twithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafterunlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Richmondactingunderdelegated authority. Byorderof theBoardof Governors,effectiveDecember23,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard

LegalDevelopments:FourthQuarter,2015 169 Order Issued Under Sections 3 and 4 of the Bank Holding Company Act Community Bank System, Inc. Dewitt, New York OrderApprovingtheAcquisitionof aSavingsandLoanHoldingCompanyandAcquisitionof aBank FRBOrderNo.2015–34(November18,2015) CommunityBankSystem,Inc.(“CBSI”),Dewitt,NewYork,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956,asamended(“BHCAct”), hasrequestedtheBoard’sapprovalundersections4(c)(8)and4(j)of theBHCAct1to acquireOneidaFinancialCorp.(“Oneida”)andtherebyindirectlyacquireitssubsidiary bank,OneidaSavingsBank,astatesavingsbankthathaselectedtobetreatedasasavings associationpursuanttosection10(l)of theHomeOwners’LoanAct,asamended,2bothof Oneida,NewYork.CBSIhasalsorequestedtheBoard’spriorapprovalundersection3of theBHCAct3toacquireStateBankof Chittenango(“Bankof Chittenango”), Chittenango,NewYork,alimitedpurposecommercialbankwhollyownedbyOneida SavingsBank.4Followingtheproposedacquisition,OneidaSavingsBankandBankof ChittenangowouldbemergedintoCBSI’ssubsidiarybank,CommunityBank,N.A., Canton,NewYork.5 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister27,171(2015)).6Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthintheBHCAct. CBSI,withconsolidatedassetsof approximately$7.9billion,isthe142ndlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$6.1billionin deposits.7CBSIcontrolsCommunityBank,whichoperatesinNewYorkandPennsylvania. CommunityBankisthe26thlargestdepositoryinstitutioninNewYork,controlling depositsof approximately$4.9billion,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate.8 Oneida,withconsolidatedassetsof approximately$850million,isthe819thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$744millionin deposits.OneidacontrolsOneidaSavingsBank,whichoperatessolelyinNewYork. OneidaSavingsBankisthe73rdlargestinsureddepositoryinstitutioninNewYork, 1 12U.S.C.§§1843(c)(8)and(j). 2 12U.S.C.§1467a(l). 3 12U.S.C.§1842(a). 4 BankofChittenangoisastate-charterednonmembercommercialbank,theactivitiesofwhicharelimitedto municipaldeposit-taking.OneidaisnotabankholdingcompanywithrespecttoBankofChittenango.See 12U.S.C.§1841(a)(5)(E). 5 ThemergersofOneidaSavingsBankandBankofChittenangointoCommunityBankaresubjecttothe approvaloftheOfficeoftheComptrolleroftheCurrency(“OCC”),pursuanttosection18(c)oftheFederal DepositInsuranceAct.12U.S.C.§1828(c).TheOCCapprovedthebankmergersonNovember12,2015. 6 12CFR262.3(b). 7 NationwideassetanddepositdataareasofJune30,2015,unlessotherwisenoted. 8 StatedepositdataareasofJune30,2014,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations.

170 FederalReserveBulletin|March2016 controllingdepositsof approximately$676million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.9 Onconsummationof thisproposal,CBSIwouldbecomethe126thlargestinsureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $8.8billion,whichrepresentlessthan1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.CBSIwouldcontroltotaldepositsof approximately $6.8billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.InNewYork,CBSIwouldbecomethe23rd largestdepositoryorganization,controllingdepositsof approximately$5.6billion,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.10TheBoardrequiresthatsavingsassociationsacquiredby bankholdingcompaniesconformtheirdirectandindirectactivitiestothosepermissiblefor bankholdingcompaniesundersection4(c)(8)of theBHCAct.11CBSIhascommittedthat allof theactivitiesof Oneidaanditssubsidiarieswillconformtothosepermissibleunder section4of theBHCActandRegulationYorbedivested. FactorsGoverningBoardReviewof theTransactions Becausethistransactioninvolvestheacquisitionof asavingsassociationandabank,the Boardhasreviewedthetransactionunderbothsection4andsection3of theBHCAct, respectively.Section4establishesthestandardsgoverningtheacquisitionof asavingsassociation,andsection3establishesthestandardsgoverningtheacquisitionof abank. Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof Oneida“canreasonablybeexpectedtoproducebenefitstothepublic,such asgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossible adverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof theUnited Statesbankingorfinancialsystem.”12Aspartof itsevaluation,theBoardreviewsthe financialandmanagerialresourcesandthefutureprospectsof thecompaniesinvolved,the effectof theproposaloncompetitionintherelevantmarkets,therisktothestabilityof theUnitedStatesbankingorfinancialsystem,andthepublicbenefitsof theproposal.13In actingonanoticetoacquireasavingsassociation,theBoardreviewstherecordsof performanceof therelevantinsureddepositoryinstitutionsundertheCommunityReinvestment Act(“CRA”). 9 ThetotalamountofdepositsheldbyBankofChittenangoareincludedinthedepositdataforOneidaSavings Bank. 10 12CFR225.28(b)(4)(ii). 11 Asavingsassociationoperatedbyabankholdingcompanymayengageonlyinactivitiesthatarepermissible forbankholdingcompaniesundersection4(c)(8)oftheBHCAct.12CFR225.28(b)(4).Inthisinstance,CBSI willimmediatelymergeOneidaSavingsBankintoCommunityBankandwillnotoperatethesavingsassociationindependently. 12 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankWallStreetReformandConsumerProtectionAct (“Dodd-FrankAct”),Pub.L.No.111-203,124Stat.1601(2010),added“risktothestabilityoftheUnited Statesbankingorfinancialsystem”tothelistofpossibleadverseeffects. 13 See12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrder2012-2(February14,2012) (“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008); WachoviaCorporation,92FederalReserveBulletinC138(2006);andBancOneCorporation,83FederalReserve Bulletin602(1997).

LegalDevelopments:FourthQuarter,2015 171 Section3of theBHCActrequirestheBoardtoconsiderthefinancialandmanagerial resourcesandfutureprospectsof thecompaniesinvolvedinatransactiontoacquire controlof abank.Section3alsorequirestheBoardtoconsiderthecompetitiveeffectsof thetransaction,theeffectof theproposalontheconvenienceandneedsof thecommunitiesaffectedbytheproposal,therisksof theproposaltothestabilityof theU.S.banking orfinancialsystem,andcertainotherfactors. CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardevaluatesthecompetitiveeffectsof aproposalinlightof allof thefactsof record.14 TheBoardalsoconsidersthecompetitiveeffectsof aproposalwhenactingonanapplicationundersection3of theBHCAct.15Undersection3of theBHCAct,theBoardis prohibitedfromapprovingaproposalthatwouldresultinamonopolyorwouldbein furtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantbanking market,andfromapprovingabankacquisitionthatwouldsubstantiallylessencompetition inanyrelevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitytobeserved.16 CBSIandOneidahavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Utica-Rome,NewYork(“Utica-Romemarket”),andSyracuse,NewYork(“Syracuse market”),bankingmarkets.17TheBoardhasconsideredthecompetitiveeffectsof the proposalinthesebankingmarketsinlightof allthefactsof record.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthebanking markets,therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarkets (“marketdeposits”)thatCBSIwouldcontrol,18theconcentrationlevelsof marketdeposits andtheincreaseinthatlevelasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”) undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”),19andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheUtica-RomeandSyracusebanking markets.Onconsummationof theproposal,theUtica-RomemarketandSyracusemarket wouldremainmoderatelyconcentrated,asmeasuredbytheHHI.Thechangesinthe 14 12U.S.C.§1843(j)(2). 15 12U.S.C.§1842(c). 16 12U.S.C.§1842(c)(1). 17 TheUtica-RomemarketincludesHerkimerandOneidacountiesandportionsofMadisoncounty,allofNew York.TheSyracusemarketincludesCayuga,Onondaga,andOswegocountiesandportionsofCortlandand Madisoncounties,allofNewYork. 18 DepositandmarketsharedataareasofJune30,2014,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989),andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 19 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html.

172 FederalReserveBulletin|March2016 HHIwouldbeminimal,andnumerouscompetitorswouldremaininthemarketsfollowing consummationof theproposal.20 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheUtica-RomeandSyracusemarketsorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingproposalsundersections3and4of theBHCAct,theBoardconsidersthe financialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.21 Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothaparent-onlyandaconsolidatedbasis,as wellasinformationaboutthefinancialconditionof thesubsidiarydepositoryinstitutions andtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof information,includingpublicandsupervisoryinformationregarding capitaladequacy,assetquality,andearningsperformance,aswellaspubliccommentson theproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization, includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtocompleteeffectivelytheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. CBSIandCommunityBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisaholdingcompanymergerthatisstructuredasacashandshareexchange,withasubsequentmergerof thesubsidiarydepository institutions.22Theassetquality,earnings,andliquidityof CommunityBank,Oneida 20 CBSIoperatestheninthlargestdepositoryinstitutionintheUtica-Romemarket,controllingapproximately $102millionindeposits,whichrepresent2.5percentofthemarket’stotalweighteddeposits.Oneidaoperates theseventhlargestdepositoryinstitutioninthesamemarket,controllingweighteddepositsofapproximately $250million,whichrepresent6.1percentofthemarket’stotalweighteddeposits.Onconsummationofthe proposedtransaction,CBSIwouldbecomethethirdlargestdepositoryinstitutionintheUtica-Romemarket, controllingdepositsofapproximately$603million,whichrepresent13.9percentofthatmarket’sdeposits.The HHIfortheUtica-Romemarketwouldincreaseby5pointstoalevelof1340,and10othercompetitorswould remaininthemarket.IntheSyracusemarket,CBSIoperatesthe11thlargestdepositoryinstitution,controlling approximately$233millionindeposits,whichrepresent2.1percentofthemarket’sweighteddeposits,and Oneidaoperatesthe16thlargestdepositoryinstitutioninthesamemarket,controllingweighteddepositsof approximately$88million,whichrepresentlessthan1percentofthemarket’sweighteddeposits.Onconsummationoftheproposedtransaction,CBSIwouldbecometheninthlargestdepositoryinstitutionintheSyracusemarket,controllingdepositsofapproximately$409million,whichrepresent3.6percentofthemarket’s totaldeposits.TheHHIfortheSyracusemarketwoulddecreaseby11pointstoalevelof1212,and25other competitorswouldremaininthemarket. 21 12U.S.C.§§1842(c)(2)and1843(j)(4);12CFR225.13(b)and.26(b). 22 Aspartoftheproposedtransaction,eachshareofOneidacommonstockwouldbeconvertedintoarightto receivecashorCBSIcommonstockbasedonafixedexchangeratio,oracombinationofthetwo.CBSIhas thefinancialresourcestofundtheacquisition.

LegalDevelopments:FourthQuarter,2015 173 SavingsBank,andBankof Chittenangoareconsistentwithapproval,andCBSIappearsto haveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,thefutureprospectsof theinstitutionsunderthe proposalareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of CBSI,Oneida,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyCBSI,theBoard’ssupervisoryexperienceswithCBSI andOneidaandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicablebanking,consumer protection,andanti-money-launderinglaws,aswellasinformationprovidedbythe commenter. CBSI,Oneida,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.CBSI’sexistingrisk-managementprogramanditsdirectorsandseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof CBSIhavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors. TheBoardalsohasconsideredCBSI’splansforimplementingtheproposal.CBSIis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepostacquisitionintegrationprocessforthisproposal.CBSIwouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,CBSI’smanagementhas theexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafe andsoundmanner,andCBSIplanstointegrateOneida’sexistingmanagementand personnelinamannerthataugmentsCBSI’smanagement.23 Basedonallof thefactsof record,includingCBSI’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandthefutureprospectsof theorganizationsinvolvedintheproposal,aswellas therecordsof effectivenessof CBSIandOneidaincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.24TheBoard alsoconsidersthisfactorinweighingthepossibleadverseeffectsof thetransactionagainst itspublicbenefits,asrequiredbysection4(j)of theBHCAct.25Initsevaluationof the effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved,the Boardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Inthisevaluation,theBoardplacesparticular emphasisontherecordsof therelevantdepositoryinstitutionsundertheCRA.26The 23 Onconsummation,twoindividualscurrentlyservingasdirectorsandofficersofOneidaandOneidaSavings BankwillbeaddedtotheboardofdirectorsofCBSIandCommunityBank. 24 12U.S.C.§1842(c)(2). 25 12U.S.C.§1843(j)(2). 26 12U.S.C.§2901etseq.

174 FederalReserveBulletin|March2016 CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeinstitutions’safeandsoundoperation,27andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.28 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideloanapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,or certainothercharacteristics.TheBoardalsoconsiderstheassessmentsof otherrelevant supervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalso mayconsidertheapplicantinstitution’sbusinessmodel,marketingandoutreachplans, plansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof CommunityBankandOneidaSavingsBank,29thefairlendingandcompliancerecordsof both banks,thesupervisoryviewsof theOCCandtheFederalDepositInsuranceCorporation (“FDIC”),confidentialsupervisoryinformation,informationprovidedbyCBSI,andthe publiccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal.Inthiscase,theBoardreceivedcommentsfroma commenterwhoobjectstotheproposalonthebasisof allegeddisparitiesinthenumberof conventionalhomepurchaseloansofferedtoAfricanAmericansorHispanics,as comparedtowhitesbyCommunityBankintheBuffalo/NiagaraFalls(“Buffalo/Niagara”) MetropolitanStatisticalArea(“MSA”),theRochesterMSA,andtheSyracuseMSA,allin NewYork,andbyOneidaSavingsBankintheSyracuseMSA,asreflectedindatareported undertheHomeMortgageDisclosureAct(“HMDA”)30for2013.Inadditiontothe commenter’slending-relatedcomments,thecommenterallegesthatCBSIisseekingto gerrymanderitsproposedpost-mergerCRAassessmentareas.31TheOCCconsideredthe sameadversecommentsinconnectionwithitsreviewof theunderlyingbankmergerapplication.32 Businessof theInvolvedInstitutionsandResponsetoComment.CommunityBankisoneof thelargestcommunitybankingfranchisesheadquarteredinupstateNewYork.Itisa full-servicebankthatoffersawiderangeof financialservices,withaprimaryfocuson loanstoconsumers.CommunityBankhasalargeresidentialmortgageloanoperation; however,thebank’slendingportfolioalsoconsistsof othertypesof loans,includingsmall businessloans,commercialandindustrialloans,agriculturalloans,andconsumerloans.In additiontotraditionaldepositandloanproducts,CommunityBankalsooffersinsurance 27 12U.S.C.§2901(b). 28 12U.S.C.§2903. 29 BankofChittenangoiscurrentlynotsubjecttotheCRA,asthebankisalimitedpurposecommercialbank thatisrestrictedtoacceptingmunicipaldeposits. 30 12U.S.C.§2801etseq. 31 Thecommenter’sallegationwaspromptedbyCBSI’sresubmissionofitspost-mergerassessmentareasto correctitsinadvertentinclusionofcertainentirecountiesinitspost-mergerassessmentareamaporiginally submittedinconnectionwithitsholdingcompanyapplication. 32 TheOCCconsideredtheCRAperformanceevaluationofeachbankinvolvedinthetransaction,andona prospectivebasis,theprobableeffectoftheproposedbankmergerontheconvenienceandneedsofthe communitiestobeserved.

LegalDevelopments:FourthQuarter,2015 175 andinvestmentproducts,andtrustservices.CommunityBank’sbranchesaregenerally locatedinsmallertownsandcitieswithinitsgeographicmarketareas. CBSIarguesthatitslendingrecordtominoritiesintheBuffalo/Niagara,Rochester,and SyracuseMSAs,asreflectedinthe2013HMDAdata,isattributabletothelowpopulation of minoritiesinthecommunitiesinwhichitsbranchesarelocatedandisconsistentwith thefairlylowlevelof minoritymortgageloanapplicationsthatareprocessedbyallHMDA reportinginstitutionsinsuchMSAsgenerally.CBSIassertsthatallmortgageapplications receivedbyCommunityBankarereviewedinaccordancewiththebank’spoliciesand proceduresforunderwritingandaresubjecttoallof thebank’spoliciesandprocedures withrespecttofairlending.CBSIfurtherassertsthatitslendingpracticesarebasedon criteriathatensurebothsafeandsoundlendingandequalaccesstocreditbycreditworthy applicants,andthatthebankhascomprehensiveproceduresandpoliciesinplaceto accomplishthesegoals,whichincludea“secondreview”processforanyloandenialof a minorityapplicant;ongoingfairlendingtrainingforthebank’slendingpersonnel;an annualfairlendingriskassessment;andquarterlyreportsfromthebank’schief compliance officer,directorof internalaudit,andchief riskofficertotheboardof directorsof the bankregardingconsumerprotection,fairlending,CRA,andotherlawsandregulations. OneidaSavingsBankmaintains12full-serviceofficesinruralareasof NewYork.Oneida SavingsBankoffersproductsandservicesforbusinessandretailconsumersandhasa significantlendingfocusinservingthehomemortgagecreditneedsof itsassessmentareas. CBSIstatesthatOneidaSavingsBankdidnotreceiveanyconventionalhomepurchase applicationsfromAfricanAmericanorHispanicapplicantsin2013intheSyracuseMSA, andarguesthatthebank’slackof HMDA-reportableconventionalhomepurchaseapplicationsin2013waslargelyattributedtotheunder-representationof AfricanAmericansand HispanicsinthecommunitiesinwhichOneidaSavingsBank’sbranchesarelocated. CBSIassertsthatOneidaSavingsBankmaintainscomprehensivefairlendingpoliciesand proceduresthataredesignedtoensureequalaccesstocreditforallqualifiedapplicants,a secondreviewprocessof loandenials,annualfairlendingtrainingforallemployeesand directors,andanannualfairlendingauditconductedbyOneida’sinternalaudit department. Recordsof PerformanceundertheCRA.Asindicatedabove,inevaluatingtheconvenience andneedsfactorandCRAperformance,theBoardconsiderssubstantialinformationin additiontoinformationprovidedbypubliccommentersandtheresponsetocommentsby theapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformation,aswellasinformationandviewsprovided bytheappropriatefederalsupervisors.33 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.34Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitu- 33 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642,11,665 (March11,2010). 34 12U.S.C.§2906.

176 FederalReserveBulletin|March2016 tion’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,includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;35theinstitution’scommunitydevelopmentlending,includingthenumberand amountof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.36 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof CommunityBank.CommunityBankwasassignedanoverall“Satisfactory”ratingbytheOCCatitsmostrecentCRAperformanceevaluation,asof March12,2012(“CommunityBankEvaluation”).37CommunityBankreceived“High Satisfactory”ratingsfortheLendingTest,InvestmentTest,andServiceTest.38Examiners foundthatCommunityBankprovidedagoodlevelof communitydevelopmentservices. ExaminersfoundthatCommunityBank’slendinglevelsreflectedexcellentresponsiveness tocreditneedsandanexcellentratioof loanswithinitsassessmentareas.Examinersalso foundthatthebankhadagooddistributionof lendingamongcensustractsandborrowers of differentincomelevelsandbusinessesof differentsizes.Theexaminershighlightedthat 35 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 36 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 37 TheCommunityBankEvaluationwasconductedusingtheLargeInstitutionCRAExaminationProcedures. ExaminersreviewedloansreportableunderHMDAandCRAdatacollectionrequirementsfromJanuary1, 2008,throughDecember31,2011.Theevaluationperiodforcommunitydevelopmentloans,investments,and serviceswasfromDecember12,2008,throughMarch11,2012.Asoftheevaluationdate,13ofthebank’s15 assessmentareaswerelocatedwithinthestateofNewYork.Consequently,thegreatestweightwasgivento NewYorkStateinthedeterminationofthebank’soverallCRArating. 38 Examinersconductedfull-scopereviewsoftheNorthernRegionNon-MSAandSouthernRegionNon-MSA assessmentareasofthebank,sincethoseareascombinedrepresented79percentofthebank’stotallending, 65percentofthebank’stotalnumberofbranches,and64percentofthebank’stotaldepositsinthestateof NewYork.Theexaminersperformedlimited-scopereviewsofthebank’sperformanceintheMSAportionsof thebank’sassessmentareas,includingtheBuffalo/Niagara,Rochester,andSyracuseMSAs,andfoundthatthe bank’soverallperformanceundertheLendingTest,InvestmentTest,andServiceTestinsuchareaswasnot inconsistentwithitsperformanceintheassessmentareasthatreceivedfull-scopereviews.

LegalDevelopments:FourthQuarter,2015 177 CommunityBank’sinnovativeandflexiblelendingactivityhadapositiveimpactonthe evaluationof itslendingperformanceinNewYork. ExaminersfoundCommunityBanktohaveinvestmentsthatreflectedgoodresponsiveness tothecreditandcommunitydevelopmentneedsof thebank’sassessmentareas.Examinersnotedthatthebank’sinvestmentsinitsassessmentareasincludedinvestmentsin mortgaged-backedsecuritiescomprisedof mortgageloansmadetoLMIindividualsorto financeresidenceslocatedinLMIneighborhoods,andinvestmentsinmunicipalbondsthat supportedtherevitalizationandstabilizationof LMItractsormiddleincomecensustracts designatedasdistressedorunderserved. Examinersfoundthatthebank’sdeliverysystemswereaccessibletocensustractsandindividualsof differentincomelevelsthroughoutitsassessmentareas.Examinersalsofound thatCommunityBank’shoursandservicesofferedthroughoutitsassessmentareaswere good,andservicesofferedwerecomparableamongitsbranchlocationsregardlessof the incomelevelof thecensustract.Examinersfurthernotedthatthebank’sperformancein providingcommunitydevelopmentserviceswasgood.ExaminershighlightedCommunity Bank’slow-costandfreebankingserviceproducts,includingitsfreechecking,savings,and onlinebankingproducts. CommunityBank’sActivitiessincetheCommunityBankEvaluation.CBSIcontendsthat, sincetheCommunityBankEvaluation,ithassignificantlyincreaseditscommunitydevelopmentlendingandinvestments,andhascontinuallyengagedincommunitydevelopmentandoutreacheffortsinitsassessmentareas.CBSIassertsthat,betweentheyears2013 and2014,CommunityBank’semployeesdonatedtheirtimeandexpertiseonbehalf of CommunityBanktoorganizations,withintheSyracuse,Rochester,andBuffalo/Niagara assessmentareas,thathavecommunitydevelopmentastheirprimarymission,including affordablehousingagenciesandorganizationsfocusedonbusinessdevelopment,women andchildrenadvocacy,andothercharitablecausesCommunityBankrepresentsthat followingconsummationof theproposedtransaction,itintendstoimplementadditional measurestomaintainandexpanditsoutreachactivities,staff,andotherresourcesto continuetoserviceminorityindividualsinitsexpandedassessmentareas. CRAPerformanceof OneidaSavingsBank.OneidaSavingsBankwasassignedanoverall CRAratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbythe FDIC,asof June30,2014(“OneidaSavingsBankEvaluation”).39Thebankreceived “Satisfactory”ratingsfortheLendingTest40andCommunityDevelopmentTest. 39 TheOneidaSavingsBankEvaluationwasconductedusingtheIntermediateSmallBankEvaluationProcedures,whichincludetheLendingandCommunityDevelopmentTests.TheLendingTestevaluatedthebank’s loanoriginationsforloansreportableunderHMDAfor2012and2013.TheCommunityDevelopmentTest evaluatedcommunitydevelopmentloans,qualifiedinvestments,andcommunitydevelopmentservicesforthe periodofFebruary14,2011,throughJune30,2014.Commercial,consumer,andfarmloans,however,werenot considered,astheydidnotrepresentasubstantialportionofthebank’sloanportfolio.TheOneidaSavings BankEvaluationincludedafull-scopereviewofOneidaSavingsBank’stwoassessmentareaslocatedwithin theSyracuseandUtica-RomeMSAs.Thebank’sperformanceinitsassessmentarealocatedwithintheSyracuseMSAreceivedmoreweightintheoverallperformanceconclusionsandratingssinceamajorityofthe bank’sofficesandlendingoccursinthatarea. 40 TheLendingTestapplicabletointermediatesmallbanksspecificallyevaluatestheinstitution’sloan-to-deposit ratioandotherlending-relatedactivities,suchasloanoriginationsforsaletothesecondarymarkets,communitydevelopmentloans,orqualifiedinvestments;thepercentageofloansandotherlending-relatedactivities locatedinthebank’sassessmentareas;thebank’srecordoflendingtoandengaginginotherlending-related activitiesforborrowersofdifferentincomelevelsandbusinessesandfarmsofdifferentsizes;thegeographic distributionofthebank’sloans;andthebank’srecordoftakingactioninresponsetowrittencomplaints aboutitsperformanceinhelpingtomeetthecreditneedsinitsassessmentareas.See,e.g.,12CFR228.26(b).

178 FederalReserveBulletin|March2016 InevaluatingtheLendingTest,examinersfoundOneidaSavingsBank’snetloan-todepositratiotobereasonable.FocusingontheSyracuseMSA,examinersnotedthata substantialmajorityof thebank’sloansweremadewithinitsassessmentareas,andthe geographicdistributionof loansreflectedareasonabledispersionthroughouttheassessmentareas.Examinersalsofoundthatthebank’sdistributionof borrowersreflected reasonablepenetrationamongindividualsof differentincomelevelsgiventhedemographicsof thebank’sassessmentareas.TheexaminersalsonotedthatOneidaSavings Bank’sassessmentareashadbeendefinedinaccordancewiththerequirementsof theCRA regulationanddidnotarbitrarilyexcludelow-andmoderate-incomegeographies. InevaluatingtheCommunityDevelopmentTest,examinersfoundthatOneidaSavings Bankwasadequatelyresponsivethroughcommunitydevelopmentloans,qualifiedinvestments,andcommunitydevelopmentservices.Examinersnotedthatthebankofferedthree low-costdepositaccountsthatwouldparticularlybenefitlow-andmoderate-income individualsthroughoutitsassessmentareas.TheOCCfoundthatCommunityBank’sand OneidaSavingsBank’srecordsof helpingtomeetthecreditneedsof theircommunities andtheprobableeffectsontheconvenienceandneedsof thosecommunitieswereconsistentwithapprovalof thebankmergerapplication,subjecttocertainconditionsrelatedto CommunityBank’sdelineationof itspost-mergerassessmentareas. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. CBSIrepresentsthattheproposalwouldprovidecustomersof thecombinedorganization accesstoadditionalorexpandedservices,duetoanexpandednetworkof branchand ATMlocationsinitsmarketareas.41Uponconsummationof thebankmergers,CommunityBankwouldoffertheformerdepositorsof OneidaSavingsBankitsproductsand services,whichCommunityBankhasrepresentedareinmanycasesbroaderthantheproductsandservicesofferedbyOneidaSavingsBankandBankof Chittenango.CBSIexpects thatthemergerwouldalsoenableittocompetemoreeffectivelywithnationalfinancial institutionsinitsmarketareasandimproveitsabilitytomeettheneedsof itscustomers andthecommunitiesinitsmarketareas.CommunityBankalsorepresentsthatnosignificantreductionsinproductsorserviceswouldbeexpectedasaresultof theproposal. Asnoted,thecommenterallegedtheexistenceof HMDAdatadisparitiesinCommunity Bank’sconventionalhomepurchaselendingtowhitescomparedtoitslendingtoAfrican AmericansandHispanicsintheSyracuse,Rochester,andBuffalo/Niagaramarketsandin OneidaSavingsBank’sconventionalhomepurchaselendingintheSyracusemarket.As discussedabove,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution.TheOCCconductedreviewsof CommunityBank’sandOneidaSavingsBank’s2013HMDAdataandconductedsupervisoryactivitiestoassessfairlendingriskatCommunityBank.Inthatconnection,theOCC evaluatedsupervisoryinformationaswellasotherinformationprovidedbyCommunity Bank.TheBoardhasconferredwiththeOCCregardingitsreviewandhastakeninto considerationsupervisoryreviewsandotherrelevantinformation. Thecommenteralsodisputedtheappropriatenessof CommunityBank’sproformaassessmentareas.TheOCCconductedareviewof CommunityBank’scurrentandproposed assessmentareas.CommunityBankcommitted,inanOctober29,2015lettertotheOCC, toexpanditspost-mergerCRAassessmentareasinrecognitionof thebank’scontinued 41 BankofChittenangowouldbemergedoutofexistenceundertheproposal,anditssoleofficelocatedin Chittenango,NewYork,wouldbecloseduponconsummationofthemerger.CBSIhasrepresentedthat CommunityBankwouldoffermunicipaldeposit-takingservicesatallofitsbranches,includingtheformer branchesoftheOneidaSavingsBankacquiredbyCommunityBankundertheproposal.

LegalDevelopments:FourthQuarter,2015 179 growth.42TheOCCindicatedthatthecommitmentaddressedconcernswithrespecttothe areasdirectlyimpactedbytheproposedtransaction. Inaddition,asaconditionof approvalof thebankmergerapplication,theOCCis requiringthatCommunityBankcreateaCRAAssessmentAreaDelineationPolicy (“Policy”)43andmodify,asappropriate,itsassessmentareasinaccordancewiththePolicy. CommunityBankmustsubmitthePolicyandanyproposedmodificationstothePolicyor itsassessmentareastotheOCCforapproval. TheBoardexpectsCBSItoensurethatCommunityBankcomplieswiththeconditionsand commitmentsimposedbytheOCC.Moregenerally,theBoardexpectsCBSItoimplement policiesandproceduresthatarecommensuratewithaninstitutionof itssizeand complexity,includingpoliciesandprocedurestoensurefullcompliancewithCRA requirements. ConclusiononConvenienceandNeeds.TheBoardhasconsideredallof thefactsof record, includingtherecordsundertheCRAof therelevantdepositoryinstitutionsinvolved,the institutions’recordsof compliancewithfairlendingandotherconsumerprotectionlaws, consultationswiththeOCCandtheFDIC,confidentialsupervisoryinformation,informationprovidedbyCBSI,thepubliccommentsontheproposal,44andotherpotentialeffects of theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedon thatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsections3and4of theBHCActtorequiretheBoardtoconsidertheextentto whichaproposedacquisition,merger,orconsolidationwouldresultingreaterrisktothe stabilityof theUnitedStatesbankingorfinancialsystem.45 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting 42 Intheletter(“CommitmentLetter”),datedOctober29,2015,fromCommunityBank,N.A.,toMarvaV. Cummings,OCCDirectorofDistrictLicensing,CommunityBankcommittedtodelineatingitspostconsummationassessmentareastoincludethefollowingareas:(i)allofOswegoCounty,NewYork,including theareasnorthoftheOswegoRiverandthenorthshoreofOneidaLake;(ii)allofOneidaCounty,NewYork, includingtheCityofUtica;(iii)threecensustractspreviouslyexcludedthatformatrianglebetweenthebank’s Boiceville(UlsterCounty)andFleischmanns(DelawareCounty)branches,bothofNewYork;(iv)theCityof Binghamton,NewYork,andthecensustractssouthoftheSusquehannaRiverandnorthofthestateborder; (v)allofTiogaCounty,NewYork;(vi)allofChemungCounty,NewYork;(vi)theCityofIthacaandallof TompkinsCounty,bothofNewYork;and(vii)thecensustractsinCarbonCountyandSchuylkillCounty, betweentheLansford(CarbonCounty)andLehighton(CarbonCounty)branchesanditsHazelton(Luzerne County)branch,allofPennsylvania. 43 12CFR25.41. 44 Thecommenteralsoexpressedconcernaboutpossiblejoblossesresultingfromtheproposal.CBSIhas describedcertainstepsitwouldtaketominimizesuchjoblosses,includingofferingcomparablepositionsinthe post-mergerorganizationandprovidingdisplacedemployeeswithseveranceandhealthcarebenefits,aswellas re-employmentservicesandotherassistancethroughtheNewYorkStateDepartmentofLabor.Thisconcern, however,isoutsideofthelimitedstatutoryfactorsthattheBoardisauthorizedtoconsiderwhenreviewingan applicationornoticeundertheBHCAct.See,WesternBancshares,Inc.v.BoardofGovernors,480F.2d749 (10thCir.1973);seealso,e.g.,WellsFargo&Company,82FederalReserveBulletin445,457(1996). 45 Sections604(d)and(e)oftheDodd-FrankAct,codifiedat12U.S.C.§1842(c)(7)withrespecttotheacquisitionofbanksharesorassetsandat12U.S.C.§1843(j)(2)(A)withrespecttotheacquisitionofsavings associations.

180 FederalReserveBulletin|March2016 firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.46These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.47 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,CBSIwouldhaveapproximately$8.8billionin consolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize,CBSI wouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthataproposal thatinvolvesanacquisitionof lessthan$2billioninassets,orthatresultsinafirmwith lessthan$25billioninconsolidatedassets,willnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Weighingof PublicBenefitsof theProposal Asnotedabove,inconnectionwithaproposalundersection4of theBHCAct, section4(j)of theBHCActrequirestheBoardto“considerwhetherperformanceof the activitybyabankholdingcompanyorasubsidiaryof suchcompanycanreasonablybe expectedtoproducebenefitstothepublic,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsound bankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancial system.”48Asdiscussedabove,theBoardhasconsideredthattheproposedtransactions wouldprovidegreaterservices,productofferings,andgeographicscopetocustomersof OneidaSavingsBank.Inaddition,theacquisitionswouldensurecontinuityandstrengthof servicetocustomersof OneidaSavingsBank. TheBoardconcludesthattheconductof theproposednonbankingactivitieswithinthe frameworkof RegulationY,Boardprecedent,andthisOrder,isnotlikelytoresultin significantadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interest,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.Onthebasisof theentirerecord,andforthe reasonsdiscussedabove,theBoardbelievesthatthebalanceof benefitsandpotential adverseeffectsrelatedtocompetition,financialandmanagerialresources,convenienceto thepublic,financialstability,andotherfactorsweighsinfavorof approvalof thisproposal. 46 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 47 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrder. 48 12U.S.C.§1843(j)(2).

LegalDevelopments:FourthQuarter,2015 181 Accordingly,theBoarddeterminesthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwithapproval.49 Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationandnoticeshouldbe,andherebyare,approved.50Inreachingitsconclusion,the Boardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredto considerundertheBHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyCBSIwithalltheconditionsimposedinthisOrder,includingreceiptof allrequired regulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththe proposal.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobe conditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision hereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof NewYorkactingpursuanttodelegated authority. Byorderof theBoardof Governors,effectiveNovember18,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 49 12U.S.C.§1843(j)(2)(A). 50 ThecommenterrequestedthattheBoardholdapublichearingontheproposal.Section3(b)oftheBHCAct doesnotrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.TheBoard’sregulationsprovideforahearingonanoticefiledundersection4oftheBHCActif therearedisputedissuesofmaterialfactthatcannotberesolvedinsomeothermanner.12CFR225.25(a)(2). Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterested personsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresent theirviews.TheBoardhasconsideredtherequestinlightofallthefactsofrecord.IntheBoard’sview,the commenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submittedawritten commentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnotidentify disputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublichearing. Inaddition,therequestdoesnotdemonstratewhythewrittencommentsdonotpresentthecommenter’s viewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthesereasons,andbased onallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredorwarrantedinthis case.Accordingly,therequestforapublichearingontheproposalisdenied.

182 FederalReserveBulletin|March2016 Order Issued Under Bank Merger Act Farmers Bank of Northern Missouri Unionville, Missouri OrderApprovingtheMergerof BanksandtheEstablishmentof Branches FRBOrderNo.2015–32(November13,2015) FarmersBankof NorthernMissouri(“FarmersBank”),Unionville,Missouri,1astate memberbank,hasrequestedtheBoard’sapprovalundersection18(c)of theFederal DepositInsuranceAct2(“BankMergerAct”)tomergewithFlowersNationalBank (“FlowersBank”),Cainsville,Missouri,anationalbank.3Inaddition,FarmersBankhas appliedundersection9of theFederalReserveAct(“FRA”)4toestablishandoperate branchesatthemainofficeandbranchesof FlowersBank.5 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.6Thetimeforfilingcommentshasexpired.AsrequiredbytheBankMergerAct,a reportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStates AttorneyGeneral.TheBoardhasconsideredtheapplicationandallcommentsreceivedin lightof thefactorssetforthintheBankMergerActandtheFRA. FarmersBank’stop-tierholdingcompany,NMB,withtotalconsolidatedassetsof $346.4million,operatesinMissouriandIowa.NMBisthe58thlargestdepositoryorganizationinMissouri,controllingdepositsof approximately$365.8million,whichrepresent lessthan1percentof thetotalamountof depositsininsureddepositoryinstitutionsin Missouri(“statedeposits”).7 FlowersBank,withtotalassetsof approximately$42.4million,operatesonlyinMissouri. FlowersBankisthe275thlargestinsureddepositoryinstitutioninMissouri,controlling depositsof approximately$35.9million,whichrepresentlessthan1percentof thetotal amountof statedeposits. Onconsummationof theproposal,NMBwouldbecomethe54thlargestdepositoryorganizationinMissouri,controllingdepositsof approximately$401.7million,whichrepresent lessthan1percentof thetotalamountof statedeposits. 1 FarmersBankisawhollyownedsubsidiaryofHarrisonCountyBancshares,Inc.(“HCB”),Unionville, Missouri,abankholdingcompany.HCBisawhollyownedsubsidiaryofNorthernMissouriBancshares,Inc. (“NMB”),Unionville,Missouri,afinancialholdingcompanywithtotalconsolidatedassetsofapproximately $346.4million(asofJune30,2015).NMBalsoowns54percentofExchangeBancorpofMissouri,Inc., parentofExchangeBankofMissouri,bothofFayette,Missouri,and80percentofConcordiaBanc- Management,Inc.,parentofConcordiaBank,bothofConcordia,Missouri. 2 12U.S.C.§1828(c). 3 FlowersBankiswhollyownedbyJ.ChristopherFlowersinhisindividualcapacity. 4 12U.S.C.§321. 5 FlowersBank’sbranchesarelocatedat1415WashingtonStreetinCainsvilleand3601MillerStreetinBethany, bothinMissouri. 6 12CFR262.3(b). 7 DataareasofJune30,2014.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks, savingsbanks,andsavingsassociations.

LegalDevelopments:FourthQuarter,2015 183 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.8TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.9 FarmersBankandFlowersBankcompetedirectlyintheHarrisonCounty,Missouri, bankingmarket(the“HarrisonCountymarket”).10TheBoardhasreviewedthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record.In particular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthe bankingmarket,therelativeshareof thetotaldepositsininsureddepositoryinstitutionsin themarket(“marketdeposits”)thatFarmersBankwouldcontrol,11theconcentration levelof marketdepositsandtheincreaseinthatlevelasmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”),12andothercharacteristicsof the market. Usingtheinitialcompetitivescreeningdata,intheHarrisonCountymarket,FarmersBank isthethirdlargestinsureddepositoryinstitution,controllingdepositsof approximately $60.9million,whichrepresentapproximately14.0percentof marketdeposits.Flowers Bankisthefourthlargestinsureddepositoryinstitutioninthemarket,controllingdeposits of approximately$35.9million,whichrepresentapproximately8.3percentof market deposits.Onconsummationof theproposal,FarmersBankwouldbecomethesecond largestinsureddepositoryinstitutionintheHarrisonCountymarket,controllingdeposits of approximately$96.8million,whichwouldrepresentapproximately22.3percentof marketdeposits.TheHHIinthemarketwouldincreaseby232points,from2582to2814.13 Althoughconsummationof thisproposalwouldeliminatesomeexistingcompetition, certainfactorsindicatethatthecompetitiveeffectsof theproposalwouldnotlikelybe significantlyadverse.Afterconsummationof theproposal,sevendepositoryinstitutions wouldremainintheHarrisonCountymarket,includingBethanyBankshares,adepository 8 12U.S.C.§1828(c)(5)(A). 9 12U.S.C.§1828(c)(5)(B). 10 TheHarrisonCountymarketisdefinedasHarrisonandMercercounties,theeasternhalfofGentryCounty, includingAlbany,andthenorthwesternportionofDaviessCounty,includingCoffeyandPattonsburg,allof Missouri. 11 DepositandmarketsharedataareasofJune30,2014,andarebasedondatareportedbyinsureddepository institutionsintheFederalDepositInsuranceCorporation’sSummaryofDepositsdata. 12 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsDOJBankMergerGuidelines,whichwereissuedin1995, werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),atwww.justice.gov/opa/pr/2010/ August/10-at-938.html. 13 AnalysisoftheHarrisonCountymarketusingdataonsmallbusinesslendingresultsinanHHIsimilartothat derivedusingdepositdata.Dependingontheassumptionsmadeintheanalysis,thestructuraleffectofthe transactiononsmallbusinesslendingwouldeithermarginallyexceedtheBoard’sdelegationcriteriaormeet thosedelegationcriteriabyasmallmargin.

184 FederalReserveBulletin|March2016 institutionthatwouldcontrol43percentof deposits.14Oneotherdepositoryinstitution wouldcontrolatleast20percentof marketdeposits.Theproposedtransactionwould reducethedominanceof BethanyBanksharesbycreatingacompetitorthat,whilestill sizablysmallerthanthelargestcompetitorinthemarket,isbettersituatedtocompetein themarketandisonlymarginallylargerthanthefirmthatiscurrentlythesecondlargestin themarket. TheDOJhasalsoanalyzedtheeffectof thetransactiononcompetitionintherelevant marketsandhasadvisedtheBoardthatconsummationof theproposalwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalisunlikelytohaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheHarrisonCountymarketorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformationregardingthefinancialconditionof thedepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavariety of publicandsupervisoryinformationregardingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,andearningsprospects,andthe impactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theacquiringorganizationtoabsorbthecostsof theproposalandtocompleteeffectively theproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors, theBoardconsistentlyconsiderscapitaladequacytobeespeciallyimportant.TheBoard considersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof their financialandmanagerialresourcesandtheproposedbusinessplan. FarmersBankiswellcapitalizedandwouldremainsoonconsummationof theproposal. Theproposalisstructuredasamergerof twodepositoryinstitutionswitheachshareof FlowersBanktobecanceledinexchangeforcashconsiderationtobefundedentirelyby excessundividedprofitsheldinthecapitalof FarmersBank.Theassetquality,earnings, andliquidityof FarmersBankandFlowersBankareconsistentwithapproval,and FarmersBankappearstohaveadequateresourcestoabsorbthecostsof theproposaland tocompletetheintegrationof thetargetbranchesintoFarmersBank’soperations.Inaddition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FarmersBankandFlowersBank,includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhasconsidereditssupervisory 14 BethanyBankshares’largemarketpresenceistheprimarycauseofthemarket’shighHHI,contributingover 1850pointstothecurrentHHIof2582.BethanyBanksharesalsodominatesthemarket’ssmallbusiness lending.

LegalDevelopments:FourthQuarter,2015 185 experiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations, andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws.TheBoardalsohasconsideredFarmersBank’s plansforimplementingtheproposal. FarmersBankandFlowersBankareeachconsideredtobewellmanaged.Thedirectors andseniormanagementof FarmersBankhavesignificantbankingexperienceandare consideredtobesatisfactory.Inaddition,FarmersBankwouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredtobeacceptablefromasupervisoryperspective. Basedonallthefactsof record,includingFarmersBank’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafter consummation,theBoardconcludesthatconsiderationsrelatingtothefinancialand managerialresourcesandfutureprospectsof theorganizationsinvolvedintheproposal,as wellastherecordsof effectivenessof FarmersBankandFlowersBankincombatting money-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved, theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoardplaces particularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).15TheCRArequiresthefederalfinancialsupervisoryagenciestoencouragefinancialinstitutionstohelpmeetthecreditneedsof thelocal communitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,and requirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity,includinglowandmoderate-income(“LMI”)neighborhoods. Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsbyotherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheapplicant institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans followingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Farmers BankandFlowersBank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theOfficeof theComptrollerof theCurrency(“OCC”),confidential supervisoryinformation,andinformationprovidedbyFarmersBank. 15 12U.S.C.§2901etseq.

186 FederalReserveBulletin|March2016 Recordof PerformanceundertheCRA.TheBoardevaluatesaninstitution’sperformance basedontheCRAevaluationcompletedbythatinstitution’sprimaryregulator.16The CRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitution prepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof its entirecommunity,includingLMIneighborhoods.17Aninstitution’smostrecentCRA performanceevaluationisaparticularlyimportantconsiderationintheapplications processbecauseitrepresentsadetailedon-siteevaluationof theinstitution’soverallrecord of lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailabledatareportedundertheHomeMortgageDisclosureAct,automatedloanreports,andotherreportsgeneratedbytheinstitutiontoassesstheinstitution’s lendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.The institution’slendingperformanceisbasedontheinstitution’sloan-to-depositratio,loan originationsforsaletothesecondarymarket,lending-relatedactivitiesinitsassessment areas,recordof engaginginlending-relatedactivitiesforborrowersof differentincome levelsandbusinessesandfarmsof differentsizes,geographicdistributionof loans,and recordof takingactioninresponsetowrittencomplaintsaboutitsperformance.Inadditiontothelendingtest,intermediatesmallinstitutionsarealsosubjecttoacommunity developmenttestthatevaluatesthenumberandamountof theinstitution’scommunity developmentloansandqualifiedinvestments,theextenttowhichtheinstitutionprovides communitydevelopmentservices,andtheinstitution’sresponsivenessthroughsuchactivitiestocommunitydevelopmentlending,investment,andserviceneeds.18 CRAPerformanceof FarmersBank.FarmersBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof KansasCity,asof October22,2012.19FarmersBankreceived“Satisfactory”ratingsfor boththelendingtestandthecommunitydevelopmenttest. Examinersdeterminedthatthebank’saveragenetloan-to-depositratiowasreasonable giventhebank’ssize,financialcondition,andassessmentareacreditneeds.Inaddition, examinersnotedthatFarmersBank’sdistributionof loansbybusinessandfarmincome levelwasreasonableinitsassessmentareas.Forresidentialrealestateloans,examiners notedthatthelevelof lendingbyincomelevelexceededexpectionsintheIowaassessment areaandwasreasonableintheMissouriassessmentarea.Examinersnotedthatthe bank’slendinginmoderateincomegeographiesexceededdemographicsforsmallbusinesses,smallfarms,andresidentialrealestateloansandwasapproachingexcellentlevels. Examinersnotedthatthebank’scommunitydevelopmentperformancedemonstrated adequateresponsivenesstocommunitydevelopmentneedsthroughoutitsassessmentareas, andthebankhadanadequatelevelof communitydevelopmentloans,investments,dona- 16 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (2010). 17 12U.S.C.§2906. 18 See12CFR228.26. 19 FarmersBank’sCRAevaluationwasconductedusingIntermediateSmall-BankCRAExaminationProcedures,consistingofthelendingandcommunitydevelopmenttestsdescribedabove.Examinersperformedfullscopereviewsofthebank’sactivitiesinPutnam,Daviess,Grundy,Harrison,andMercercounties,Missouri, andAppanoose,Decatur,andWaynecounties,Iowa,duringthesix-monthperiodendedonJuly31,2012.

LegalDevelopments:FourthQuarter,2015 187 tions,andservicesforthereviewperiod.Examinersalsonotedthatthebank’sdelivery systemstogeographiesandindividualsof differentincomelevelswerereasonablyaccessible.Examinersfoundnoevidenceof discriminatoryorotherillegalcreditpractices. CRAPerformanceof FlowersBank.FlowersBankreceivedanoverallratingof “Outstanding”atitsmostrecentCRAperformanceexaminationbytheOCC,asof October24,2011.20Examinersdeterminedthatthebank’slendingactivitiesreflectedexcellentpenetrationamongbusinessesandfarmsof differentsizes.Examinersfoundthatthe bank’sdistributionof loanstosmallbusinesseswasexcellentanditsloanstobusinesses withrevenuesof lessthan$1millionperyearexceededdemographics.Examinersnoted thatFlowersBank’sloan-to-depositratioreflectedreasonableresponsivenesstothecredit needsof thecommunity.Examinersalsonotedthatasubstantialmajorityof thebank’s lendingwaswithinitsassessmentareaandthatFlowersBank’sinvestmentactivities enhancedcreditavailabilityinitsassessmentarea. AdditionalCRAActivitiesof FarmersBank.FarmersBankrepresentsthatitprovidesa widevarietyof productsandservicesthataredesignedtofittheneedsof itsentirecommunity.FarmersBankstatesthatitencouragesitsemployeestoidentifyandengageinopportunitiestoprovidefinancialeducationtolow-andmoderate-incomefamiliesinthe community,includingschoolsandseniorcitizens’groups.FarmersBankrepresentsthatits employeeshelpprovidecoursesonfinancialeducationatalocalcommunitycollege. FarmersBanknotesthatitiscurrentlyconsideringinvestmentsinCRA-eligiblesmallbusinessinvestmentcompanies. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. FarmersBankrepresentsthatcustomersof bothbankswillbenefitbygainingaccesstothe fullrangeof productsandservicescurrentlyofferedbybothbanks.Forexample, customersof FlowersBankwillgainaccesstonewdepositaccount,mortgage,and variable-rateIRAproducts,andcustomersof FarmersBankwillgainaccesstoanew fixed-rateIRAproduct.Inaddition,FarmersBank’sstatusasapreferredlenderunderthe FarmServiceAgency’sguidelineswillbenefitcustomersof FlowersBankbecausetheywill gainaccesstoanabbreviatedapprovalprocessforlow-andmoderate-incomefarmers, includingbeginningfarmers.Moreover,FarmersBankrepresentsthatcustomersof both bankswillbenefitfromalargernetworkof branchesandATMs. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingtherecordsof therelevantdepositoryinstitutionsinvolvedunder theCRA,theinstitutions’recordsof compliancewithfairlendingandotherconsumer protectionlaws,confidentialsupervisoryinformation,informationprovidedbyFarmers Bank,andotherpotentialeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenience andneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”21 20 FlowersBank’sCRAevaluationwasconductedusingtheSmallBankCRAExaminationProcedures, consistingofthelendingtestdescribedabove.Examinersperformedafull-scopereviewofthebank’sactivities infivecensustractsinHarrisonandMercercounties,Missouri,fromJanuary1,2009,throughJune30,2011. 21 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5).

188 FederalReserveBulletin|March2016 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.22These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.23 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummationof theproposedtransaction,NMBwouldhave approximately$388.8millioninconsolidatedassetsandwouldnotbelikelytopose systemicrisks.TheBoardgenerallypresumesthatamergerresultinginafirmwithless than$25billionintotalconsolidatedassetswouldnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches FarmersBankhasappliedundersection9of theFRAtoestablishandoperatebranchesat thecurrentlocationsof FlowersBank,andtheBoardhasconsideredthefactorsitis requiredtoconsiderwhenreviewinganapplicationunderthatsection.24Specifically,the BoardhasconsideredFarmersBank’sfinancialcondition,management,capital,actionsin meetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfinds thosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditioned oncompliancebyFarmersBankwithallthecommitmentsmadeinconnectionwiththis proposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare 22 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 23 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 24 12U.S.C.§322;12CFR208.6.

LegalDevelopments:FourthQuarter,2015 189 deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Thetransactionmaynotbeconsummatedbeforethe15thcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsaftertheeffectivedateof thisorderunless suchperiodisextendedforgoodcausebytheBoardorbytheFederalReserveBankof KansasCityactingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveNovember13,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo,Powell andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

190 FederalReserveBulletin|March2016 Order Issued Under Federal Reserve Act Chemical Bank Midland, Michigan OrderApprovingEstablishmentof aBranch FRBOrderNo.2015–36(December30,2015) ChemicalBank,astatememberbanksubsidiaryof ChemicalFinancialCorporation,both of Midland,Michigan,hasrequestedtheBoard’sapprovalundersection9of theFederal ReserveAct(“FRA”)1andtheBoard’sRegulationH2tooperateamobilebranchtocollect depositsandbank-relateddocumentsfrombusinesscustomersincertaincountiesin Michigan.3Theproposedmobilebranchwouldbeabranchunderfederallawbecauseit wouldtakedepositsfromChemicalBank’scustomers.4However,ChemicalBankproposes tooperatethemobilebranchasamessengerserviceforpurposesof Michiganlaw.5 ChemicalBankmustobtainBoardapprovalpriortoexpandingthebranchactivitiesof the proposedmobilebranchbeyondthoseactivitiespermittedasstate-lawmessengerservices.6 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.7Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheapplicationandall commentsreceivedinlightof thefactorsspecifiedintheFRA. ChemicalFinancialCorporationistheeighthlargestdepositoryorganizationinMichigan, with187branchesthroughoutthestateandapproximately$7.3billionindeposits,which representsapproximately3.8percentof thetotalamountof depositsof insureddepository institutionsinthestate.8 UndertheBoard’sRegulationH,whichimplementssection9of theFRA,thefactorsthat theBoardmustconsiderinactingonbranchapplicationsinclude(1)thefinancialhistory 1 12U.S.C.§321.See12U.S.C.§36;Mich.Comp.Laws487.13711(permittingaMichiganstate-charteredbank toestablishandoperateamobilebranchatanylocationwithintheStateofMichigan).Althoughstatelaw permitsastate-charteredbanktoestablishandoperateamobilebranch,ChemicalBankhasnotfiledanapplicationtoestablishamobilebranchwiththeMichiganDepartmentofInsuranceandFinancialServices (“DIFS”).Instead,ChemicalBankproposestooperatethemobilebranchasamessengerserviceunder Michiganstatelaw,whichdoesnotrequirethefilingofapriornoticeorapplicationwiththeDIFS.Mich. Comp.Laws487.14101. 2 12CFRpart208. 3 Themobilebranchwouldoperateinthefollowingcounties,allinMichigan:Alcona,Allegan,Alpena,Antrim, Arenac,Bay,Barry,Benzie,Berrien,Branch,Calhoun,Cass,Cheboygan,Charlevoix,Clare,Crawford, Emmet,Gladwin,GrandTraverse,Gratiot,Hillsdale,Huron,Ionia,Iosco,Isabella,Kalamazoo,Kalkaska, Kent,Lake,Leelanau,Manistee,Mason,Mecosta,Midland,Missaukee,Montcalm,Montmorency,Newaygo, Ogemaw,Osceola,Oscoda,Otsego,Ottawa,PresqueIsle,Roscommon,Saginaw,Sanilac,Tuscola,VanBuren, andWexford.ChemicalBankpreviouslyreceivedapprovaltooperateamobilebranchinthecountiesof ShiawasseeandGenesee,bothinMichigan.ChemicalBankwouldnotoperatethemobilebranchinanyother countyinMichigan. 4 TheBoard’sRegulationHdefinesabranchas“anybranchbank,branchoffice,branchagency,additional office,oranybranchplaceofbusinessthatreceivesdeposits,payschecks,orlendsmoney.”12CFR208.2(c)(1). RegulationHspecificallyprovidesthatabranchmayincludeamobilefacility.Id. 5 UnderMichiganlaw,aMichiganstate-charteredbankmayoperateamessengerservicethatengagesinlimited activities,includingamongotherthings,collectingdepositsandpickingupordeliveringcash,currency,checks, drafts,securities,andcertainotheritems.Mich.Comp.Laws487.11202(m). 6 UnderMichiganlaw,ChemicalBankmustprovidepriornoticetothedirectoroftheDIFStoestablisha mobilebranch.Mich.Comp.Laws487.13711. 7 12CFR262.3(b). 8 DataareasofJune30,2015.Inthiscontext,insureddepositoryinstitutionsincludeinsuredcommercialbanks, savingsandloanassociations,andsavingsbanks.

LegalDevelopments:FourthQuarter,2015 191 andconditionof theapplyingbankandthegeneralcharacterof itsmanagement;(2)the adequacyof thebank’scapitalanditsfutureearningsprospects;(3)theconvenienceand needsof thecommunitytobeservedbythebranch;(4)inthecaseof brancheswith deposit-takingcapability,thebank’sperformanceundertheCommunityReinvestmentAct (“CRA”);9and(5)whetherthebank’sinvestmentinbankpremisesinestablishingthe branchsatisfiescertaincriteria.10TheBoardmustconsiderthesesamefactorsinactingon mobilebranchapplications. TheBoardhasconsideredtheapplicationinlightof thesefactorsandthepubliccomment ontheproposalreceivedfromthechief executiveofficerof aprospectivebankcompetitor headquarteredinCheboyganCounty,Michigan.Thecommenterassertsthatitscommunity’sfinancialservicesneedsareadequatelymetbythefinancialinstitutionscurrently operatingthere.ThecommenteralsocontendsthatChemicalBankdoesnotcurrentlyhave, nordoesitplantoestablish,aphysicalpresenceinCheboyganCounty. Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof ChemicalBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,information providedbyChemicalBank,andthecommentreceived.ChemicalBankiswellcapitalized andwouldremainsouponconsummationof theproposal.Afterconsideringallthefacts of record,theBoardconcludesthatthefinancialhistoryandcondition,capitaladequacy, andfutureearningsprospectsof ChemicalBankareconsistentwithapprovalof the proposal.TheBoardalsohasreviewedChemicalBank’sproposedinvestmentinthemobile branchandconcludesthatitsinvestmentisconsistentwithregulatorylimitationson investmentinbankpremises.11 InconsideringChemicalBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithChemical Bankandthebank’srecordof compliancewithapplicablebankinglaws,includingantimoney-launderinglaws,andthebanksecurityproceduresthatwouldapplytothemobile branch.12ChemicalBankisconsideredtobewellmanaged.Basedonthisreviewandall thefactsof record,theBoardconcludesthatthecharacterof ChemicalBank’smanagement,includingtheeffectivenessof ChemicalBankincombattingmoney-laundering activitiesandChemicalBank’sbranchsecurityprocedures,isconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations Inconsideringtheeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe creditneedsof thecommunitiesitserves,aswellasotherpotentialeffectsof theproposal ontheconvenienceandneedsof thecommunitiestobeserved.13Inthisevaluation,the Boardplacesparticularemphasisontherecordof therelevantdepositoryinstitutionunder theCRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage 9 12U.S.C.§2901etseq. 10 12CFR208.6(b). 11 12CFR208.21(a). 12 See12CFR208.61(c). 13 12CFR208.6(b)(3).

192 FederalReserveBulletin|March2016 insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,14andrequiresthe appropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods.15 Inaddition,theBoardconsidersthebank’soverallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.Inaddition,theBoardmayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Recordof PerformanceundertheCRA.Inevaluatingtheconvenienceandneedsfactorand CRAperformance,theBoardconsidersaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationandinformationandviewsprovidedbytheappropriatefederalsupervisors.16TheCRArequiresthattheappropriatefederalfinancial supervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’s recordof helpingtomeetthecreditneedsof itsentirecommunity,includingLMIneighborhoods.17Aninstitution’smostrecentCRAperformanceevaluationisaparticularly importantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-site evaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverallrecord of lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sdatareportedundertheHomeMortgageDisclosureActof 197518inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollectedand reportedundertheCRAregulationstoassessaninstitution’slendingactivitieswithrespect toborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedon(1)thenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)the geographicdistributionof suchloans,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberandamountof loansinlow-, moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloans basedonborrowercharacteristics,includingthenumberandamountof homemortgage loanstolow-,moderate-,middle-,andupper-incomeindividuals;19(4)theinstitution’s communitydevelopmentlending,includingthenumberandamountof communitydevel- 14 12U.S.C.§2901(b). 15 12U.S.C.§2903. 16 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642,11665 (March11,2010). 17 12U.S.C.§2906. 18 12U.S.C.§2801etseq. 19 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3).

LegalDevelopments:FourthQuarter,2015 193 opmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Chemical Bank,thefairlendingandcompliancerecordsof thebank,confidentialsupervisoryinformation,informationprovidedbyChemicalBank,andthepubliccommentreceivedonthe proposal. CRAPerformanceof ChemicalBank.ChemicalBankwasassignedanoverall “Outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheFederal ReserveBankof Chicago,asof August26,2013(“ChemicalBankEvaluation”).20Each ratingChemicalBankreceivedunderthelending,investment,andservicetestswasan “Outstanding.”21 ExaminersnotedthatChemicalBankoriginatedasubstantialmajorityof loanswithinits assessmentareasandshowedexcellentresponsivenesstocreditneedsthroughoutitsassessmentareas.Examinersalsonotedthatthebankhadanexcellentrecordof servingthe creditneedsof verysmallbusinesses.Further,ChemicalBank’sgeographicdistributionof loansreflectedexcellentpenetrationthroughouttheassessmentareas.Examinersalso notedthatChemicalBankwasaleaderinmakingcommunitydevelopmentloansinsideits assessmentareasandusedflexibleandinnovativelendingpracticesinservingassessment areaneeds.Examinersnotedthatthedollaramountof ChemicalBank’slendingincreased byapproximately11.0percentfromthepriorevaluation. ExaminersfoundthatChemicalBankprovidedanexcellentlevelof qualifiedinvestments, donations,andgrants.Examinersnotedthatthebankdemonstratedexcellentresponsivenesstocreditandcommunitydevelopmentneeds.Thebankalsomadeextensiveuseof innovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiatives. ExaminersnotedthatChemicalBank’sCRA-qualifiedinvestmentsincreasedbyapproximately32.9percentinnumberand50.5percentindollarsfromthepriorevaluation. ExaminersnotedthatChemicalBank’sbranchlocationchangeshadimprovedtheaccessibilityof itsdeliverysystems,particularlyinLMIgeographiesandtoLMIindividuals. Examinersalsofoundthatthebank’sdeliverysystemswerereadilyaccessibletothebank’s geographiesandindividualsof differentincomelevelsintheassessmentareas.Further, examinershighlightedthatChemicalBankwasaleaderinprovidingcommunitydevelopmentservicesthroughoutitsassessmentareas. AdditionalCRAActivitiesof ChemicalBank.ChemicalBankrepresentsthatitprovidesa comprehensiverangeof bankingandrelatedfinancialservicestomeettheneedsof individuals,families,andbusinessesinthecommunitiesitserves.ChemicalBankstatesthatit 20 TheChemicalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The ChemicalBankEvaluationreviewedhomemortgageandsmallbusinesslendingdatafromJanuary1,2011, throughDecember31,2012.Theevaluationperiodforcommunitydevelopmentloans,investments,and serviceswasJuly1,2011,throughAugust26,2013. 21 TheChemicalBankEvaluationincludedafull-scopereviewoffiveassessmentareas:theGrandRapids– Wyoming,Michigan,MetropolitanStatisticalArea(“MSA”);theNiles–BentonHarbor,Michigan,MSA;the BayCity,Michigan,MSA;theKalamazoo–Portage,Michigan,MSA;andtheassessmentareacomprising24 non-MSAcountiesofNorthCentralMichigan.Alimited-scopereviewwasperformedintheBattleCreek, Michigan,MSA;theFlint,Michigan,MSA;theHolland–GrandHaven,Michigan,MSA;theSaginaw– SaginawTownshipNorth,Michigan,MSA;theCassCounty,Michigan,AssessmentArea;theassessmentarea comprisingHuron,Sanilac,andTuscolaCounties,allinMichigan;theBranchCounty,Michigan,Assessment Area;andtheAlleganCounty,Michigan,AssessmentArea.

194 FederalReserveBulletin|March2016 usesinnovativeandflexiblelendingpracticesdesignedtoexpandhomeownershipopportunitiesforLMIborrowers,suchasofferingmortgagesinsuredbytheFederalHousing Administration,government-guaranteedRuralDevelopmentmortgages,andtheMichigan StateHousingDevelopmentAuthority’ssingle-familymortgages.Inaddition,Chemical BankisinvolvedintheMichiganStateHousingDevelopmentAuthorityProperty ImprovementProgram,whichprovideshomeimprovementloanstoLMIindividualswith incomesbelow80percentof theareamedianincome.ChemicalBankalsorepresentsthatit isaleaderinitsassessmentareasintermsof itsinvolvementinqualifiedcommunitydevelopmentorganizations,includinginunderservedruralmarketsinwhichitoperates. ChemicalBankoffersseveralcommercialloanproductswithflexibletermstoservethe needsof smallbusinesscustomersinitscommunities,includingSmallBusinessAdministrationloans,loansundertheCapitalAccessProgramoperatedbytheStateof Michigan, andloansundertheFederalHomeLoanBankProgramsforCommunityInvestments. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. ChemicalBankwouldusethemobilebranchtoexpandtheavailabilityof servicesto customersthroughoutitscurrentCRAassessmentareas.Asnotedabove,acommenter objectedtotheproposalandallegedthatCheboyganCounty’sfinancialservicesneedsare adequatelymetbythefinancialinstitutionscurrentlyoperatingthere.TheBoardgenerallyconsiderstheentryof anewcompetitorintoacommunitytobeapositivefactorwhen assessingtheeffectof aproposalontheconvenienceandneedsof thecommunitybecause newentryprovidesadditionalalternativesforconsumersandbusinesses.22ChemicalBank representsthatitsbusinessrelationshipsalreadyextendintoCheboyganCounty,andthe proposedmobilebranchwouldallowittobetterservethecounty’sresidentsandthe surroundingcommunities.ChemicalBanknotesthatthemobilebranchwouldenhancethe convenienceandefficiencyof theservicesitprovidestoitsbusinesscustomersaswellasto publicschools,municipalities,andothergovernmentalentities. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingtherecordsof ChemicalBankundertheCRA,thebank’srecord of compliancewithfairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyChemicalBank,thepubliccommentonthe proposal,andthepotentialeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenience andneedsfactorisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.TheBoard’sapprovalisspecificallyconditionedon ChemicalBank’scompliancewithallcommitmentsmadetotheBoardinconnectionwith theproposalaswellasallconditionsimposedinthisorder.TheBoard’sapprovalislimited toconductingtheproposeddeposit-anddocument-collectionservices.ChemicalBank mustseekBoardapprovalbeforeengaginginadditionalbranchactivitiesthroughthe mobilebranch.Furthermore,ChemicalBankmustseekBoardapprovalif itwishesto expandtheareasinwhichitmayprovidemobilebranchservices.23Thecommitmentsand conditionsreliedonbytheBoardaredeemedtobeconditionsimposedinwritingin connectionwithitsfindingsanddecisionand,assuch,maybeenforcedinproceedings underapplicablelaw. 22 SeeAdamsBank&Trust,FRBOrder2013-6(September4,2013). 23 Seesupranote3.

LegalDevelopments:FourthQuarter,2015 195 Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe FederalReserveBankof Chicagoactingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveDecember30,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard

196 FederalReserveBulletin|March2016 Orders Issued Under International Banking Act Royal Bank of Canada Montreal, Canada OrderApprovingEstablishmentof aBranch FRBOrderNo.2015–29(October7,2015) RoyalBankof Canada,Montreal,Canada(“RBC”),aforeignbankwithinthemeaningof theInternationalBankingActof 1978(“IBA”),hasappliedundersection7(d)of theIBA1to establishalimitedfederalbranchinJerseyCity,NewJersey.TheIBAprovidesthata foreignbankmustobtaintheapprovalof theBoardtoestablishabranchintheUnited States. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinJerseyCity,NewJersey(TheJersey Journal,September12,2014).Thetimeforsubmittingcommentshasexpired,andthe Boardhasconsideredallcommentsreceived. RBC,withconsolidatedassetsof approximately$832billion,isthesecondlargestbankin Canada.2RBCoffersarangeof commercial,wealthmanagement,andretailbankingproducts.InadditiontoitsCanadianandU.S.activities,RBCoperatesinover44countries throughanetworkof branches,localbanks,andnonbanksubsidiaries.3RBCisaqualifyingforeignbankingorganizationunderRegulationK.4 Undersection5of theIBA,aforeignbankmayestablishabranchoutsideitshomestate undercertainconditions.Onesetof conditionspermitsaforeignbanktoestablisha branchoutsideitshomestateif theestablishmentandoperationof suchbranchis permittedbythestateinwhichthebranchistobeestablishedandthebranchlimitsits deposit-takingtothatof anEdgecorporationoperatingundersection25Aof theFederal ReserveAct.5RBCmeetstherequirementstoestablishaninterstatebranchpursuantto theseconditionsinsection5of theIBAinthiscase.6Consistentwiththerestrictionsona limitedbranch,theproposedbranchwouldnottakeanydepositsotherthanthose permittedforacorporationorganizedundersection25Aof theFederalReserveAct.7The proposedbranchwouldalsoprovidesimilarservicestothoseprovidedbyitsNewYork branches,whichincludecreditandfinancialservicesprimarilyfocusedoninstitutional clientsandcapitalmarketactivities. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether(1)theforeignbankandanyforeignbank 1 12U.S.C.§3105(d). 2 AssetandrankingdataareasofJuly31,2015,andarebasedontheexchangerateasofthatdate. 3 IntheUnitedStates,RBCoperatesabanksubsidiary,RBCBank(Georgia),NationalAssociation,Atlanta, Georgia;threefederalbranchesinNewYork,NewYork(“NewYorkbranches”);anagencyinDallas,Texas; representativeofficesinSanFrancisco,California,Wilmington,Delaware,andSeattle,Washington;anda broker-dealer,RBCCapitalMarketsLLC,inNewYork,NewYork. 4 12CFR211.23(a). 5 12U.S.C.§3103(a)(7)(A). 6 Aforeignbankmayalsoestablishafull-servicebranchifitmeetsotherconditionsintheIBA.12U.S.C. §3103(a)(7)(B). 7 RBC’shomestateisNewYork.Undersection25AoftheFederalReserveAct,anEdgecorporationmay receivedepositsoutsidetheUnitedStatesandmayreceiveonlysuchdepositsintheUnitedStatesthatareincidentalto,orforthepurposeofcarryingout,transactionsinforeigncountries.12U.S.C.§615(a).RegulationK definestheextentofpermissibledeposit-takingactivitiesofEdgecorporations.12CFR211.6(a)(1).

LegalDevelopments:FourthQuarter,2015 197 parentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,(2)the foreignbankhasfurnishedtotheBoardtheinformationitneedstoassesstheapplication adequately,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.8TheBoard alsoconsidersthefinancialandmanagerialresourcesof theorganization,theconvenienceandneedsof thecommunity,andotherfactorssetforthintheIBAandRegulationK.9 Asnotedabove,RBCengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. RBCalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplication throughitssubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardhaspreviouslydeterminedthatRBCissubjecttocomprehensivesupervisiononaconsolidatedbasisbyits homecountrysupervisor,theOfficeof theSuperintendentof FinancialInstitutions (“OSFI”).10Basedonallthefactsof record,ithasbeendeterminedthatRBCcontinuesto besubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountry supervisor. TheBoardhasalsoconsideredthefinancialandmanagerial,andother,factorsrequiredby theIBA.Canada’srisk-basedcapitalstandardsareconsistentwiththoseestablishedby theBaselCapitalAccord(“Accord”).RBC’scapitalisinexcessof theminimumlevelsthat wouldberequiredbytheAccordandisconsideredequivalenttocapitalthatwouldbe requiredof aU.S.bankingorganization.Managerialandotherfinancialresourcesof RBC areconsideredconsistentwithapproval,andRBCappearstohavetheexperienceand capacitytosupporttheproposedlimitedbranch.Inaddition,RBChasestablishedcontrols andproceduresfortheproposedbranchtoensurecompliancewithU.S.lawandforits operationsingeneral. 8 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, auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankand itsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 9 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:(i)whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;(ii)thefinancialandmanagerialresourcesofthebank;(iii)whetherthebankhas procedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountryto addressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombat moneylaundering;(iv)whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthe bank’soperationswiththeBoard;(v)whetherthebankhasprovidedtheBoardwithadequateassurancesthat itwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofitsaffiliates thattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBAandotherapplicablefederal bankingstatutes;(vi)whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;(vii)theneedsof thecommunity;and(viii)thebank’srecordofoperation.TheBoardalsoconsiders,inthecaseofaforeign bankthatpresentsarisktothestabilityoftheUnitedStates,whetherthehomecountryofthebankhas adopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulation forthefinancialsystemofsuchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 10 RBCInvestorServicesBankS.A.,FRBOrderNo.2013-15(Dec.17,2013);RoyalBankofCanada,94Federal ReserveBulletinC45(2008);RoyalBankofCanada,83FederalReserveBulletin442(1997).

198 FederalReserveBulletin|March2016 TheOSFIhasnoobjectiontotheestablishmentof theproposedbranch.Canadaisa memberof theFinancialActionTaskForceandsubscribestoitsrecommendationson measurestocombatmoneylaunderingandinternationalterrorism.Inaccordancewith theserecommendations,Canadahasenactedlawsandcreatedlegislativeandregulatory standardstodetermoneylaundering,terroristfinancing,andotherillicitactivities.Money launderingisacriminaloffenseinCanada,andfinancialinstitutionsarerequiredto establishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.RBChaspoliciesandprocedurestocomplywiththeselawsandregulations,andRBC’scompliancewithapplicable lawsandregulationsismonitoredbygovernmentalentitiesresponsibleforanti-moneylaunderingcompliance. WithrespecttoaccesstoinformationonRBC’soperations,therestrictionsondisclosurein relevantjurisdictionsinwhichRBCoperateshavebeenreviewed,andrelevantgovernment authoritieshavebeencontactedregardingaccesstoinformation.RBChascommittedto makeavailabletotheBoardsuchinformationonitsoperationsandonthoseof anyof its affiliatesthattheBoarddeemsnecessarytodetermineandenforcecompliancewiththe IBA,theBankHoldingCompanyActof 1956,andotherapplicablefederallaw.Tothe extentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylawor otherwise,RBChascommittedtocooperatewiththeBoardtoobtainanynecessary consentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,ithasbeendetermined thatRBChasprovidedadequateassurancesof accesstoanynecessaryinformationthat theBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”)amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbank thatpresentsarisktothestabilityof theUnitedStatesfinancialsystem,whetherthehome countryof theforeignbankhasadopted,orismakingdemonstrableprogresstoward adopting,anappropriatesystemof financialregulationforthefinancialsystemof such homecountrytomitigatesuchrisk.11Informationrelevanttothestandardregardingrisk tothestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular, considerationhasbeengiventotheabsoluteandrelativesizeof RBCinitshomejurisdiction;thesize,type,andscopeof theactivitiesRBCproposestoconductintheUnited States,includingthepotentialforthoseactivitiestoincreaseortransmitfinancialinstability;andtheframeworkinplaceforsupervisingRBCinitshomejurisdiction.Basedon theseandotherfactors,financialstabilityconsiderationsinthisproposalareconsistent withapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyRBCas wellastothetermsandconditionssetforthinthisorder,RBC’sapplicationtoestablisha limitedfederalbranchinNewJerseyisherebyapprovedbytheDirectorof theDivision of BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel, pursuanttoauthoritydelegatedbytheBoard.12Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof RBCanditsaffiliatessubsequentlyinterferewith theBoard’sabilitytodetermineandenforcecompliancebyRBCoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof RBC’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallycondi- 11 Dodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1440(2010),codifiedat12U.S.C.§3105(d)(3)(E). 12 12CFR265.7(d)(12).

LegalDevelopments:FourthQuarter,2015 199 tionedoncompliancebyRBCwiththecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthisorder.13 Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveOctober7, 2015. RobertdeV.Frierson Secretaryof theBoard 13 TheBoard’sauthoritytoapprovetheestablishmentofbranchesparallelsthecontinuingauthorityoftheOffice oftheComptrolleroftheCurrency(“OCC”)tolicenseofficesofaforeignbank.TheBoard’sapprovalofthis applicationdoesnotsupplanttheauthorityoftheOCCtolicensetheproposedbranchofRBCinaccordancewithanytermsandconditionsthatitmayimpose.

200 FederalReserveBulletin|March2016 Korea Exchange Bank Seoul, Republic of Korea OrderApprovingtheEstablishmentof anAgency FRBOrderNo.2015–31(October27,2015) KoreaExchangeBank(“KEB”),Seoul,Republicof Korea,aforeignbankwithinthe meaningof theInternationalBankingAct(“IBA”),hasappliedundersection7(d)of the IBA1toretaintheagencycurrentlyoperatedinNewYork,NewYork,byHanaBank, Seoul,Republicof Korea,followinganinternalreorganizationthatinvolvedKEB’smerger withitsaffiliate,HanaBank.2TheIBAprovidesthataforeignbankmustobtainthe approvalof theBoardtoestablishanagencyintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Post,July30,2015).Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. KEB,withtotalconsolidatedassetsof approximately$107billion,isthefifthlargest commercialbankinKoreabyassetsize.3KEB’ssharesarewidelyheld,withnoshareholderorgroupof shareholderscontrollingmorethan10percentof itsoutstanding shares.4KEBengagesinabroadrangeof retailandcommercialbankingactivitiesthrough numerousofficesandsubsidiarieslocatedthroughouttheworld.OutsideKorea,KEBhas operationsintheUnitedStatesandover20othercountries. IntheUnitedStates,KEBoperatesthreewhollyownedsubsidiaries:KEBNYFinancial Corp.,NewYork,NewYork;KEBLAFinancialCorp.,LosAngeles,California;andKEB USAInternationalCorp.,NewYork,NewYork.5KEBisaqualifyingforeignbanking organizationunderRegulationK.6 KEBandHanaBankhavebeenaffiliatedforeignbankssince2012.OnAugust27,2015, KEBreceivedapproval,pursuanttosection211.24(a)(6)of theBoard’sRegulationK,to proceedwiththemergerof KEBandHanaBankpriortoBoardactiononKEB’sapplicationtoestablishanagencyintheUnitedStatesthroughretentionof theHanaBank agency.7Themergerof KEBandHanaBankwascompletedonSeptember1,2015. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishanagency,theBoardmustconsiderwhether(1)theforeignbankandanyforeignbank parentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,(2)the 1 12U.S.C.§3105(d). 2 OnSeptember1,2015,HanaBankmergedwithandintoKoreaExchangeBanktoform“KEBHanaBank.” 3 AssetdataareasofMarch31,2015.RankingdataareasofDecember31,2014. 4 AsofDecember31,2014,theNationalPensionServiceofKorea,FranklinResources,andBlackRockowned 9.5percent,7.0percent,and5.1percent,respectively,ofthevotingsharesofHanaFinancialGroup,Seoul, RepublicofKorea,theultimateparentofKEB.Nootherpersonowned5percentormoreofthevotingshares ofKEBanditsultimateparent.TherearenovotingagreementsorothermechanismsthatexistamongshareholdersfortheexerciseofcontroloverHanaFinancialGroup. 5 KEBUSAInternationalCorp.engagesinactivitieslimitedtoprovidingadministrativeback-officefunctionsto KEB,pursuanttosection4(c)(1)(C)oftheBankHoldingCompanyActof1956(12U.S.C.§1843(c)(1)(C)). 6 12CFR211.23(a). 7 SeeLetterdatedAugust27,2015,fromtheBoardtoMr.WilliamS.Eckland,SidleyAustinLLP.Consistent with12CFR211.24(a)(6),KEBprovidedcommitmentstotheBoardtonotengageinanynewlinesofbusiness orexpanditsU.S.activitiesuntilthedispositionoftheapplicationandtoabidebytheBoard’sdecisionon KEB’sapplicationtoestablishanagency,including,ifnecessary,adecisiontorequiretheterminationofthe activitiesoftheagency.

LegalDevelopments:FourthQuarter,2015 201 foreignbankhasfurnishedtotheBoardtheinformationitneedstoassesstheapplication adequately,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.8TheBoard alsoconsidersadditionalstandardssetforthintheIBAandRegulationK.9 Asnotedabove,KEBengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. KEBalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. TheBoardpreviouslyhasdeterminedthatKEBissubjecttocomprehensivesupervisionon aconsolidatedbasisbyitshomecountrysupervisor,theKoreanFinancialSupervision Service(“FSS”).10KEBremainssupervisedbytheFSSonsubstantiallythesameterms andconditions.Basedonallthefactsof record,ithasbeendeterminedthatKEBcontinues tobesubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomecountry supervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.TheFSShasnoobjectiontotheestablishmentof theproposedagency. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsandotherfactors requiredbytheIBA.Korea’srisk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapitalAccord(“BaselAccord”).KEB’scapitalisinexcessof the minimumlevelsthatwouldberequiredbytheBaselAccordandisconsideredequivalentto capitalthatwouldberequiredof aU.S.bankingorganization.Managerialandother financialresourcesof KEBareconsideredconsistentwithapproval,andKEBappearsto havetheexperienceandcapacitytosupporttheproposedagency.Inaddition,KEBhas establishedcontrolsandproceduresfortheproposedagencytoensurecompliancewith U.S.lawandforitsoperationsingeneral. 8 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, auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankand itsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 9 12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2)–(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:(i)whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;(ii)thefinancialandmanagerialresourcesofthebank;(iii)whetherthebankhas procedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountryto addressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombat moneylaundering;(iv)whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthe bank’soperationswiththeBoard;(v)whetherthebankhasprovidedtheBoardwithadequateassurancesthat itwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofitsaffiliates thattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBAandotherapplicablefederal bankingstatutes;(vi)whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;(vii)theneedsof thecommunity;and(viii)thebank’srecordofoperation.TheBoardalsoconsiders,inthecaseofaforeign bankthatpresentsarisktothestabilityoftheUnitedStates,whetherthehomecountryofthebankhas adopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulation forthefinancialsystemofsuchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 10 HanaFinancialGroup,FRBOrderNo.2013-4(August14,2013).

202 FederalReserveBulletin|March2016 Koreaisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordance withtheserecommendations,Koreahasenactedlawsandregulationstodetermoney launderingthatareconsistentwiththeFinancialActionTaskForce’srecommendations. MoneylaunderingisacriminaloffenseinKorea,andfinancialinstitutionsarerequiredto establishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.KEBhaspoliciesandprocedurestocomplywiththeselawsandregulations,anditscomplianceismonitoredby governmentalentitiesresponsibleforanti-money-launderingcompliance. KEBhascommittedtomakeavailabletotheBoardsuchinformationonitsoperationsand onthoseof anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeIBA,theBankHoldingCompanyActof 1956,andotherapplicable federallaw.Totheextentthattheprovisionof suchinformationtotheBoardmaybe prohibitedbylaworotherwise,KEBhascommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosure of suchinformation.Inlightof thesecommitmentsandotherfactsof record,ithasbeen determinedthatKEBhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresents arisktothestabilityof theUnitedStatesfinancialsystem,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,an appropriatesystemof financialregulationforthefinancialsystemof suchhomecountryto mitigatesuchrisk.11Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular,considerationhas beengivento(1)thesizeandscopeof KEB’sactivities,includingthetypeof activitiesit proposestoconduct,intheUnitedStatesandthepotentialforthoseactivitiestoincrease ortransmitfinancialinstability;and(2)theframeworkinplaceforsupervisingKEBinits homejurisdiction.Basedontheseandotherfactors,financialstabilityconsiderationsin thisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyKEBas wellastothetermsandconditionssetforthinthisorder,KEB’sapplicationtoestablishan agencyinNewYorkisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuanttoauthority delegatedbytheBoard.12Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof KEBanditsaffiliatessubsequentlyinterferewiththeBoard’sabilityto obtaininformationtodetermineandenforcecompliancebyKEBoritsaffiliateswith applicablefederalstatutes,theBoardmayrequireterminationof anyof KEB’sdirector indirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecifically conditionedoncompliancebyBankwiththecommitmentsmadeinconnectionwiththis applicationandwiththeconditionsinthisorder.13 11 Pub.L.No.111-203,124Stat.1376,1440(2010),codifiedat12U.S.C.§3105(d)(3)(E). 12 12CFR265.7(d)(12). 13 TheBoard’sauthoritytoapprovetheestablishmentofanagencyparallelsthecontinuingauthorityoftheState ofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplant theauthorityoftheStateofNewYorkanditsagent,theNewYorkStateDepartmentofFinancialServices,to licensetheproposedagencyofKEBinaccordancewithanytermsandconditionsthattheNewYorkState DepartmentofFinancialServicesmightimpose.TheNewYorkStateDepartmentofFinancialServices approvedKEB’sapplicationtoestablishtheagencyonAugust31,2015.

LegalDevelopments:FourthQuarter,2015 203 Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveOctober27, 2015. MargaretMcCloskeyShanks DeputySecretaryof theBoard

204 FederalReserveBulletin|March2016 Taiwan Business Bank, Ltd. Taipei, Taiwan OrderApprovingEstablishmentof aBranch FRBOrderNo.2015–37(December31,2015) TaiwanBusinessBank,Ltd.(“TBB”),Taipei,Taiwan,aforeignbankwithinthemeaning of theInternationalBankingActof 1978(“IBA”),hasappliedundersection7(d)of the IBA1toestablishastate-licensedbranchinNewYork,NewYork.TheForeignBank SupervisionEnhancementActof 1991,whichamendedtheIBA,providesthataforeign bankmustobtaintheapprovalof theBoardtoestablishabranchintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Post,January16,2015).Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. TBB,withconsolidatedassetsof approximately$45billion,isthe14thlargestbankin Taiwan.2TBBisasubsidiaryof Bankof Taiwan(“BOT”),Taipei.3TaiwanFinancial HoldingCompany,Ltd.iswhollyownedbyTaiwan’sMinistryof Financeandownsallof BOT’sshares.TBBoffersavarietyof traditionalbankingproductsandservices, includingcorporateandconsumerloans,tradefinance,foreignexchange,trust,andcredit cardservices.OutsideTaiwan,TBBoperatesbranchesinHongKong,Shanghai,Sydney, andBrisbane.IntheUnitedStates,TBBoperatesastate-licensedbranchinLosAngeles, California.TBBisaqualifyingforeignbankingorganizationunderRegulationK.4 TBB’sparentbank,BOT,withconsolidatedassetsof approximately$151billion,isthe largestcommercialbankinTaiwan.Thebankoffersarangeof commercial,investment, andretailbankingproducts.OutsideTaiwan,BOToperatesbranchesinHongKong, Johannesburg,London,Singapore,Tokyo,andShanghai,andarepresentativeofficein Mumbai.IntheUnitedStates,BOToperatesstate-licensedbranchesinNewYork,New York,andLosAngeles,California.BOTisaqualifyingforeignbankingorganizationunder RegulationK. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether(1)theforeignbankandanyforeignbank parentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,(2)the foreignbankhasfurnishedtotheBoardtheinformationitneedstoassesstheapplication adequately,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.5TheBoard alsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.6 1 12U.S.C.§3105(d). 2 AssetdataareasofJune30,2015,andarebasedontheexchangerateasofthatdate.Rankingdataareasof December31,2014. 3 BOTownsapproximately17.2percentofthevotingsharesofTBBandhasthreeofthe15seatsonTBB’s boardofdirectors. 4 12CFR211.23(a). 5 12U.S.C.§3105(d)(2);12CFR211.24.RegulationKprovidesthataforeignbankissubjecttoconsolidated homecountrysupervisioniftheforeignbankissupervisedorregulatedinsuchamannerthatitshomecountry supervisorsreceivesufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanyaffiliate)toassesstheforeignbank’soverallfinancialconditionandcompliance withlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthisstandard,theBoardconsiders,amongother indiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensure thatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,

LegalDevelopments:FourthQuarter,2015 205 Asnotedabove,TBBandBOTengagedirectlyinthebusinessof bankingoutsidethe UnitedStates.TBBalsohasprovidedtheBoardwithinformationnecessarytoassessthe applicationthroughsubmissionsthataddresstherelevantissues. TheFederalReservepreviouslyhasdeterminedthatTBBandBOTaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor,theFinancial SupervisoryCommission(“FSC”).7TBBandBOTremainsupervisedbytheFSCon substantiallythesametermsandconditions.Basedonallthefactsof record,ithasbeen determinedthatTBBandBOTcontinuetobesubjecttocomprehensivesupervisionona consolidatedbasisbytheirhomecountrysupervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.TheFSChasnoobjectiontotheestablishmentof theproposed branch. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsinthecase.Taiwan’s risk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapital Accord(“BaselAccord”).TBB’scapitalisinexcessof theminimumlevelsthatwouldbe requiredbytheBaselAccordandisconsideredequivalenttocapitalthatwouldberequired of aU.S.bankingorganization.Managerialandotherfinancialresourcesof TBBare consideredconsistentwithapproval,andTBBappearstohavetheexperienceandcapacity tosupporttheproposedbranch.Inaddition,TBBhasestablishedcontrolsandproceduresfortheproposedbranchtoensurecompliancewithU.S.lawandforitsoperationsin general. Taiwanhasenactedlawsandregulationstodetermoneylaunderingthatareconsistent withFinancialActionTaskForcerecommendations.Moneylaunderingisacriminal offenseinTaiwan,andfinancialinstitutionsarerequiredtoestablishinternalpolicies, procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughout theirworldwideoperations.TBBhaspoliciesandprocedurestocomplywiththeselawsand regulations,andTBB’scompliancewithapplicablelawsandregulationsismonitoredby governmentalentitiesresponsibleforanti-money-launderingcompliance. TBBhascommittedtomakeavailabletotheBoardsuchinformationonitsoperationsand onthoseof anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce auditreports,orotherwise;(iii)obtaininformationonthedealingsandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’s determination. 6 12U.S.C.§3105(d)(3)-(4)and12CFR211.24(c)(2)-(3).Theadditionalstandardssetforthinsection7ofthe IBAandRegulationKincludethefollowing:(i)whetherthebank’shomecountrysupervisorhasconsentedto theestablishmentoftheoffice;(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 TaiwanBusinessBank,81FederalReserveBulletin746(1995);BankofTaiwan(orderdatedJune27,2011),97 FederalReserveBulletin56(2ndQuar.2011).

206 FederalReserveBulletin|March2016 compliancewiththeIBA,theBankHoldingCompanyActof 1956,andotherapplicable federallaw.Totheextentthattheprovisionof suchinformationtotheBoardmaybe prohibitedbylaworotherwise,TBBhascommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfordisclosure of suchinformation.Inlightof thesecommitmentsandotherfactsof record,ithasbeen determinedthatTBBhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”)amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbank thatpresentsarisktothestabilityof theUnitedStatesfinancialsystem,whetherthehome countryof theforeignbankhasadopted,orismakingdemonstrableprogresstoward adopting,anappropriatesystemof financialregulationforthefinancialsystemof such homecountrytomitigatesuchrisk.8Informationrelevanttothestandardregardingriskto thestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular, considerationhasbeengiventotheabsoluteandrelativesizeof TBBinitshomejurisdiction;thescopeof TBB’sactivities,includingthetypesof activitiesitproposestoconduct intheUnitedStatesandthepotentialforthoseactivitiestoincreaseortransmitfinancial instability;andtheframeworkinplaceforsupervisingTBBinitshomejurisdiction.Based ontheseandotherfactors,financialstabilityconsiderationsforthisproposalareconsistent withapproval. TheIBAestablishescriteriathatmustbemetbeforetheBoardcanapprovetheestablishmentof abranchoutsideaforeignbank’shomestate.TBB’shomestateisCalifornia. Undersection5(a)(2)of theIBA,asamendedbysection104of theRiegle-NealInterstate BankingandBranchingEfficiencyActof 1994,9aforeignbank,withtheapprovalof the Boardandtheappropriatestatesupervisoryagency,mayestablishandoperateastatelicensedbranchinanystateoutsideitshomestatetotheextentthatastate-charteredbank withthesamehomestateastheforeignbankcoulddosoundersection18(d)(4)of the FederalDepositInsuranceAct(“FDIAct”).Section18(d)(4),whichpreviouslyauthorized statesto“optin”tointerstatedenovobranching,wasamendedbysection613of the Dodd-FrankActtopermitinsuredstatebankstoestablishinterstatedenovobranches nationwide.10Ithasbeendeterminedthatalltheothercriteriareferredtoin section5(a)(1)and5(a)(3)of theIBA,includingthecriteriainsection7(d)of theIBA, havebeenmet.11Inviewof allthefactsof record,theBoardispermittedtoapprovethe establishmentof aninterstatedenovostate-charteredbranchbyTBBundersection5(a)of theIBA. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyTBBas wellasthetermsandconditionssetforthinthisorder,TBB’sapplicationtoestablisha branchinNewYorkisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel,pursuanttoauthority delegatedbytheBoard.12Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof TBBanditsaffiliatessubsequentlyinterferewiththeBoard’sabilityto 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 Actand12U.S.C.§1831u(b)(1),(b)(3),and(b)(4)).IthasbeendeterminedthatTBBisincompliancewith statefilingrequirements.TBBwasadequatelycapitalizedasofthedatetheapplicationwasfiled,andon consummationofthisproposalTBBwouldbewellcapitalizedandwellmanaged. 12 12CFR265.7(d)(12).

LegalDevelopments:FourthQuarter,2015 207 obtaininformationtodetermineandenforcecompliancebyTBBoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof TBB’sdirectorindirect activitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditioned oncompliancebyTBBwiththecommitmentsmadeinconnectionwiththisapplication andwiththeconditionsinthisorder.13 Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveDecember31, 2015. RobertdeV.Frierson Secretaryof theBoard 13 TheBoard’sauthoritytoapprovetheestablishmentofbranchesparallelsthecontinuingauthorityoftheState ofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplant theauthorityoftheStateofNewYorkanditsagent,theNewYorkStateDepartmentofFinancialServices,to licensetheproposedbranchofTBBinaccordancewithanytermsandconditionsthattheNewYorkState DepartmentofFinancialServicesmayimpose.

208 FederalReserveBulletin|March2016 Order Issued Under Home Owners’ Loan Act Synchony Financial Stamford, Connecticut OrderApprovingaSavingsandLoanHoldingCompanyandCertainActivities FRBOrderNo.2015–30(October14,2015) SynchronyFinancial,Stamford,Connecticut,hasrequestedtheBoard’sapprovalunder section10(e)of theHomeOwners’LoanAct,asamended(“HOLA”),1tooperateasa publiclyownedsavingsandloanholdingcompany(“SLHC”)andretaincontrolof its subsidiaryfederalsavingsassociation,SynchronyBank(“SynchronyBank”orthe “Bank”),Draper,Utah.SynchronyFinancialhasalsorequestedtheBoard’sapproval undersection10(c)of HOLAandsection238.51(b)of theBoard’sRegulationLLto continuetoengageincertainbusinessactivitiesthroughitscontrolof numerous non-savingsassociationsubsidiaries.2GeneralElectricCompany(“GE”),GeneralElectric CapitalCorporation(“GECC”),andGEConsumerFinance,Inc.(“GECFI”),currently ownandcontrol,eitherdirectlyorindirectly,84.6percentof theoutstandingsharesof SynchronyFinancial’scommonstock.3Undertheproposal,GEwouldofferitsshareholderstheopportunitytoexchangesharesof GEcommonstockforsharesof Synchrony Financialcommonstock.SynchronyFinancialwillbecomeastand-aloneSLHCupon consummationof theexchangeoffer. Noticesof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, havebeenpublished(80FederalRegister26257(May7,2015);80FederalRegister29321 (May21,2015)).4Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredtheproposalandthefactorssetforthinsections10(c)and(e)of HOLAinlight of alltheinformationof record.5 SynchronyFinancial,withconsolidatedassetsof approximately$75.8billion,controls SynchronyBankandisthe36thlargestinsureddepositoryorganizationintheUnited States,controllingapproximately$37.8billionindeposits,whichrepresentlessthan 1percentof thetotalamountof depositsintheUnitedStates.6SynchronyFinancial providesarangeof creditanddepositproductstoNorthAmericanconsumers.Synchrony BankhasamainofficeinUtahandoperatesasinglebranchinNewJersey. FactorsGoverningEvaluationof theProposal InevaluatingaproposaltoestablishanSLHCundersection10(e)of HOLA,theBoardis requiredtoconsiderthecompetitiveeffectsof theproposal;thefinancialandmanagerial resourcesandfutureprospectsof theapplicantandsavingsassociationinvolved;theconve- 1 12U.S.C.§1467a(e). 2 12U.S.C.§1467a(c).Seetheappendixforalistingofthesesubsidiariesandtheirrespectiveactivities. 3 Theremaining15.4percentofSynchronyFinancial’scommonstockispubliclytraded.Nosingleshareholder holdsmorethan5percentofthepubliclytradedstock. 4 12CFR238.14(c)(2)and238.53(e). 5 12U.S.C.§§1467a(c)(4)(B)and(e)(2);seealso12CFR238.54(c)and238.15. 6 Asset,deposit,andrankingdataareasofJune30,2015,unlessotherwisenoted.

LegalDevelopments:FourthQuarter,2015 209 nienceandneedsof thecommunitytobeserved,includingtherecordof performance undertheCommunityReinvestmentAct(“CRA”);7andtheeffectof theacquisitiononthe savingsassociationandtheinsurancerisktotheDepositInsuranceFund.8 Section10(c)(4)of HOLA,governingSLHCholdingcompanyactivities,requiresthe Boardtoconsiderwhethertheperformanceof aparticularactivitycanreasonablybe expectedtoproducebenefitstothepublic(suchasgreaterconvenience,increasedcompetition,orgainsinefficiency)thatoutweighpossibleadverseeffectsof suchactivity(suchas undueconcentrationof resourcesordecreasedorunfaircompetition,conflictsof interest, orunsoundfinancialpractices).9Aspartof thisevaluation,theBoardisalsorequiredto considerthemanagerialandfinancialresources,includingcapital,of thecompanies involved.10 CompetitiveConsiderations Section10(e)(2)of HOLAprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopoly,orthatwouldbeinfurtheranceof anycombinationorconspiracyto monopolizeortoattempttomonopolizethesavingsandloanbusinessinanypartof the UnitedStates.11HOLAalsoprohibitstheBoardfromapprovingaproposaltheeffectof whichinanysectionof thecountrymaybesubstantiallytolessencompetition,ortendto createamonopoly,orthatinanyothermannerwouldbeinrestraintof trade,unlessthe anticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestbythe probableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunityto beserved.12Inaddition,theBoardmustconsiderthecompetitiveeffectsof aproposalto acquireanon-savingsassociationcompanyunderthebalancingtestof section10(c)(4)of HOLA.13 Theproposalisare-organizationanddivestitureof asavingsassociationbyitscurrent ownerwithoutacombinationwithanotherdepositoryinstitution.Accordingly,the proposalwouldnotdecreasecompetitioninanymarket. TheDepartmentof JusticehasadvisedtheBoardthatconsummationof theproposal wouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbanking market.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunity tocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantmarket,includinganysavingsandloanmarkets.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. FinancialandManagerialResourcesandFutureProspects InreviewingproposalsunderHOLA,theBoardconsidersthefinancialandmanagerial resourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financial factors,theBoardreviewsinformationregardingthefinancialconditionof theorganiza- 7 12CFR238.15(b)(3). 8 12U.S.C.§1467a(e)(2);seealso12CFR238.15. 9 12U.S.C.§1467a(c)(4)(B)(i);seealso12CFR238.54(c). 10 12U.S.C.§1467a(c)(4)(B)(ii)-(iii);seealso12CFR238.54(c). 11 12U.S.C.§1467a(e)(2)(A);seealso12CFR238.15(a)(1). 12 12U.S.C.§1467a(e)(2)(B);seealso12CFR238.15(a)(2). 13 12U.S.C.§1467a(c)(4)(B)(i).

210 FederalReserveBulletin|March2016 tionsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformation regardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof publicandsupervisoryinformationregardingcapitaladequacy,assetquality, andearningsperformance.TheBoardevaluatesthefinancialconditionof thecombined organization,includingitscapitalposition,assetquality,liquidity,earningsprospects,and theimpactof theproposedfundingof thetransaction.Inassessingfinancialfactors,the Boardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsiderswhether currentandprojectedcapitalpositionsandlevelsof indebtednessconformtostandards andpoliciesestablishedbytheBoard.14TheBoardconsidersthefutureprospectsof the organizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresources andtheproposedbusinessplan. SynchronyFinancialandSynchronyBankarebothwellcapitalizedandwouldremainso onconsummationof theproposal.15Asdescribedabove,theproposedtransactionisstructuredasashareexchange,inwhichGEshareholderswillbegiventheopportunityto exchangesharesof GEcommonstockforsharesof SynchronyFinancialcommonstock. Consummationof theproposalwouldeliminateGEasasourceof strengthforSynchrony FinancialandSynchronyBank;however,itwouldalsoallowSynchronyFinancialdirect andfullaccesstothecapitalmarketsinthesamemanneranddegreeasotherdepository institutionsof similarsize,structure,andoperations.Theassetquality,earnings,and liquidityof SynchronyFinancialandSynchronyBankareconsistentwithapproval.In addition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.16In evaluatingthemanagerialresourcesof thecompanyorsavingsassociation,theBoard considersthecompetence,experience,andintegrityof theofficers,directors,andprincipal shareholdersof thecompanyorsavingsassociation;theirrecordof compliancewithlaws andregulations;andtherecordof thecompanyorsavingsassociationanditsaffiliatesof fulfillinganycommitmentsto,andanyconditionsimposedby,theBoardinconnection withpriorapplications.17Synchronyexpectstoreplacefiveexistingdirectorswithfivenew, independentdirectors.Themanagementof SynchronyFinancialandSynchronyBankare otherwiseproposedtoremainthesameascurrently.Accordingly,theBoardhasreviewed theexaminationrecordsof SynchronyBank,includingassessmentsof itsmanagement, risk-managementsystems,andoperations.Inaddition,theBoardhasconsideredinformationprovidedbySynchronyFinancial,theBoard’ssupervisoryexperienceswithSynchrony Financialandthoseof otherrelevantbanksupervisoryagencieswiththeorganization,and SynchronyFinancial’srecordof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws. SynchronyFinancial’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof SynchronyFinancialhavesubstantialknowledgeof andexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredSynchronyFinancial’splansforimplementingtheproposal. SynchronyFinancialisdevotingsignificantfinancialandotherresourcestoexpandits 14 12CFR238.15(b)(1). 15 TheBoardconsideredtheleverageratio,totalrisk-basedcapitalratio,tier1risk-basedcapitalratio,and commonequitytier1risk-basedcapitalratiooftheconsolidatedassetsofSynchronyFinancialandSynchrony Bank. 16 12CFR238.15(b)(2). 17 See12U.S.C.§1467a(e)(1)(B);12CFR238.15(b)(2).

LegalDevelopments:FourthQuarter,2015 211 infrastructuretosupportitsoperationasastand-aloneorganization.Inparticular, SynchronyFinancialhasdevelopedstand-alonecorporategovernance,capitalplanning, informationtechnology,compliance,regulatory,internalaudit,andothercontroloperationsandinfrastructure.SynchronyFinancialhasalsodevelopeditsownstand-aloneriskmanagementpoliciesandprocesses.Theseactionsareconsideredacceptablefroma supervisoryperspective.Inaddition,SynchronyFinancial’smanagementhastheexperience andresourcestoensurethattheorganizationcancontinuetooperateinasafeandsound manner. Basedonallthefactsof record,includingSynchronyFinancial’ssupervisoryrecord,managerialandoperationalresources,andplansforoperatingtheinstitutiononastand-alone basisafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancial andmanagerialresourcesandfutureprospectsof theorganizationinvolvedinthe proposal,aswellasSynchronyFinancial’srecordof compliancewithapplicablebanking laws,includinganti-money-launderinglaws,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection10(e)of HOLA,theBoardconsiderstheeffectof the transactionontheconvenienceandneedsof thecommunitiestobeserved.18TheBoard alsotakestheconvenienceandneedsof thecommunitiestobeservedintoconsiderationin thebalancingtestundersection10(c)(4)of HOLA.19Initsevaluationof theeffectof the proposalontheconvenienceandneedsof thecommunitiestobeserved,theBoard considerswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof the communitiestheyserve,aswellasotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoardplaces particularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.20TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,21andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.22 Inaddition,theBoardconsiderstheinstitution’soverallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,andinformationprovidedbythe applicant.TheBoardmayalsoconsidertheinstitution’sbusinessmodel,itsmarketingand outreachplans,theorganization’splansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant.Inassessingtheconvenienceandneedsfactorinthiscase, theBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof SynchronyBank,thefairlendingandcompliancerecordsof SynchronyBank,thesupervisoryviewsof theOfficeof theComptrollerof theCurrency (“OCC”)andtheConsumerFinancialProtectionBureau(“CFPB”),confidentialsupervisoryinformation,andinformationprovidedbySynchronyFinancial. 18 12U.S.C.§1467a(e)(2);12CFR238.15(b)(3). 19 12U.S.C.§1467a(c)(4)(B)(i). 20 12CFR238.15(b)(3). 21 12U.S.C.§2901(b). 22 12U.S.C.§2903.

212 FederalReserveBulletin|March2016 TheOCCandCFPBhaveeachconductedconsumercomplianceexaminationsof SynchronyBank.TheBoardhasreviewedthoseexaminationreportsandconsultedwith theOCCandCFPBregardingSynchronyBank’srecordof compliancewithfairlending andotherconsumerprotectionlawsandregulationsandtheBank’spoliciesandprocedurestohelpensurecompliancewithfairlendingandotherconsumerprotectionlawsand regulations.SynchronyBankintendstomaintainthesepoliciesandproceduresfollowing consummationof thetransaction. Recordof PerformanceUndertheCRA.TheCRArequiresthattheappropriatefederal financialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity,includingLMI neighborhoods.23Aninstitution’smostrecentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed, on-siteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’soverall recordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHomeMortgageDisclosureActdatainadditiontosmallbusiness,small farm,andcommunitydevelopmentloandatacollectedandreportedundertheCRAregulationstoassessaninstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonthe numberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans (asapplicable)intheinstitution’sassessmentareas;thegeographicdistributionof such loans,includingtheproportionanddispersionof theinstitution’sloansinitsassessment areasandthenumberandamountof loansinlow-,moderate-,middle-,andupper-income geographies;thedistributionof suchloansbasedonborrowercharacteristics,including thenumberandamountof homemortgageloanstolow-,moderate-,middle-,andupperincomeindividuals;24theinstitution’scommunitydevelopmentlending,includingthe numberandamountof communitydevelopmentloansandtheircomplexityand innovativeness;andtheinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies.Consequently,theBoard considerstheoverallCRAratingandtheratingonthelendingtesttobeimportantindicators,whentakenintoconsiderationwithotherfactors,indeterminingwhetheradepository institutionishelpingtomeetthecreditneedsof itscommunities. CRAPerformanceof SynchronyBank.SynchronyBankwasassignedanoverall “Outstanding”ratingbytheOCCatitsmostrecentCRAperformanceevaluation,asof December31,2012(“CRAEvaluation”).25DuetoBank’sdesignationasalimited-purpose 23 12U.S.C.§2906. 24 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 25 AtthetimeoftheCRAEvaluation,SynchronyBankoperatedunderthename“GECapitalRetailBank, FSB.”Theinstitutionchangeditsnameto“SynchronyBank”onJune2,2014.TheBankwasdesignatedasa limited-purposesavingsassociationforCRAevaluationpurposeseffectiveMay1,2009;therefore,theCRA Evaluationwasconductedusingexaminationproceduresforlimited-purposeinstitutions.Examinersreviewed communitydevelopmentactivitiesfromOctober1,2009,throughDecember31,2012,andreviewedthelevel andnatureofqualifiedinvestments,communitydevelopmentlending,andcommunitydevelopmentservices.

LegalDevelopments:FourthQuarter,2015 213 savingsassociationforCRAevaluationpurposes,examinersconsideredthefollowing ratingcriteria:(1)levelof communitydevelopmentlending,communitydevelopment services,andqualifiedinvestmentactivity;(2)useof innovativeorcomplexqualifiedinvestments,communitydevelopmentloans,andcommunitydevelopmentservices;and (3)responsivenesstocreditandcommunitydevelopmentneedsintheinstitution’sassessmentarea.SynchronyBankwasfoundtodemonstrate(1)ahighlevelof communitydevelopmentlending,communitydevelopmentservices,andqualifiedinvestmentactivities; (2)occasionaluseof innovativeorcomplexqualifiedinvestments,communitydevelopment loans,andcommunitydevelopmentservices;and(3)excellentresponsivenesstocreditand communitydevelopmentneedsintheBank’sassessmentarea. ExaminersfoundthatBankprovidedsignificantlevelsof communitydevelopmentlending, communitydevelopmentservices,andqualifiedinvestmentactivityinandoutsideBank’s assessmentarea.Examplesof communitydevelopmentloanscitedbyexaminersincluded Bank’spartnershipandleadershiprolewithaconsortiumof 29financialinstitutionsthat offersflexiblefinancingfornewconstructionorrehabilitationof multifamilyaffordablehousingdevelopmentprojects;itsleadershiproleinthecreationof asmallbusinessloan poolinresponsetocommunityneeds;anditsextensionof creditwithflexibletermsto supportalocalcitygovernmentintheacquisitionandrehabilitationof targetedsinglefamilyproperties.Examinersnotedthatemployeesof Bankanditsaffiliatescontributed significanttimetocommunitydevelopmentservicesduringthereviewperiod,including servicewithorganizationsdedicatedtoaffordablehousing,financialeducation,and supportforwomenseekingemployment.Inparticular,examinersnotedBankofficers’ effortstoinitiateasmallbusinesseducationalprogramthatguideswomenentrepreneursto developskillsinplanningandoperatingtheirownbusinessesandprovidesmentorsand accesstofinancingforgraduatesof theprogram.Significantqualifiedinvestmentactivities includedthepurchaseof securitiesbackedbymortgagestoLMIborrowersintheassessmentarea,investmentsinsmallbusinessinvestmentcompanies,andgrantsandfinancial supportforprogrammingatschoolsservingprimarilyLMIhouseholdsintheassessment area. ExaminersnotedBank’suseof innovativeorcomplexqualifiedinvestments,community developmentloans,andcommunitydevelopmentservices.Inparticular,examinerscited projectsthatincludedfinancingamultifinancialinstitutionconsortiumthatofferspermanentfinancingforlow-incomehousingandmultifamilyaffordablehousingintheUtah area;assemblingacomplexsmallbusinessloanpoolwithseveralotherbanks;andcreating aprogramtoassistwomenindevelopingtheskillsandknowledgeneededtobecomesmall businessentrepreneurs. ExaminersfoundBanktoberesponsivetocreditandcommunitydevelopmentneedsinits assessmentarea.Inparticular,examinersnotedthatidentifiedneedsinBank’sassessment areaforsmallbusinessdevelopment,financialeducation,andaffordablehousingwere addressedbyBankthroughsuchinitiativesasthecreationof thesmallbusinesseducation programforwomennotedabove,Bank’sinvestmentinasmallbusinessinvestment company,andcommunitydevelopmentloansandinvestmentsdesignedtofinanceaffordablehousing. AtBank’srequest,examinersalsoconsideredqualifiedinvestments,communitydevelopmentlending,and communitydevelopmentservicesprovidedbyBank’saffiliates.TheassessmentareaoftheCRAEvaluation wasdefinedastheSaltLakeCity,UTMetropolitanStatisticalArea(“SaltLakeCityMSA”).TheSaltLake CityMSAiscomprisedofSaltLake,Summit,andTooeleCounties.Ifabankhasadequatelyaddressedits assessmentareaneeds,examinersconsidercommunitydevelopmentactivitiesabanksubmitsthatbenefitareas outsideitsassessmentareaintheevaluationofitsperformance.Asdiscussedfurtherbelow,becauseBankhad adequatelyaddressedtheneedsofitsassessmentarea,communitydevelopmentactivitiesbenefitingareas outsidetheassessmentareawereconsideredinevaluatingBank’sperformance.

214 FederalReserveBulletin|March2016 SynchronyBank’sEffortsSincethe2012CRAEvaluation.SynchronyBankrepresentsthat sincetheCRAEvaluation,Bankhasmadeadditionalcommunitydevelopmentloansand qualifiedinvestmentsbenefitingitsassessmentarea.TheBankhasalsoexpandeditsCRA staff andprovidedvolunteercommunitydevelopmentservicesfocusedonfinancial educationforLMIhouseholdsinUtah.SynchronyBankhasindicatedthatitwillcontinue itsfocusoncommunitydevelopmentservicesandoninternaltargetsforCRA performance. AdditionalConvenienceandNeedsConsiderations.TheBoardalsoconsidersotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. SynchronyFinancialhasrepresentedthatitsseparationfromGEwouldenableitto operateasafinancecompanyindependentof theneedsof itscurrentparentholding companies,GEandGECC.Inparticular,SynchronyFinancialstatedthatitsstrategicand competitiveactionswillnolongerbelimitedbythebroaderstrategicandcommercial considerationsthatareinherentinbeingasubsidiaryof large,highlycomplexorganizationssuchasGEandGECC. SynchronyFinancialalsorepresentedthatitdoesnotanticipateanydiminutioninthe productsandservicesitcurrentlyoffers.Rather,SynchronyFinancialintendstoofferadditionalproductstoitscustomersandmayexpanditssmallbusinesslendingactivities. SynchronyBankintendstore-launchaconsumer-basedgeneralpurposecreditcardthat willoffercustomersgreaterfinancialflexibilityandconvenienceaswellaspermitBankto expanditsconsumerbankingexperience.TheBankalsointendstointroduceademanddepositcheckingaccountwithfeaturessuchasdebitcardaccess,overdraftprotection,and billpaymentcapabilities.TheBankfurtherintendstoenhanceitsdigitalplatformbyintegratingcreditcardaccountsinto“digitalwallets”thatcanbeaccessedthroughmobile devicesthatallowconsumerstoshopandpayforgoodsandservicesusingtheirsmart phonesandtablets.Inaddition,SynchronyFinancialhasinvestedresourcesintodevelopingastand-alonerisk-managementfunctionandinformationsecuritycapabilitiesto strengthenthesafetyandsoundnessof itsownoperations. Theproposalwillalsoreducethesystemicfootprintof GECC–alargesystemicallyimportantinstitution–andwillaccordinglysimplifyGECC’sorganizationalstructure,thus makingGECCeasiertoresolve. ConclusiononConvenienceandNeedsConsiderations.TheBoardhasconsideredallthe factsof record,includingtherecordof SynchronyBankundertheCRA,itsrecordof compliancewithfairlendingandotherconsumerprotectionlaws,consultationswiththe OCCandtheCFPB,confidentialsupervisoryinformation,informationprovidedby SynchronyFinancial,andotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthatthe convenienceandneedsfactorisconsistentwithapproval. Effectof TransactionontheBankandInsuranceRisktotheDepositInsuranceFund Inactingonaproposalundersection10(e)of HOLA,theBoardconsidersthelikelyeffect of thetransactiononthesavingsassociationandanyinsurancerisktotheDepositInsuranceFund.26Theproposalwouldestablishof SynchronyFinancialasastand-aloneSLHC. Asdiscussedabove,thefinancialandmanagerialresourcesandfutureprospectsof the organizationareconsistentwithapproval.TheproposalwouldprovideSynchronyFinancialwithdirectandfullaccesstocapitalmarkets.Inaddition,SynchronyFinancialand 26 12U.S.C.§1467a(e)(2).

LegalDevelopments:FourthQuarter,2015 215 SynchronyBankhavetakenandcontinuetotakestepstostrengthentheirinternalriskmanagementsystemsinconnectionwiththistransaction.TheBoardhasconsideredthe likelyeffectof thetransactionontheBankandbelievesthatitisconsistentwithapproval. Inaddition,inviewof SynchronyFinancialandSynchronyBank’scurrentresources, capital,andfutureprospects;thesignificantfinancialandotherresourcesbeingdevotedto supporttheindependentoperationof SynchronyFinancialandSynchronyBank;andthe managerialresourcesof SynchronyFinancialandSynchronyBank;theBoardafter consultingwiththeFederalDepositInsuranceCorporation,believesthattheproposal wouldnotappearlikelytohaveanymaterialeffectontheinsurancerisktotheDeposit InsuranceFund. SLHCBusinessActivities SynchronyFinancialhasalsorequestedapprovalundersection10(c)of HOLAtoretain controlof certainnon-savingsassociationsubsidiariesandtherebyengageinbusiness activitiespermissibleforanSLHC.Section10(c)(4)of HOLArequirestheBoardto considerwhethertheperformanceof aparticularactivitycanreasonablyexpectedto producebenefitstothepublicthatoutweighpossibleadverseeffectsof suchactivity,27 takingintoconsiderationthemanagerialandfinancialresources,includingcapital,of the companiesinvolved.28Asnotedabove,theproposaldoesnotinvolveanynewconcentrationsof resourcesordecreaseincompetitionbecauseSynchronyFinancialisnotacquiring anyotherentitiesaspartof thisproposal.Moreover,theproposalwillenhancethe stabilityof theU.S.financialsystembyreducingthecomplexityandinterconnectednessof GE,GECC,andGECFI,andtheproposalisexpectedtoresultinexpandedproductsand servicestocustomersof SynchronyFinancial.Inaddition,asdiscussedabove,considerationsrelatingtoSynchronyFinancial’sfinancialandmanagerialresources,including capital,areconsistentwithapproval. Forthereasonsdiscussedabove,andbasedontheentirerecord,theBoardfindsthatthe proposedretentionof non-savingsassociationsubsidiariesandactivitiesbySynchrony Financialislikelytoresultinbenefitstothepublicthatoutweighanypossibleadverse effectsfromthetransactionandisconsistentwithapprovalunderthestandardof section10(c)(4)of HOLA. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder HOLA.TheBoard’sapprovalisspecificallyconditionedoncompliancebySynchrony Financialwithalltheconditionsimposedinthisorder,includingreceiptof allrequired regulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththe applications.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedto beconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecision hereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisorderunlesssuchperiodisextendedforgoodcausebytheBoardortheFederal ReserveBankof NewYorkactingpursuanttodelegatedauthority. 27 12U.S.C.§1467a(c)(4)(B)(i);seealso12CFR238.54(c). 28 12U.S.C.§1467a(c)(4)(B)(ii)-(iii);seealso12CFR238.54(c).

216 FederalReserveBulletin|March2016 Byorderof theBoardof Governors,effectiveOctober14,2015. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard

LegalDevelopments:FourthQuarter,2015 217 Appendix 1. RetailFinanceCreditServices,LLC,Stamford,Connecticut,whichengagesin extendingcreditandservicingloans. 2. RetailFinanceInternationalHoldings,Inc.,Draper,Utah,whichengagesinservicing activitiesandcommunitydevelopmentactivitiesandindirectlyengagesinactivitiesthat areusualinconnectionwiththetransactionof bankingorotherfinancialoperations abroad. 3. SynchronyHoldingCompany,Mississauga,Ontario,Canada,whichindirectlyengages inactivitiesthatareusualinconnectionwiththetransactionof bankingorother financialoperationsabroad. 4. SynchronyFinancialCanadaCompany,Mississauga,Ontario,Canada,whichindirectlyengagesinactivitiesthatareusualinconnectionwiththetransactionof banking orotherfinancialoperationsabroad. 5. SynchronyFinancialCanada,Mississauga,Ontario,Canada,whichengagesinactivitiesthatareusualinconnectionwiththetransactionof bankingorotherfinancial operationsabroad. 6. SynchronyInternationalServicesPrivateLimited,Madhapur,India,whichengagesin servicingactivities. 7. SynchronyGlobalServicesPhilippines,Inc.,MuntinlupaCity,Philippines,which engagesinservicingactivities. 8. CareCreditLLC,CostaMesa,California,whichengagesinservicingactivities. 9. RetailFinanceServicing,LLC,Draper,Utah,whichengagesinservicingactivities. 10. BlueTrademarkHolding,LLC,Stamford,Connecticut,whichengagesinservicing activities. 11. SynchronyInternationalResourceManagement,LLC,Draper,Utah,whichengagesin servicingactivities. 12. RFSHolding,Inc.,Stamford,Connecticut,whichindirectlyengagesinextending creditandservicingloans;activitiesusualinconnectionwithmaking,acquiring, brokering,orservicingloansorotherextensionsof credit;andprivate-placement services. 13. SBFE,LLC,Beachwood,Ohio,whichengagesindataprocessing. 14. amobilecommercesoftwaredevelopmentcompany,whichengagesindataprocessing. 15. SRTHoldings,LLC,Stamford,Connecticut,whichengagesinextendingcreditand servicingloansandactivitiesusualinconnectionwithmaking,acquiring,brokering,or servicingloansorotherextensionsof credit. 16. RFSHolding,LLC,Stamford,Connecticut,whichengagesinextendingcreditand servicingloans;activitiesusualinconnectionwithmaking,acquiring,brokering,or servicingloansorotherextensionsof credit;andprivate-placementservices. 17. PLTHolding,LLC,Stamford,Connecticut,whichengagesinextendingcreditand servicingloansandactivitiesusualinconnectionwithmaking,acquiring,brokering, orservicingloansorotherextensionsof credit. 18. SynchronyReceivablesTrust,Newark,Delaware,whichengagesinextendingcredit andservicingloansandactivitiesusualinconnectionwithmaking,acquiring, brokering,orservicingloansorotherextensionsof credit. 19. SynchronyCreditCardMasterNoteTrust,NewYork,NewYork,whichengagesin extendingcreditandservicingloansandactivitiesusualinconnectionwithmaking, acquiring,brokering,orservicingloansorotherextensionsof credit. 20. SynchronyLending,Inc.,whichengagesinextendingcreditandservicingloans;activitiesusualinconnectionwithmaking,acquiring,brokering,orservicingloansorother extensionsof credit;andprivate-placementservices. 21. SynchronySalesFinanceHolding,LLC,whichengagesinextendingcreditand servicingloans;activitiesusualinconnectionwithmaking,acquiring,brokering,or servicingloansorotherextensionsof credit;andprivate-placementservices.

218 FederalReserveBulletin|March2016 22. SynchronySalesFinanceMasterTrust,whichengagesinextendingcreditandservicing loansandactivitiesusualinconnectionwithmaking,acquiring,brokering,orservicing loansorotherextensionsof credit.

219 Federal Reserve BULLETIN June 2016 Vol. 102, No. 3 Legal Developments: First Quarter, 2016 Order Issued Under Bank Merger Act Goldman Sachs Bank USA New York, New York OrderApprovingtheAcquisitionof AssetsandAssumptionof Liabilities FRBOrderNo.2016–03(March21,2016) GoldmanSachsBankUSA(“GSBank”),thestatememberbanksubsidiaryof The GoldmanSachsGroup,Inc.(“GoldmanSachs”),bothof NewYork,NewYork,has requestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct (“BankMergerAct”)1toassumesubstantiallyallthedepositliabilitiesandacquirecertain limitedassetsfromGECapitalBank,Holladay,Utah,theindustrialbanksubsidiaryof GeneralElectricCapitalCorporation(“GECC”),Norwalk,Connecticut.2 Undertheproposal,GSBankwouldassumeapproximately$17billionof GECapital Bank’s$18.2billionindeposits.GSBankalsowouldacquirecertaintechnologyandintangibleassetsusedbyGECapitalBanktomanageitsonlineretaildeposit-takingplatform; theseassetsrepresentapproximately1percentof thetotalassetsof GECapitalBank.GS Bankalsowouldhirecertainemployeesof GECapitalBankwhomanageandprovide supportfortheonlinedepositplatform.Thedepositstobeacquiredarecurrentlyheldat GECapitalBank’sUtahofficeand,uponconsummationof theproposal,wouldbeheldat GSBank’sbranchlocatedinSaltLakeCity,Utah. GoldmanSachs,withconsolidatedassetsof approximately$859.9billion,isthefifth largestinsureddepositoryorganizationintheUnitedStatesbyassets.3GoldmanSachsis the21stlargestinsureddepositoryorganizationintheUnitedStatesbydeposits,controllingdepositsthroughGSBankof approximately$78.1billion,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.GSBankhasofficesinMassachusetts,NewJersey,NewYork,andUtah,andholds itsdepositsinabranchinSaltLakeCity,Utah.GSBankisthesecondlargestinsured depositoryinstitutioninUtah,controllingapproximately15.1percentof thetotaldeposits heldininsureddepositoryinstitutionsinthatstate. GECapitalBank,withtotalassetsof approximately$23.0billion,operatesasingle nonretailbankingofficeinHolladay,Utah.GECapitalBanksolicitsdepositsnationwide 1 12U.S.C.§1828(c).TheBankMergerActappliestoamergerorconsolidationbetweeninsureddepositoryinstitutions,anacquisitionbyaninsureddepositoryinstitutionoftheassetsofanotherinsureddepositoryinstitution,oran assumptionbyaninsureddepositoryinstitutionofliabilitytopaydepositsmadeinanotherinsureddepositoryinstitution.12U.S.C.§1828(c)(2). 2 GECapitalBankisadepositoryinstitutionthatisinsuredbytheFederalDepositInsuranceCorporation(“FDIC”). 3 Asset,deposit,ranking,andmarket-sharedataareasofJune30,2015,unlessotherwisenoted.Inthiscontext,insured depositoryinstitutionsincludecommercialbanks,savingsbanks,savingsassociations,andindustrialloancompanies.

220 FederalReserveBulletin|June2016 throughanInternet-baseddeposit-takingplatform.GECapitalBankistheninthlargest insureddepositoryinstitutioninUtah,controllingapproximately$18.2billionindeposits, whichrepresentapproximately3.5percentof thetotalamountof depositsof insured depositoryinstitutionsinthatstate. Onconsummationof theproposal,GoldmanSachswouldcontrolapproximately $95.1billionindepositsthroughGSBank.GoldmanSachswouldremainthefifthlargest insureddepositoryorganizationintheUnitedStatesbyassetsandwouldbecomethe 17thlargestinsureddepositoryorganizationintheUnitedStatesbydeposits.GSBank wouldremainthesecondlargestdepositoryinstitutioninUtah,controllingapproximately 18percentof thetotaldepositsof insureddepositoryinstitutionsinthestate. PublicCommentsontheProposal Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.4TheBoardextendedtheinitialperiodforpubliccommenttoaccommodatethe publicinterestinthisproposal,providinginterestedpersonsuntilOctober30,2015,atotal periodof morethan70days,tosubmitwrittencomments.Thetimeforsubmitting commentshasexpired.TheBoardreceivedcommentsconcerningtheproposalfrom84 individualsandorganizations. Approximately31commenterssubmittedcommentssupportingtheproposal.5Manyof thesecommentersdescribefavorableexperienceswithGSBankandcommendedthe companyanditsmanagementforitssupportforvariouscommunitydevelopment programs,initiatives,projects,andpartnerships.Supportingcommentersalsoassertedthat GSBankhasworkedtoexpandcreditindistressedareas,providedlow-andmoderateincome(“LMI”)householdswithaccesstofinancialservices,anddevelopedinnovative projectstobenefitlow-incomeandminoritycommunities. Approximately53commenterssubmittedcommentseitheropposingtheproposal, requestingthattheBoardapprovetheproposalonlysubjecttocertainconditions,or expressingconcernsabouttheproposal.6Manyof thesecommentersexpressconcerns abouttheinvolvedinstitutions’performanceundertheCommunityReinvestmentActof 1977(“CRA”)7aswellastheCRAperformanceof GSBankafterconsummationof the proposal.Thesecommentersalsoexpressconcernsaboutthelevelof GSBank’sandGE CapitalBank’ssmallbusinesslendingandarguethatGSBankshouldinvestmoreinthe communitiesinwhichitwouldacceptdepositsasaresultof theproposal.Someopposing commentersallegethatGSBank’scommunitydevelopmentactivitiesarenotcommensuratewiththebank’ssizeandthatthereareracialdisparitiesinGSBank’soriginationof certainmortgageproducts,basedondatareportedfor2013and2014undertheHome MortgageDisclosureActof 1975(“HMDA”).8 Manyopposingcommentersquestionwhethertheproposalwouldresultinpublicbenefits, allegingthatGSBankanditsaffiliateshaveviolatedlawsandhavebeeninvestigatedfor 4 12U.S.C.§1828(c)(3);12CFR262.3(b). 5 Onecommentersubmittedaformsupportingtheproposalsignedby199ofthecommenter’saffiliatedlocal organizationsfrom46states. 6 Oftheopposingcommenters,approximately16commenterssubmittedindividualizedwrittencomments,and approximately37commenterssubmittedsubstantiallyidenticalformletters.Onecommentersubmittedapetitioninoppositiontotheproposalwiththenamesof14individuals. 7 12U.S.C.§2901etseq. 8 12U.S.C.§2801etseq.

LegalDevelopments:FirstQuarter,2016 221 possibleviolationsof lawsintheUnitedStatesandabroadrelatedtomortgageservicing, mortgagesecuritization,andasset-pricemanipulation.Commentersstatethatthe GoldmanSachsorganizationshouldnotbeallowedtoincreaseinsizeandcomplexity, arguingthatitis“toobigtofail.”SeveralotheropposingcommentersquestiontherelationshipbetweentheFederalReserveandGoldmanSachs.9 FactorsGoverningBoardReviewof theTransaction TheBankMergerActsetsforththefactorsthattheBoardmustconsiderwhenreviewing certaintransactionsbetweeninsureddepositoryinstitutions.10Thesefactorsincludethe competitiveeffectsof theproposalintherelevantgeographicmarkets;thefinancialand managerialresourcesandfutureprospectsof theinvolvedinstitutions;theeffectivenessof theinvolvedinstitutionsincombattingmoneylaunderingactivities;theconvenienceand needsof thecommunitiestobeserved,includingtherecordsof performanceunderthe CRAof theinsureddepositoryinstitutionsinvolvedinthetransaction;andtherisktothe stabilityof theUnitedStatesbankingorfinancialsystem.Inproposalsinvolvinginterstate transactions,theBoardalsomustconsidertheconcentrationof depositsasapercentage of thetotaldepositscontrolledbyinsureddepositoryinstitutionsintheUnitedStates. InevaluatingthestatutoryfactorsundertheBankMergerAct,theBoardconsideredthe informationandviewspresentedbyallcommenters.TheBoardalsoconsideredallthe informationpresentedintheapplicationandsupplementalfilingsbyGSBank,various reportsfiledbytherelevantcompanies,publiclyavailableinformation,andotherinformationandreports.Inaddition,theBoardconsultedwiththerelevantfinancialsupervisory agenciesandreviewedconfidentialsupervisoryinformation,includingexaminationreports onthedepositoryinstitutionsinvolved.AsrequiredbytheBankMergerAct,areporton thecompetitiveeffectsof theproposalwasrequestedfromtheUnitedStatesAttorney General.Afterareviewof allthefactsof record,andforthereasonsdiscussedinthis order,theBoardhasconcludedthatthestatutoryfactorsitisrequiredtoconsiderunder theBankMergerActareconsistentwithapprovalof theproposal. InterstateandDepositCapAnalyses TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”)11 amendedtheBankMergerAct12toprovidethat,ingeneral,theBoardmaynotapprovean applicationtoengageinatransactionundertheBankMergerActif thetransaction involvesinsureddepositoryinstitutionswithdifferenthomestatesandtheapplicant controlsorwouldcontroluponconsummationof theproposedtransactionmorethan 10percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited 9 SomeopposingcommenterssuggestthatconsiderationofthisproposalbytheFederalReservewouldcreate conflictsofinterestduetowhatcommentersarguearecloserelationshipsbetweentheinstitutionsinvolvedand employeesofsomeFederalReserveBanks.TheBankMergerActrequiresthattheBoardactonanapplicationfiledundertheActif,asinthiscase,theresultingbankistobeastatememberbank.12U.S.C.§1828(c)(2). AlthoughtheBoardhasdelegatedtotheFederalReserveBankstheauthoritytoactonBankMergerAct applicationsmeetingcertaincriteria(see,e.g.,12CFR265.11(c)(11)),thismatterwasdecidedbytheBoard directly,withoutanyinvolvementbyanyindividualsidentifiedbycommenters. Inaddition,severalcommenterspointtopressreportsconcerningtheillegaldisclosureofconfidentialsupervisoryinformationbyanemployeeoftheFederalReserveBankofNewYork(“NewYorkReserveBank”)and anemployeeoftheGoldmanSachsorganization.Asnotedinthepressreportscitedbycommenters,the employmentoftheseindividualshasbeenterminatedbytheNewYorkReserveBankandtheGoldmanSachs organization,respectively.Theindividualshavebeenchargedfortheirillegalactivities,haveenteredaplea concerningtheiractivities,andareawaitingsentencing. 10 12U.S.C.§1828(c)(5)and(11). 11 Pub.L.No.111-203,124Stat.1376(2010). 12 Dodd-FrankAct§623(a),124Stat.at1634,codifiedat12U.S.C.§1828(c)(13).

222 FederalReserveBulletin|June2016 States.Forpurposesof theBankMergerAct,thehomestateof GSBankisNewYorkand thehomestateof GECapitalBankisUtah.13Consummationof theproposalwouldresult inGSBankcontrollinglessthan1percentof thedepositsof U.S.insureddepository institutions.Theproposedacquisitionof depositsandassetsof GECapitalBankwould notbeprohibitedbythelawof anystateinwhichGECapitalBankislocated.14Accordingly,inlightof allthefactsof record,theBoardisnotrequiredtodenytheproposal undertheinterstatemergerprovisionsof theBankMergerAct.15 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.16TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectof thetransactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved. GSBankandGECapitalBankdonotdirectlycompeteinanylocalretailbankingmarket. TheDepartmentof Justicehasconductedareviewof thepotentialcompetitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof theproposalwouldnot likelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.In addition,theappropriatebankingagencieshavebeenaffordedanopportunitytocomment andhavenotobjectedtotheproposal. Basedonallthefactsof record,includingthedifferencesinbusinessmodels,products,and methodsforprovidingservicestocustomers,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddetermines thatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandthefutureprospectsof theinstitutionsinvolved.17Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof theorganizationsinvolved,aswellasinformationregardingthefinancialconditionof the organizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof publicandsupervisoryinformationregardingcapitaladequacy,assetquality, andearningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition, assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof the 13 Astatebank’shomestateisthestatebywhichthebankischartered.12U.S.C.§1828(c)(13)(C)(ii)(II).GE CapitalBankisconsideredtobeabankforpurposesoftheBankMergerAct. 14 TheproposalalsoissubjecttotheapprovaloftheNewYorkDepartmentofFinancialServicesandtheUtah DepartmentofFinancialInstitutions.GSBankhascompliedwiththerelevantstatefilingrequirements. 15 ForpurposesoftheRiegle-NealInterstateBankingandBranchEfficiencyActof1994(“Riegle-NealAct”), bothGSBankandGECapitalBankareauthorizedunderfederallawto,andcurrentlydo,operateinUtah.In 2008,GSBankwasformedthroughthemergeroftwoGoldmanSachssubsidiaries,aNewYorktrustcompany andaUtahbank;themergerwasapprovedbytheFDICpursuanttotheBankMergerActandtheRiegle- NealAct.SeeTheGoldmanSachsTrustCompany,2008WL8014759(FederalDepositInsuranceCorporation 2008);seealso12U.S.C.§1831u(d)(2). 16 12U.S.C.§1828(c)(5). 17 12U.S.C.§1828(c)(5)and(11).

LegalDevelopments:FirstQuarter,2016 223 transaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtocompleteeffectivelytheproposedintegrationof theoperationsof the institutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolved intheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan.Inthiscase,theBoardalsohasconsultedwiththeFDICandtheConsumer FinancialProtectionBureau(“CFPB”). GSBankandGECapitalBankarewellcapitalized,andtheresultingbankwouldremain soonconsummationof theproposal.Asnoted,theproposedtransactioninvolvesthe assumptionof depositsandanacquisitionof certainrelatedassets,includingtechnology, systems,andrecordsusedbyGECapitalBanktomanageandacceptdeposits.18GSBank alsowouldhirealimitednumberof GECapitalBankemployeesresponsiblefor managingandoperatingthedepositplatform.Theassetquality,earnings,andliquidityof GSBankandGECapitalBankareconsistentwithapproval,andGSBankappearstohave adequateresourcestoabsorbthecostsof assumingandintegratingGECapitalBank’s depositsandrelatedtechnologyandsystems.Inaddition,futureprospectsareconsidered consistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of thebankafterconsummationof theproposal.TheBoardhasconsideredGSBank’s plansforimplementingtheproposalandhasreviewedtheexaminationrecordsof GSBank andGECapitalBank,includingassessmentsof theirmanagement,riskmanagement systems,andoperations.Inaddition,theBoardhasconsideredinformationprovidedby GSBank,theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,theorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws,aswellasinformationprovidedbycommenters. Thedirectorsandseniorexecutiveofficersof GSBankhavesubstantialknowledgeof and experienceinthebankingandfinancialservicessectors.Moreover,GSBankhasconducted comprehensiveduediligenceandisdevotingthenecessaryfinancialandotherresourcesto addressallaspectsof thepost-integrationprocessforthisproposal.Theproposalrepresentsalimitedacquisitionandwouldnotappeartorequiresubstantialmanagerialor operationalresourcestointegrateeffectively.GSBankwouldsupplementitsexistingriskmanagementpolicies,procedures,andcontrolstoaddresstheadditionalbusinesslinesand risksassociatedwiththeoperationstobeacquired.Inaddition,GSBankmanagement hastheexperienceandresourcestoensurethatthebankoperatesinasafeandsound mannerafterconsummationof theproposal,andGSBankplanstointegratethe employeesof GECapitalBankthatwouldbehiredbyGSBankaspartof thisproposalin amannerthataugmentsGSBank’smanagement. Basedonallthefactsof record,includingGSBank’ssupervisoryrecord,managerialand operationalresources,plansforoperatingtheresultingbankafterconsummation,and commentsreceivedontheproposal,19theBoardconcludesthatconsiderationsrelatingto 18 GSBankwouldassumeGECapitalBank’sliabilitytopaycertaindepositsandwouldreceiveapaymentfrom GECapitalBankequaltothevalueoftheassumeddeposits,subjecttocertainadjustments. 19 CommentersallegethatGSBank“hasenteredintonumerouslegalsettlementssince2004”andthatthereare publicreportsofinvestigationsintheUnitedStatesandabroadintopossiblewrongdoingbyaffiliatesofGS Bank.CommentersalsoallegethatGoldmanSachsandGSBankengagedinwrongfulmortgageservicing practices,notingthatin2011,GoldmanSachsandGSBankenteredintoaconsentorderwiththeBoard relatedtoitsmortgageservicingandforeclosureactivities.SeeConsentOrderamongTheGoldmanSachs Group,Inc.,GoldmanSachsBankUSA,andBoard,DocketNos.11112BHCand11-112BSM(amended February28,2013),availableatwww.federalreserve.gov/newsevents/press/enforcement/enf20130228a13.pdf.As

224 FederalReserveBulletin|June2016 thefinancialandmanagerialresourcesandfutureprospectsof theorganizationsinvolved intheproposal,aswellastherecordsof effectivenessof GSBankandGECapitalBankin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.20Initsevaluation of theeffectof theproposalontheconvenienceandneedsof thecommunitiestobeserved, theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneeds of thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalonthe convenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,21andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includingLMIneighborhoods.22Inthis regard,thefederalfinancialsupervisoryagenciesevaluatetheperformanceof eachinstitutioninthecontextof thebank’sproductofferings,businessstrategy,andinstitutional capacityandconstraints.23 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheapplicant institution’sbusinessmodel,itsmarketingandoutreachplans,theinstitution’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof GSBank andGECapitalBank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theFDICandtheCFPB,confidentialsupervisoryinformation,information providedbyGSBank,andthepubliccommentsreceivedontheproposal.TheBoardalso hasconsideredthelimitedscopeof theproposedtransactionandthelimitedconsumer bankingactivitiesof GSBank. Summaryof PublicCommentsonConvenienceandNeeds Asnotedabove,theBoardreceivedcommentsfrom31commenterssupportingthe proposal.ThesecommenterspointtothebenefitsthatGSBankprovidestothecommunitiesitserves,includingthebank’s10,000SmallBusinessesInitiative,whichprovidessmall notedabove,theBoardhasconsideredthesupervisoryhistoryandtakenthefirm’srecordofcomplianceinto accountinconsideringthiscase.Inthisregard,theconsentorderresultedfrominteragencyon-sitereviewsof severalmortgageservicingcompanies,includingGSBank’sindirectsubsidiaryLittonLoanServicingLP (“Litton”),Houston,Texas,thatfoundcriticalweaknessesintheseservicers’mortgageservicingandforeclosureprocessesthatresultedinunsafeandunsoundpractices.GoldmanSachssoldLittonin2011andhasmade remediationpaymentstoaffectedborrowersunderthetermsoftheconsentorder. 20 12U.S.C.§1828(c)(5)(B). 21 12U.S.C.§2901(b). 22 12U.S.C.§2903. 23 See,e.g.,12CFR228.21(b).

LegalDevelopments:FirstQuarter,2016 225 businessownerswithfreeone-on-onebusinesscounselingaswellastrainingandadvice frombusinessexperts,andvariousotherprojectsandpartnershipswithcommunitygroups. SupportingcommentersalsoassertthatGSBankhasalonghistoryof expandingcreditin distressedareas,providingaccesstofinancialservicestoLMIhouseholds,andworking withotherfinancialinstitutions,localgovernments,andcommunitygroupsoninnovative andsophisticatedprojectstobenefitlow-incomeandminoritycommunities.Supporting commenterscontendthatGSBankextendsitscommunityreinvestmentprogramsbeyond itsCRAassessmentareasandarguethatbeneficialprojectswithinthecommenters’ communitieswouldnothavebeenpossiblewithoutthesupportof GSBank.Forexample, onecommenterstatesthattheGoldmanSachsorganizationwasakeypartnerinaproject thatdeveloped262unitsof newaffordablehousingalongsideamixed-useretail,educational,healthcare,andartspaceinMemphis,Tennessee. TheBoardalsoreceivedcommentsfrom53commentersopposingtheproposal.Manyof thesecommentersarguethatGSBank’sCRAinvestmentswereinadequatewithregardto smallbusinessloansinLMIcommunities,thatGSBankhadunsuitablylowlevelsof corporatephilanthropy,andthatthelevelof communitydevelopmentgrantsbyGSBank wasinadequateforabankof itssizeandimportance.OnecommentercontendsthatGS Bankdoesnotconsiderfinancialinclusionandempowermentasapartof itsCRA strategy.OnecommenterstatesthatGSBank’sCRAassessmentareasshouldincludeCaliforniabecause25percentof complaintsregardingGSBanktotheCFPBarelodgedon behalf of individualsorentitiesinCalifornia.AnothercommenterallegesthatGSBank hasalimitedpresenceinSouthBronx,NewYork.CommentersalsoarguethatGSBank giveslimitedsupporttocommunityorganizations. Commentersalsoexpressconcernsregardingthefutureperformanceof GSBankunder theCRA.CommentersarguethatGSBankshouldprovideclarityonitsfuturebanking activities;theyurgetheBoardnottoapprovetheapplicationuntilGSBankprovidesmore detailregardinghowitsCRAassessmentareaswouldchangeasaresultof theproposal andhowGSBankwouldincreaseCRAactivityinitsprimaryassessmentareas.Several commentersarguethatGSBankberequiredtoworkwithcommunitygroupstocreatea bindingcommunityreinvestmentplan. Inaddition,severalcommentersallegethatGSBankneglectsminoritycommunities.Inthis regard,twocommentersallegethatHMDAdatareportedfor2013and2014byGSBank showeddiscriminatorylendingpracticesinCaliforniaandintheNewYorkCityarea. OthercommentersraiseissuesabouttheCRAperformanceof GECapitalBank,especially withregardtosmallbusinesslendinginLMIcommunities. Manycommentersallegethattheproposalwouldprovidenoclearpublicbenefit. Commentersalsoallegethattheproposaldoesnothingtoaddresstheconvenienceand needsof thecommunitiesGECapitalBankcurrentlyserves.AcommenterallegesthatGS Bankdoesnotshowcommitmenttoservethepublicinterest.Anothercommentercriticizes GoldmanSachsforpurchasingresidentialpropertiesinforeclosureandthenleasingthe propertiestoresidentialtenants—apracticecommonlyreferredtoas“REOtorental.” Businessesof theInvolvedInstitutions GSBankisawholesalebankwhoseactivitiesarefocusedonhighnetworthindividuals, institutionalclients,andcorporations.Thebank’sprimaryactivitiesincludeaccepting deposits;lendingtohigh-net-worthindividuals,institutionalclients,andcorporations;and makingmarketsinoverthecounterderivatives,specificallyasaninterestrateriskmanagementservicetoitsinstitutionalandcorporateclients.GSBank’sconsumerbanking activitiesarecurrentlylimitedtobankingservicesprovidedtoGoldmanSachs’swealth-

226 FederalReserveBulletin|June2016 managementcustomers.Forexample,GSBank’smortgage-lendingactivitiesarelimitedto loansmadeasanaccommodationtoexistinghighnetworthcustomers. GECapitalBankisacommercialfinancebankthatfocusesonextendingcommercialloans andleases.Thebankfundsitslendingactivitiesprimarilythroughbrokereddepositsand depositssourcednationwidethroughanonlinedeposit-takingplatform.Asnoted,GE CapitalBankoperatesasingleofficeinHolladay,Utah.Theproposedtransactionisa componentof aplantodissolveGECapitalBank;thisispartof abroaderstrategyby GECC,theparentof GECapitalBank,toreducethesizeof GECC’sfinancial-services businessesandtherebyreducethefirm’ssystemicfootprintandachieveotherbusiness purposes. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationandinformationandviewsprovidedbytheappropriatefederalsupervisors.24 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.25Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. TheCRApermitsabanktoapplytoitsprimaryfederalregulatortobedesignatedasa wholesaleoralimited-purposebank.26TheCRAperformanceof awholesaleorlimitedpurposebankisassessedbyevaluatingthebank’scommunitydevelopmentactivities.27 Thisevaluationinvolvesanassessmentof (i)thenumberandamountof communitydevelopmentloans(includingoriginationsandpurchasesof loans,andothercommunitydevelopmentloandataprovidedbythebank,suchasdataonloansoutstanding, commitments,andlettersof credit),qualifiedinvestments,orcommunitydevelopment services;(ii)theuseof innovativeorcomplexqualifiedinvestments,communitydevelopmentloans,orcommunitydevelopmentservices,andtheextenttowhichtheinvestments arenotroutinelyprovidedbyprivateinvestors;and(iii)thebank’sresponsivenesstocredit andcommunitydevelopmentneeds.28Basedonitsbusinessactivities,GSBankhasbeen designatedasawholesalebank. Asnotedabove,twocommentersallegethatHMDAdatareportedfor2013and2014by GSBankshowthatGSBankmadeadisproportionatelylownumberof conventionalhome purchaseandrefinanceloanstoAfricanAmerican,Asian,andHispanicborrowersinthe NewYorkCityareaandinCalifornia.TheBoardisconcernedbythesetypesof disparities becausetheymayindicateweaknessesintheadequacyof policiesandprogramsatan 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75Fed.Reg.11642,11665 (March11,2010). 25 12U.S.C.§2906. 26 12CFR228.25.Alimited-purposebankisonethatoffersonlyanarrowproductline(suchascreditcardor motorvehicleloans)toaregionalorbroadermarketandforwhichadesignationasalimited-purposebankis ineffect.Awholesalebankisonethatisnotinthebusinessofextendinghomemortgage,smallbusiness,small farm,orconsumerloanstoretailcustomers. 27 12CFR228.25(c). 28 Id.

LegalDevelopments:FirstQuarter,2016 227 institutionformeetingitsobligationstoextendcreditfairly.However,otherinformation criticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.29Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformation regardingthelendingrecordof aninstitution.Inthiscase,asnotedabove,theBoardhas consideredallthefactsof record,includingthefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theFDICandtheCFPB,confidentialsupervisory information,informationprovidedbyGSBank,andthepubliccommentsreceivedonthe proposal.TheBoardalsoconsideredthat,asawholesalebank,GSBankisnotinthebusinessof extendinghomemortgageloanstoretailcustomers,andthatthesmallnumberof homemortgageloansthebankdoesmakeareextendedasanaccommodationtoexisting high-net-worthcustomers. CRAPerformanceof GSBank GSBankwasassignedanoverall“Outstanding”ratingatitsmostrecentCRApublic evaluationbytheNewYorkReserveBank,asof November5,2012(“GSBankEvaluation”).30ExaminersfoundthatGSBankprovidedahighlevelof communitydevelopment loans,communitydevelopmentservices,orqualifiedinvestments,particularlyinvestments thatarenotroutinelyprovidedbyprivateinvestors.Examinersfoundthatthebankmade extensiveuseof innovativeorcomplexqualifiedinvestments,communitydevelopment loans,andcommunitydevelopmentservices.ExaminersfurthernotedthatGSBankexhibitedexcellentresponsivenesstocreditandcommunityeconomicdevelopmentneedsinits assessmentareas. IntheNewYorkCityAA,anareaonwhichcommentersfocused,31examinersfoundthat GSBankprovidedahighlevelof communitydevelopmentloans,qualifiedinvestments, andservices,particularlyinvestmentsnotprovidedbyprivateinvestors.GSBankexhibited excellentresponsivenesstocreditandcommunityeconomicdevelopmentneedsintheNew YorkCityAA,especiallyafterHurricaneSandy.ExaminersfoundthatGSBank’slevelof annualizedcommunitydevelopmentloansandinvestmentsasapercentageof assets comparedveryfavorablytoeightsimilarlysituatedwholesalebanksoperatingintheassessmentarea.32GSBank’scommunitydevelopmentactivitiesprimarilytargetedaffordable housingandrevitalizationandstabilization,whichwereidentifiedbycommunitycontacts asessentialneedswithintheassessmentarea. ExaminersfoundthatGSBankwasaleaderincommunitydevelopmentlendinginthe NewYorkCityAA,inidentifyingkeycommunityneedsandbringingfinancinginnova- 29 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 30 Asawholesalebank,GSBankwasevaluatedundertheCommunityDevelopmentTest.Theevaluationperiod fortheGSBankEvaluationwasfromOctober1,2010,throughDecember31,2012.Examinersreviewedthe levelofGSBank’squalifiedcommunitydevelopmentloans,investments,andservicesinthebank’stwoassessmentareas,whicharelocatedinthefollowingMetropolitanStatisticalAreas(“MSAs”):theNewYork– NorthernNewJersey–LongIsland,NewYork–NewJersey–Pennsylvania,MSA(“NewYorkCityAA”)andthe SaltLakeCity,Utah,MSA(“SaltLakeCityAA”).TheNewYorkReserveBankbegananewCRApublic evaluationofGSBankin2015;thispublicevaluationisnotyetcomplete. 31 CommentersallegethatGSBankdidnotprovideanadequatelevelofphilanthropicsupportto,anddidnot participateincommunitydevelopmentinitiativeswith,NewYorkCity–basedcommunitygroups.Commenters urgedGSBanktocommittoincreasingitscorporatephilanthropy.GSBankcontendsthatGoldmanSachsis routinelyamongtheleadersincorporatephilanthropy,providingcharitablegrantsthroughanumberof differentchannels.TheCRAdoesnotauthorizethefederalbankingagenciestodirectabank’scharitable grantsandothercommunitydevelopmentactivitiestospecificgroups,individuals,projects,ortypesof investments. 32 AcommenterallegesthatGSBankwasbehindpeerinstitutionsinitspercentageofassetsdevotedtocommunitydevelopment.

228 FederalReserveBulletin|June2016 tionstothesemarkets.33GSBankengagesincommunitydevelopmentlendingthrougha dedicatedbusinessunit,theUrbanInvestmentGroup.Examinersfoundthatamajorityof GSBank’scommunitydevelopmentloansusedinnovativeand/orcomplexstructuresand involvedprojectsthathavemultiplelayersof financingandthatrequirecollaborationwith cityandstategovernmentpartners. ExaminersalsonotedthatGSBankwasaleader,whencomparedtosimilarlysituated banks,inthenumberof communitydevelopmentservicesitprovidesintheNewYorkCity AA.Qualifyingcommunitydevelopmentserviceswereprovidedthroughongoingboard andcommitteememberships,theprovisionof technicalfinancialassistance,andthedevelopmentof newprogramsthatrespondtoidentifiedneedswithindistressedcommunities. Examinersfoundthatthebank’scommunitydevelopmentactivitywithintheNewYork CityAAreflectedanextensivelevelof innovativenessandcomplexity.InadditiontoLow IncomeHousingTaxCreditinvestments,34NewMarketsTaxCreditinvestments,35and predevelopmentfinancing,GSBankemployedinnovativeprograms,includingthefirst socialimpactbond,36equityinvestmentstoacquireandrefurbishforeclosedpropertiesand sellthemtoLMIindividuals,andaprogramtargetingsmallbusinessdevelopment. ExaminersalsoassignedGSBankan“Outstanding”ratingforitsCRAactivitiesinthe SaltLakeCityAA.Inparticular,examinersfoundthatGSBankhadahighlevelof communitydevelopmentloans,qualifiedinvestments,andcommunitydevelopment services.ExaminersalsonotedthatGSBankmadeuseof innovativeand/orcomplexstructuresforcommunitydevelopmentlendingandqualifiedinvestmentopportunities.The bank’scommunitydevelopmentactivitiesexhibitedexcellentresponsivenesstothecredit andcommunitydevelopmentneedsof theSaltLakeCityAA. GSBank’sEffortsSincethe2012CRAEvaluation GSBankrepresentsthat,sincethe2012CRAevaluation,thebankhasmadecommunity developmentloansandinvestmentsfocusedonsupportingtheconstructionorfinancingof affordablehousingwithinitsassessmentareas.GSBankhaspartneredwithcommunity groupsthatprovidehomeowner-relatedservicesinLMIcommunitiesinNewYorkandhas providedfundingforthedevelopmentandpreservationof affordablehousinginNewYork. GoldmanSachsandGSBank,throughthe10,000SmallBusinessesInitiative,have committedfundstoprovidebusinesseducationandsupportservicesaswellasaccessto capitaltosmallbusinessesinUtah.GSBankhasfurtherinvestedinajointventurefocused onacquiringsingle-familyhomesinLMIneighborhoodsintheSaltLakeCityareawith thepurposeof buyingforeclosed-uponpropertiesandrehabilitatingthemforrental,aswell asprovidinghomebuyereducationandemergencyfinancialcounselingtotenants. GoldmanSachsandGSBankalsohavepartneredwithnonprofitorganizationsonmany volunteerprojectsintheSaltLakeCityarea. 33 CommentersallegethatGSBankmadefewofitscommunitydevelopmentloansandinvestmentswith nonprofitorganizationsgenerally,andwithcommunitydevelopmentcorporationsinparticular.Inaddition,a commenterallegesthatGSBankdoesnotmakefinancialinclusionandempowermentapartofitsCRA strategy.Asnotedabove,theCRAdoesnotauthorizethefederalbankingagenciestodirectabank’scommunitydevelopmentactivitiestospecificgroups,individuals,projects,ortypesofinvestments. 34 See26U.S.C.§42. 35 See26U.S.C.§45D. 36 Asocialimpactbondisacontractunderwhichprivateinvestorsprovidecapitalandmanagementforapublic projectaimedatimprovingspecificsocialoutcomes,suchasincreasededucationalperformance.Iftheproject achievesitsstatedobjectives,thegovernmententitywithwhichthecontractismaderepaystheprivateinvestors withreturnsthatarebasedonthesavingsthegovernmentaccruesasaresultoftheproject’ssuccess.

LegalDevelopments:FirstQuarter,2016 229 Asnoted,theNewYorkReserveBankbegananewCRApublicevaluationof GSBankin 2015.Whiletheevaluationisnotcomplete,preliminaryinformationindicatesthatlevelsof communitydevelopmentgrant-making,loans,andinvestmentsbyGSBankappeartobe appropriateforabankof itssizewhencomparedtopeerswithsimilaractivities.Preliminaryinformationalsoindicatesthatthebankcontinuestoprovideflexibleandinnovative lendingforcommunitydevelopmentpurposes.Theredoesnotappeartobeareversalof anypositivetrendsobservedinthepreviouslycompletedpublicevaluation. CRAPerformanceof GECapitalBank GECapitalBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof October15,2012(“GECapitalBankEvaluation”).37GECapitalBankreceivedanoverallratingof “LowSatisfactory”fortheLending Testandoverallratingsof “HighSatisfactory”forboththeInvestmentTestandthe ServiceTest.38 WhenevaluatingtheLendingTest,FDICexaminersfocusedonGECapitalBank’s communitydevelopmentlendingperformance.39Basedonthisfocus,examinersassigned GECapitalBanka“LowSatisfactory”rating,findingthatthebankmadeasmallbut adequatelevelof communitydevelopmentloanswithinitsassessmentarea.Inaddition, FDICexaminersassignedGECapitalBankoverallratingsof “HighSatisfactory”forboth theInvestmentTestandtheServiceTestbecausethebankprovidedarelativelyhighlevelof communitydevelopmentservices,aswellasasignificantlevelof qualifiedcommunity developmentinvestmentsandnumerousgrantsanddonationsrelativetotheinstitution’s businessstrategy,availableopportunities,andcompetitionwithintheassessmentarea. FDICexaminersfoundthatthebankexhibitedgoodresponsivenesstothecreditand communityeconomicdevelopmentneedsof theassessmentarea;thebank’squalified investmentsprimarilytargetedaffordablehousing,whichwasidentifiedasacommunity needwithintheassessmentarea. AdditionalConvenienceandNeedsConsiderations Whilethisproposalislimitedinnatureanddoesnotinvolvetheacquisitionof branches, loans,orlendingoperations,thisproposaldoesinvolvetheacquisitionof depositsand increaseddeposit-takingcapabilities,andGSBankisexpectedtoadoptandimplement appropriatepoliciesandprogramstoensurethatithelpstomeettheconvenienceandneeds of itscommunitiesfollowingthistransaction.GSBankhasrecognizedthisresponsibility 37 TheGECapitalBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.TheevaluationperiodfortheLendingTest,theInvestmentTest,andtheServiceTestwasfromNovember5,2008, throughSeptember30,2012. 38 TheGECapitalBankEvaluationincludedafull-scopereviewofthebank’ssoleassessmentareainSaltLake County,Utah.ExaminersalsoconsideredcommunitydevelopmentloansmadebyGECommercialFinance CorporateLending,theGEHealthcareEquipmentFinanceGroup,GSRealEstateBusinessProperty,andGE Equity.Inaddition,examinersconsideredcommunitydevelopmentinvestmentsmadebytheGEPublic FinanceUnit. 39 SeveralcommenterscriticizedGECapitalBank’srecordofsmallbusinesslendingintheMonroeCounty,New YorkCity,andRochesterareas,allinNewYork,allegingthatthebankmadeadisproportionatelylownumber ofsmallbusinessloanstobusinesseswithgrossannualrevenueof$1millionorlessandtobusinesseslocatedin LMIcensustracts.CommentersalsocriticizedGECapitalBank’slimitedlendinginitsSaltLakeCounty assessmentarea. Inthisregard,somecommenterscriticizetheGECapitalBankEvaluationforomittingananalysisofthe bank’scommerciallendingactivitiesaspartoftheLendingTest.AsexplainedintheGECapitalBankEvaluation,inassessingtheLendingTest,FDICexaminersfocusedonthebank’scommunitydevelopmentlending withinitsdelineatedassessmentareaofSaltLakeCounty,Utah.AsnotedintheFDICevaluation,thelower numberofCRA-reportableoriginationsintheassessmentarearesultsfromthebank’sfocusoncommercial financingonanationwidebasis.

230 FederalReserveBulletin|June2016 andstatedthatitwouldcontinueitspolicies,practices,andactivitiesinamannerconsistent withitscurrent“Outstanding”recordof performanceundertheCRA.Thebankalso statesthatitwouldcontinuetoimplementitscommunitydevelopmentstrategy,which focusesoninnovativeandcomplexcommunitydevelopmentprojects,directinvestmentand lending,andpublic-privatepartnershipswithlocalgovernmentsandcommunitygroups.40 Moreover,toaddresstheallegationsof anumberof commentersthattheproposalwould notprovideaclearorsignificantpublicbenefit,GSBankhasindicatedthatnoreduction indeposit-relatedproductsorservicesisexpectedasaresultof theproposal.Consummationof theproposalwouldalsoprovidecontinuityforGECapitalBank’sdeposit customersasGECapitalBankwindsdownitsoperationsandreducesitsdeposit-taking activities. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,consultationswiththeFDICandthe CFPB,confidentialsupervisoryinformation,informationprovidedbyGSBank,thepublic commentsontheproposal,andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthat theconvenienceandneedsfactorisconsistentwithapproval. Aspartof itsapplication,GSBankstatesthatitisseparatelyexploringapotentialexpansionof itslendingactivities,includinganexpansionof itslendingtoconsumers.TheBoard expectsthatGSBankwillcontinuetohelpmeetthecreditneedsof allthecommunitiesit serves,includingLMIneighborhoods,inamannercommensuratewithconsummationof thisproposalandwithanyfutureexpansionof GSBank’slendingactivities.TheBoard willmonitorGSBank’sperformanceinthisregardthroughthesupervisoryprocess.41 FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”asafactorthatmustbeconsideredundertheBankMergerAct.42 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of themergedfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby 40 AcommenterallegesthatGSBankintendstoexpanditsactivitiesintoconsumerandsmallbusinesslending and,inviewofthatfutureexpansion,urgedGSBanktocreateaCRAplaninpartnershipwithcommunity developmentorganizations.TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbanking agencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,CITGroup,Inc.,FRBOrderNo.2015-20at24n.54(July19,2015); CitigroupInc.,88FederalReserveBulletin485(2002);FifthThirdBancorp,80FederalReserveBulletin838, 841(1994).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordofanapplicantandthe programsthattheapplicanthasinplacetoservethecreditneedsofitsCRAassessmentareas. 41 Commentersexpressconcernsaboutthewholesale-bankdesignationofGSBankforCRAevaluationpurposes andthatthebank’sfutureevaluationswouldnotreviewthebank’sfuturelendingperformanceundertheCRA. UndertheBoard’sregulationsimplementingtheCRA,theBoardreservestherighttorevokeabank’sdesignationasawholesaleorlimited-purposebankonitsowninitiative.See12CFR228.25(b).AspartoftheCRA evaluationprocess,examinersverifywhetheraninstitutioncontinuestomeettherequirementfordesignationas awholesaleorlimitedpurposebank.TheBoardwillcontinuetomonitorGSBank’swholesale-bankdesignationthroughthesupervisoryprocess. 42 Dodd-FrankAct§604(f),Pub.L.No.111-203,124Stat.1376,16(2010),amending12U.S.C.§1828(c)(5).

LegalDevelopments:FirstQuarter,2016 231 theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.43These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.44 TheBoardhasconsideredinformationrelevanttotheriskstothestabilityof theU.S. bankingorfinancialsystem,includingpubliccommentsontheproposal.45TheBoardhas consideredtheeffectof theproposalonGoldmanSachs’sandGSBank’ssystemicfootprints.Theapproximately$17billionof depositstobeassumedwouldhaveanegligible effectonthesystemicfootprintof theseorganizations,increasingitssharesof U.S. financial-systemassetsandliabilitiesbylessthan0.1percentagepoints,anddepositsbyless than0.2percentagepoints.Theacquisitionwouldalsohaveanegligibleeffectonmeasures of GoldmanSachs’sandGSBank’sinterconnectedness,increasingGoldmanSachs’s sharesof U.S.intrafinancialsystemassetsandliabilities,aswellasitsshareof short-term fundingliabilities,bylessthan0.2percentagepointseach.46 TheBoardalsohasconsideredthenetchangetostability-relatedrisksposedbythe involvedinstitutions.Inthisregard,thetransactionwouldprovideGSBankwithapproximately$17billionindeposits,adepositcustomerbase,andaplatformforincreasingits depositfundinginthefuture.Asaresult,theproposalwouldimmediatelyimprovethe stabilityof GSBank’sfundingprofilebydiversifyingsourcesof fundingandincreasing stablefundingandwouldallowthebanktomaintainandfurtherimproveitsfunding profileinthefuture.Thisshouldenhancefinancialstability.Moreover,theproposalwould facilitateGECC’seffortstoreduceitsoverallsystemicfootprintbyexitingfromitsfinancial activities.Onbalance,theproposalwouldappeartoreducetherisksposedbyGoldman Sachs,GECC,andtheirsubsidiarydepositoryinstitutions. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. RequestforPublicHearingsorMeetings SeveralcommentersrequestedthattheBoardholdpublichearingsormeetingsonthe application.SomerequestersarguedthattheBoardshouldaffordthepublicanopportunitytoprovideoraltestimonyonthisapplicationbecausethepublicdidnothaveanoppor- 43 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 44 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 45 SomecommentersgenerallyallegethatGoldmanSachsisalreadysystemicallyimportantandshouldbebroken up.TwocommentersalsoexpressconcernoverGoldmanSachs’sroleinthe2008–09financialcrisis. 46 IntrafinancialsystemassetsandliabilitiesrepresenttheamountoffinancialobligationsthatU.S.bankshaveto andfromotherU.S.andforeignfinancialfirms.Thesemetrics,alongwithshort-termfundingliabilities,are usedtomeasuretheinterconnectednessofU.S.banks.

232 FederalReserveBulletin|June2016 tunitytocommentontheapplicationin2008byGoldmanSachstobecomeabank holdingcompany.47 TheBankMergerActandtheCRAdonotrequireapublicmeetingoraformalpublic hearingonanapplication.Underitsrules,theBoardalsomay,initsdiscretion,holda publichearingormeetingif appropriatetoallowinterestedpersonsanopportunityto providerelevanttestimonywhenwrittencommentswouldnotadequatelyrepresenttheir views.TheBoardhasconsideredtherequestsinlightof allthefactsof record.Inthe Board’sview,thecommentershavehadampleopportunitytosubmitcommentsonthe proposal.Asnotedabove,theBoardextendedtheinitialperiodforpubliccommentto accommodatethepublicinterestinthisproposal,providinginterestedpersonsuntil October30,2015,atotalperiodof 72days,tosubmitwrittencomments.Commenters submittednumerouswrittencommentsthattheBoardhasconsideredinactingonthe proposal.Therequestsdonotidentifydisputedissuesof factmaterialtotheBoard’sdecisionthatwouldbeclarifiedbyapublichearingormeeting.Inaddition,therequestsdonot demonstratewhywrittencommentsdonotpresentthecommenters’viewsadequatelyor whyahearingormeetingotherwisewouldbenecessaryorappropriate.Forthesereasons, andbasedonallthefactsof record,theBoardhasdeterminedthatapublichearingor meetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestsforapublic meetingorhearingontheproposalaredenied. Inaddition,severalcommentersrequestedafurtherextensionof thecommentperiodfor theproposal.TheBoardhasalreadyprovidedforanextendedcommentperiodof 72days. Duringthistime,anumberof commenters,includingtherequesters,submitteddetailed commentsinwritingregardingtheproposal.TheBoard’sRulesof Procedurecontemplate thatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationof hardshiporothermeritoriousreasonforseekingadditionaltime.48Thecommenters’requests foradditionaltimedonotidentifycircumstancesthatwouldwarrantanextensionof the publiccommentperiodforthisproposal.49Accordingly,theBoardhasdeterminednotto extendfurtherthepubliccommentperiod. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe proposalshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBankMergerActandotherapplicablestatutes.Approvalof thisproposalisspecifically conditionedoncompliancebyGSBankwithalltheconditionssetforthinthisorder.The 47 TheBoard’sorderissuedinconnectionwiththeapplicationexplainedthebasisforwaivingpublicnotice.The GoldmanSachsGroup,Inc.,94FederalReserveBulletinC101(2008).In2009and2010,theBoardinvitedpublic commentonapplicationsandnoticesfiledbyGoldmanSachsundertheBankHoldingCompanyActof 1956toacquireorretainsharesincertainbankholdingcompaniesandsavingsandloanholdingcompanies. See75Fed.Reg.17142(April5,2010);74Fed.Reg.48970(September25,2009). 48 12CFR262.25(b)(2). 49 TwocommentersexpressconcernsaboutGSBank’suseoftheBoard’sprefilingprocess,suggestingthat commenterscouldnotparticipateintheresolutionofsubstantiveissuesraisedbytheproposalbecausethese issueswereresolvedbeforethefilingofthisapplication.Oneofthesecommenterswithdrewitscommentsin fullfollowingitsdiscussionswithGSBank. TheFederalReservehasestablishedaprefilingprocesstoprovidepotentialapplicantswithinformationabout theproceduralrequirements,suchastimingandtheapplicableforms,associatedwithaproposal.SeeSRLetter 12-12.Thisprocessalsohelpstoidentifyinformationthatmaybeneededinconnectionwithissuesthatthe Boardtypicallyconsidersinconnectionwithaparticulartypeofapplicationornotice,suchascompetitionor financialstability.Theprefilingprocessisnotused,andwasnotusedinthiscase,toresolveorpredeterminethe outcomeofanysubstantiveissues.Asineverycase,thesubstantiveissuesinvolvedinthiscasewereconsidered andresolvedaspartoftheprocessingofGSBank’sformalapplication.Indoingso,theBoardconsideredall publiccommentsontheproposal.

LegalDevelopments:FirstQuarter,2016 233 conditionsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwith itsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposedtransactionmaynotbeconsummatedbeforethefifteenthcalendardayafter theeffectivedateof thisorder,orlaterthanthreemonthsthereafterunlesssuchperiodis extendedforgoodcausebytheBoardortheNewYorkReserveBank,actingunder delegatedauthority. Byorderof theBoardof Governors,effectiveMarch21,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

234 FederalReserveBulletin|June2016 Order Issued Under Federal Reserve Act Frost Bank San Antonio, Texas OrderApprovingtheEstablishmentof Branches FRBOrderNo.2016–02(March14,2016) FrostBank,astatememberbanksubsidiaryof Cullen/FrostBankers,Inc.(“Cullen/ Frost”),bothof SanAntonio,Texas,hasrequestedtheBoard’sapprovalundersection9of theFederalReserveAct(“FRA”)1andtheBoard’sRegulationH2toestablishtwobranches inTexas.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.4Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandall commentsreceivedinlightof thefactorsspecifiedintheFRA. Cullen/FrostisthesixthlargestdepositoryorganizationinTexaswith136offices throughoutTexas,controllingapproximately$23.9billionindeposits,whichrepresent approximately3.3percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.5FrostBankoperatesonlyinTexas,andthebank’smainofficeisinSan Antonio,Texas. Undersection208.6of theBoard’sRegulationH,whichimplementssection9of the FRA,6thefactorsthattheBoardmustconsiderinactingonbranchapplicationsinclude (1)thefinancialhistoryandconditionof theapplyingbankandthegeneralcharacterof its management;(2)theadequacyof thebank’scapitalanditsfutureearningsprospects; (3)theconvenienceandneedsof thecommunitytobeservedbythebranch;(4)inthecase of brancheswithdeposit-takingcapability,thebank’sperformanceundertheCommunity ReinvestmentAct(“CRA”);7and(5)whetherthebank’sinvestmentinbankpremisesin establishingthebranchsatisfiescertaincriteria.8 TheBoardhasconsideredtheapplicationsinlightof thesefactorsandthepubliccomment receivedontheproposal.Onecommenterobjectstotheproposal,allegingthatFrostBank discriminatesagainstAfricanAmericansand“redlines”AfricanAmericanneighborhoods,particularlyintheDallasandHoustonareas,bothinTexas,withrespecttoits branching,marketing,andlendingactivities.9 1 12U.S.C.§321. 2 12CFRPart208. 3 FrostBankproposestoestablishonebranchat314SouthWWWhiteRoad,SanAntonio(the“SanAntonio Branch”),andonebranchat2421EastSeventhStreet,Austin,Texas(the“AustinBranch”). 4 12CFR262.3(b). 5 DataareasofJune30,2015.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savings andloanassociations,andsavingsbanks. 6 12CFR208.6(b). 7 12U.S.C.§2901etseq. 8 12CFR208.21(a). 9 Redliningisthepracticeofdenyingacreditworthyapplicantaloanorserviceinacertainneighborhoodeven thoughtheapplicantmayotherwisebeeligiblefortheloanorservice.

LegalDevelopments:FirstQuarter,2016 235 Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof FrostBank,theBoardhasreviewedreportsof examination,othersupervisory information,publiclyreportedandotherfinancialinformation,informationprovidedby FrostBank,andthecommentreceived.FrostBankiswellcapitalizedandwouldremainso uponconsummationof theproposal.Afterconsideringallthefactsof record,theBoard concludesthatthefinancialhistoryandcondition,capitaladequacy,andfutureearnings prospectsof FrostBankareconsistentwithapprovalof theproposal.TheBoardalsohas reviewedFrostBank’sproposedinvestmentinthebranchesandconcludesthatitsinvestmentisconsistentwithregulatorylimitationsoninvestmentinbankpremises.10 InconsideringFrostBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,riskmanagementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithFrostBank andthebank’srecordof compliancewithapplicablebankinglaws,includinganti-moneylaunderinglaws.FrostBankisconsideredtobewellmanaged.Basedonthisreviewandall thefactsof record,theBoardconcludesthatFrostBank’smanagement,aswellasthe effectivenessof FrostBankincombattingmoney-launderingactivities,areconsistentwith approvalof theproposal. ConvenienceandNeedsConsiderations Inconsideringtheeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe creditneedsof thecommunitiesitserves,aswellasotherpotentialeffectsof theproposal ontheconvenienceandneedsof thecommunitiestobeserved.11Inthisevaluation,the Boardplacesparticularemphasisontherecordof therelevantdepositoryinstitutionunder theCRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,12andrequiresthe appropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods.13 Inaddition,theBoardconsidersthebank’soverallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Frost Bank,thefairlendingandcompliancerecordsof thebank,confidentialsupervisoryinformation,informationprovidedbyFrostBank,andthepubliccommentreceivedonthe 10 12CFR208.21(a). 11 12CFR208.6(b)(3). 12 12U.S.C.§2901(b). 13 12U.S.C.§2903.

236 FederalReserveBulletin|June2016 proposal.Asnotedabove,acommenterobjectstotheproposal,allegingthatFrostBank hasengagedindiscriminatorypracticesinHoustonandDallas,bothinTexas.In particular,thecommenterallegesthatFrostBankdisfavorscertainAfricanAmerican neighborhoodsinHoustonandDallasandhaslimiteditslending,marketingactivities, communitydevelopmentactivities,andbranchinginthoseneighborhoods. FrostBankdeniesthecommenter’sallegations,arguingthatithasreceiveda“Satisfactory” ratinginitsmostrecentCRAperformanceevaluation.FrostBankassertsthattheallegationsregardingallegeddiscriminatoryactivitiesinHoustonaresubstantiallysimilartoallegationsmadein2013and2014bythesamecommenterinconnectionwiththeapplicationsbyCullen/FrostandFrostBanktoacquireWNBBancshares,Inc.,andtomergewith WesternNationalBank,14bothof Odessa,Texas(the“WNBApplications”).Inactingon thoseapplications,theBoardconsideredthecommenter’sallegationsanddetermined thattheydidnotprecludeapprovalof theproposedacquisition.15IntheDallasarea,Frost Bankcontendsthatithasrecentlyopenedbranchesthatdirectlycontributetoservingthe needsof majority-minoritycensustracts.Inaddition,FrostBankrepresentsthatthe proposedAustinandSanAntoniobranchesalsowoulddirectlyservemajority-minority tracts. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedby commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationandinformationandviewsprovidedbytheappropriatefederalsupervisors.16 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.17Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sdatareportedundertheHomeMortgageDisclosureActof 1975 (“HMDA”),18inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloan datacollectedandreportedundertheCRAregulations,toassessaninstitution’slending activitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedon(1)thenumberandamountof homemortgage, 14 Cullen/FrostBankers,Inc.,FRBOrderNo.2014-10(May14,2014)(“Cullen/FrostOrder”). 15 InconnectionwiththeBoard’sactionontheWNBApplications,Cullen/Frostprovidedcommitmentstothe BoardrelatedtothecomplianceandfairlendingprogramsofCullen/FrostandFrostBank.Thesecommitmentsarediscussedfurtherbelow. 16 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642, 11665(March11,2010). 17 12U.S.C.§2906. 18 12U.S.C.§2801etseq.

LegalDevelopments:FirstQuarter,2016 237 smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof suchloans,includingtheproportionand dispersionof theinstitution’slendinginitsassessmentareasandthenumberandamount of loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamountof home mortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;19(4)theinstitution’scommunitydevelopmentlending,includingthenumberandamountof community developmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. CRAPerformanceof FrostBank FrostBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Dallas(“ReserveBank”),asof May13, 2013(“FrostBankEvaluation”).20FrostBankreceiveda“HighSatisfactory”ratingforthe LendingTest,an“Outstanding”ratingfortheInvestmentTest,anda“HighSatisfactory” ratingfortheServiceTest.21 ExaminersfoundthatFrostBank’soveralllendingactivityinitsassessmentareaswasgood andthatFrostBankmadeasubstantialmajorityof itsloansinsideitsassessmentareas. Accordingtoexaminers,thebank’sgeographicdistributionof HMDAandsmallbusiness lendingreflectedexcellentpenetrationinLMIgeographies.Examinersalsofoundthatthe bankhadanexcellentoveralldistributionof loansamongborrowersof differentincome levelsandbusinesscustomersof differentsizes.Examinersnotedthatthebankmadean adequatelevelof communitydevelopmentloansduringthereviewperiod.FrostBank’s communitydevelopmentloansweremadeforavarietyof purposes,butthemajorityof loanswereforthepurposeof providingcommunityservicestoindividualsorLMIareas andforaffordablehousing. IntheHoustonAA,anareawherethecommenterfocused,FrostBankexhibitedgood lendingperformance.Thebank’slendingactivityreflectedgoodresponsivenesstoassessmentareacreditneeds,andthebank’sgeographicdistributionof loansreflectedexcellent penetrationthroughouttheassessmentarea.Thebank’sdistributionof borrowersreflected goodpenetrationamongborrowersof differentincomelevelsandbusinessesof different revenuesizes.FrostBankmadearelativelyhighlevelof communitydevelopmentloansin theassessmentarea. IntheDallasAA,anotherareaof concerntothecommenter,FrostBankshowedgood lendingperformance.Thebank’slendingactivityreflectedadequateresponsivenessto 19 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 20 TheFrostBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Theevaluation periodfortheLendingTestwasfromJanuary1,2010,throughDecember31,2011,exceptforcommunity developmentloans,whichhadanevaluationperiodfromAugust8,2008,throughDecember31,2011.The evaluationperiodfortheInvestmentTestandtheServiceTestwasfromAugust8,2008,throughDecember31, 2011. 21 TheFrostBankEvaluationincludedafull-scopereviewofthebank’sassessmentareaswithinthefollowing MetropolitanStatisticalAreas(“MSAs”):theAustin–RoundRock–SanMarcos,Texas,MSA;theDallas– Plano–Irving,Texas,MetropolitanDivision(“DallasAA”);theFortWorth–Arlington,Texas,Metropolitan Division;theHouston–SugarLand–Baytown,Texas,MSA(“HoustonAA”);andtheSanAntonio–New Braunfels,Texas,MSA(“SanAntonioAA”).Alimited-scopereviewwasconductedinthebank’sassessment areaswithintheBrownsville–Harlingen,Texas,MSA;theCorpusChristi,Texas,MSA;andtheMcAllen– Edinburg–Mission,Texas,MSA,aswellasintheWillacyCounty,Texas,assessmentarea.

238 FederalReserveBulletin|June2016 assessmentareacreditneeds,andthebank’sgeographicdistributionof loansreflected goodpenetrationthroughouttheassessmentarea.Thebank’sdistributionof borrowers reflectedgoodpenetrationamongborrowersof differentincomelevelsandbusinessesof differentrevenuesizes.FrostBankmadealowlevelof communitydevelopmentloansin theassessmentarea. ExaminersfoundthatFrostBankhadanexcellentlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsinitsassessmentareas.22ExaminersnotedthatFrostBank’s investmentsdemonstrateexcellentresponsivenesstothemostpressingcreditandcommunitydevelopmentneedsthroughoutitsassessmentareas.FrostBankinvestedinsmallbusinessinvestmentcompanies,purchasedmortgage-backedsecuritiesissuedbytheGovernmentNationalMortgageAssociation,andinvestedinmortgagerevenuebondsissuedby theTexasDepartmentof Housing&CommunityAffairsthataretargetedtoLMI individuals. IntheHoustonandDallasAAs,FrostBank’sperformanceontheInvestmentTestwas excellent.FrostBankexhibitedexcellentresponsivenesstocreditandcommunitydevelopmentneedsthroughitsinvestmentactivitiesintheseassessmentareas,whichincluded investmentsforaffordablehousing. ExaminersnotedthatFrostBank’sretaildeliverysystemswerereasonablyaccessibletothe geographiesandindividualsof differentincomelevels.ExaminersfurthernotedthatFrost Bank’sopeningandclosingof branchesdidnotadverselyaffecttheaccessibilityof bankingservicestoLMIgeographiesandthatthebankingservicesandbusinesshoursdid notvaryinawaythatinconveniencedanyportionof thebank’sassessmentareas, particularlyLMIgeographiesandindividuals.ExaminersalsonotedthatFrostBank offeredno-orlow-costdepositaccountsandvariousalternativedeliverysystems.Examinersindicatedthatthebankoverallwasaleaderinprovidingcommunitydevelopment servicesthatbenefitLMIresidentsandsmallbusinessesof theassessmentareas.Examiners notedthatthebank’sdirectors,officers,andstaff memberswereinvolvedinnumerous organizationsandactivitiesthatpromoteorfacilitateaffordablehousingforLMIindividuals,servicesforLMIindividuals,andeconomicdevelopmentandrevitalizationof LMI areasandwereinvolvedinfinancialliteracyoutreachefforts. IntheHoustonandDallasAAs,FrostBank’sperformanceontheServiceTestwasgood. Thebank’sretailandcommunitydevelopmentservicesreflectedgoodresponsivenesstothe needsof theseassessmentareas.Thebank’sdeliverysystemswerereasonablyaccessibleto thebank’sgeographiesandtoindividualsof differentincomelevelsintheseassessment areas.IntheDallasAA,FrostBankwasaleaderinprovidingcommunitydevelopment services;intheHoustonAA,thebankprovidedarelativelyhighlevelof communitydevelopmentservices. FrostBank’sEffortsSincethe2013CRAEvaluation FrostBankrepresentsthat,sincetheFrostBankEvaluation,ithascontinuedtohelpmeet thecreditneedsof itsassessmentareas,includingtheneedsof LMIcommunitiesandindividualswithintheseareas.FrostBankhasmadecommunitydevelopmentloansthat promoteaffordablehousingandthatsupportorganizationsprovidingcommunityservices. FrostBankhascontinuedtopurchasemortgage-backedsecuritiessecuredbymortgage loansmadetoLMIborrowersand,since2012,hasmadecommunitydevelopmentinvest- 22 FrostBank’sperformanceintheSanAntonioAAhadthegreatestimpactontheInvestmentTestduetoa higherconcentrationofdeposits,branches,andcombinedHMDAandCRAsmallbusinesslendingthanthe otherassessmentareas.

LegalDevelopments:FirstQuarter,2016 239 mentsinschoolbondsthatfundeconomicallydisadvantagedschooldistrictsthroughout Texas.FrostBankhasmadedonationstosupportCRA-qualifiednonprofitorganizations orotherentitiesprovidingcommunitydevelopmentservicesineachof itsassessmentareas. FrostBankhascontinuedtoprovidealow-costcheckingaccountandlow-costunsecured andsecuredhomeimprovementloansforLMIindividuals.Thebankhasprovidedfinancialeducationforyouths,adults,andseniorsand,beginningin2013,hasconductededucationaleventsforLMIhomeownersonhomeimprovement,homeimprovementloan options,andtheavailabilityof utilitybillassistance. TheReserveBankbeganaCRAexaminationof FrostBankinthethirdquarterof 2015. Overall,examinersfoundthatFrostBank’sCRAperformanceremainedsatisfactory, includingintheHoustonandDallasAAs.23 Asnotedabove,in2014,inconnectionwiththeBoard’sactionontheWNBApplications, Cullen/Frostcommittednottoengageinanyexpansionaryactivities,includingbranching withinitsexistingmarketareas,untilsuchtimethattheBoardhasdeemedCullen/Frostto haveclearlydevelopedapolicytosupportfutureexpansioninitscomplianceprogram, includingfairlending,andtohireadditionalstaff withrequisiteknowledgeandexperience tomanageandcontrolthebank’sfairlendingrisk,whichmightbeheightenedbyexpansion(the“Commitments”).24UndertheCommitments,Cullen/Frostmayapplytoestablish brancheswithinexistingmarketareasif theproposedbranchwoulddirectlycontributeto servingtheneedsof majority-minoritycensustracts. ConsistentwiththeCommitments,theproposedbrancheswouldincreasetheavailabilityof bankingservicesinminorityneighborhoods.Bothof theproposedbrancheswouldbe locatedinlow-income,majority-minoritycensustracts.Fourof thesixcensustracts surroundingthecensustractthatwouldcontaintheAustinBranchareLMItracts,andfive of thesearemajority-minoritycensustracts.Inthecaseof theSanAntonioBranch,four of thesevencensustractssurroundingthecensustractthatwouldcontainthebranchare LMItracts,andallaremajority-minoritycensustracts. Cullen/FrostandFrostBankhavemadeimprovementstothebank’scomplianceprogram, particularlyitsfairlendingprogram.FrostBankrepresentsthatthebankhasstrengtheneditsboardandseniormanageroversightof compliance,fairlending,andCRArisks. Thebankhasexpandeditselectronicfairlendingdatacollectionandconductsregular analysestoassessandmonitorfairlendingrisksandtrends.Inaddition,thebankhas addedstaff initsComplianceDepartmentandhasincreasedthenumberof analyststhat conductfairlendinganalysesandmanagefairlendingdata. Aspartof thebank’swidermarketingandbranchingefforts,FrostBankhasimplemented planstohelpservetheneedsof historicallyunderservedneighborhoods,focusingon majority-minoritycensustracts.FrostBankhasdevelopedamarketingandoutreach programdesignedtoinformunderservedindividualsandcommunitiesof creditavailability, increaseoutreacheffortswithneighborhoodgroupsinallof thebank’smarketareas,and targetminoritypublicationstoincreaselendingtounderservedindividualsandcommunities.FrostBankalsohasdevelopedabranchstrategytohelpservethecreditneedsof majority-minorityareas.Allof FrostBank’sbranchingactivitiesproposedafterentering intotheCommitmentshavecontributedtoservicingtheneedsof minorityneighborhoods inthebank’sexistingmarketareas;in2015,FrostBankestablishedthreenewbranchesin 23 ThereviewperiodfortheLendingTest,InvestmentTest,andtheServiceTestwasJanuary1,2012,through December31,2014. 24 Cullen/FrostOrderat19n.33.ThecommenterallegedthatCullen/FrostandFrostBankarenotincompliance withtheCommitments.

240 FederalReserveBulletin|June2016 theDallas–Plano–Irving,Texas,MetropolitanDivision,allof whichwerelocatedin majority-minoritycensustracts. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Asdiscussedabove,theproposalwouldincreasethe availabilityof bankingservicesinLMIandminorityneighborhoods.FrostBankproposes toofferitsfullarrayof productsthrougheachbranchandtoinstallanATMateach branchtoincreasetheavailabilityof bankingservicesateachlocation. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof FrostBank undertheCRA,thebank’srecordsof compliancewithfairlendingandotherconsumer protectionlaws,confidentialsupervisoryinformation,informationprovidedbyFrostBank, thepubliccommentontheproposal,andotherpotentialeffectsof theproposalonthe convenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.TheBoard’sapprovalisspecificallyconditioned onFrostBank’scompliancewithallthecommitmentsmadetotheBoardinconnection withtheproposalaswellasallconditionsimposedinthisorder.25Theconditionsand commitmentsreliedonbytheBoardaredeemedtobeconditionsimposedinwritingin connectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Approvalof theseapplicationsisalsosubjecttotheestablishmentof theproposed brancheswithinoneyearof thedateof thisorder,unlesssuchperiodisextendedbythe BoardortheReserveBankactingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveMarch14,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 25 ThisorderdoesnotgrantrelieffromtheCommitments.

LegalDevelopments:FirstQuarter,2016 241 Order Issued Under International Banking Act Unione di Banche Italiane, S.p.A. Bergamo, Italy OrderApprovingtheEstablishmentof aRepresentativeOffice FRBOrderNo.2016–01(January19,2016) UnionediBancheItaliane,S.p.A.(“UBI”),Bergamo,Italy,aforeignbankwithinthe meaningof theInternationalBankingActof 1978(“IBA”),hasappliedunder section10(a)of theIBA1toestablisharepresentativeofficeinNewYork,NewYork.The IBAprovidesthataforeignbankmustobtaintheapprovalof theBoardtoestablisha representativeofficeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork DailyNews,March30,2015).Thetimeforsubmittingcommentshasexpired,andthe Boardhasconsideredallcommentsreceived. UBIisorganizedasajointstockcorporationunderItalianlawwithmorethan147,000 shareholders.2UBI’ssharesarewidelyheld,andeachshareholderholdslessthan5percent of UBI’sshares. UBI,withtotalassetsof approximately$108billion,isthefifthlargestbankinItalyby assetsize.3UBIengagesinarangeof commercialandretailbankingactivitiesthroughits 1,560domesticbranchesandeightbanksubsidiarieslocatedinItaly.OutsideItaly,UBI operatesrepresentativeofficesinthePeople’sRepublicof China(includingHongKong SAR),Brazil,Russia,andIndia.UBIalsohasonebankingsubsidiary,UBIBancaInternationalSA,locatedinLuxembourg.UBIhasnooperationsintheUnitedStates. TheproposedrepresentativeofficewouldactasaliaisonbetweenUBI’scustomersand U.S.serviceprovidersandbusinesscontacts.Theproposedrepresentativeofficewouldalso engageinotherrepresentationalactivities,includinggatheringinformationand conductingresearch.4 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablisharepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhas furnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately,(2)the foreignbankandanyforeignbankparentengagedirectlyinthebusinessof banking outsidetheUnitedStates,and(3)theforeignbankandanyforeignbankparentaresubject 1 12U.S.C.§3107(a). 2 InOctober2015,UBIconvertedfromacooperativebankintoajointstockcorporationunderItalianlawoperatingpursuanttothenewregulatoryframeworkinItalyforthereformofcooperativebankswithconsolidated assetsexceeding€8billion.SeeLawNo.33ofMarch24,2015,convertingLegislativeDegreeNo.3of January24,2015.Althoughthischangeincorporatestructureimpactsshareholderrights—inparticular,establishingtherighttoonevoteforeachordinaryshare—nosubstantialimpactisexpectedonUBI’sbusiness modeloroperationalactivities. 3 AssetandrankingdataareasofJune30,2015. 4 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates, performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions. Arepresentativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1).

242 FederalReserveBulletin|June2016 tocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.5 TheBoardalsoconsidersadditionalstandardssetforthintheIBAandRegulationK.6 Asnotedabove,UBIengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. UBIalsohasprovidedtheBoardwiththeinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. TheBoardhaspreviouslydetermined,inconnectionwithapplicationsinvolvingother banksinItaly,thatthosebanksweresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheBankof Italy.7Asof November4,2014,UBIissubjecttothedirect prudentialsupervisionof theEuropeanCentralBankwithinthecontextof theSingle SupervisoryMechanism(“SSM”)becausethetotalvalueof itsassetsexceeds€30billion. TheSSMisasystemof financialsupervisioncomposedof theEuropeanCentralBank (“ECB”)andthenationalcompetentauthoritiesof theparticipatingMemberStatesin whichspecifictasksconcerningpoliciesrelatingtotheprudentialsupervisionof credit institutionsandthestabilityof thefinancialsystemwithintheUnionandeachMember StatearespecificallyallocatedbetweentheECBandthenationalcompetentauthority.8 UndertheSSM,theECBhasdirectprudentialsupervisoryresponsibilityforUBI,while theBankof Italy,astherelevantnationalcompetentauthorityforUBI,retainssupervisory authorityoverallotherareas,includingconsumerprotectionandthepreventionof money launderingandterroristfinancing. UndertheSSM,ajointsupervisoryteamcomposedof staff membersfromtheECBand therelevantnationalcompetentauthoritiesisestablishedfortheconsolidatedsupervision of eachsignificantsupervisedentityorsignificantsupervisedgroup,suchasUBI,in participatingEuropeanUnionmemberstates.Theresponsibilitiesof thesejointsupervisoryteamsincludeimplementationof thesupervisoryexaminationprogramapprovedby theECBandof anyECBsupervisorydecisionsconcerningthatentityorgroup;performanceof thesupervisoryreviewandevaluationprocessrequiredbyEuropeanUnionlaw; 5 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichhomecountrysupervisors (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandtherelationships betweenthebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthat areconsolidatedonaworldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapital adequacyandriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmay informtheBoard’sdetermination. 6 See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2).Thesestandardsinclude:whetherthebank’shome countrysupervisorhasconsentedtotheestablishmentoftheoffice;thefinancialandmanagerialresourcesof thebank;whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimein placeinthehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatingin multilateraleffortstocombatmoneylaundering;whethertheappropriatesupervisorsinthehomecountrymay shareinformationonthebank’soperationswiththeBoard;whetherthebankanditsU.S.affiliatesarein compliancewithU.S.law;theneedsofthecommunity;andthebank’srecordofoperation.TheBoardmay also,inthecaseofaforeignbankthatpresentsarisktothestabilityoftheUnitedStates,takeintoaccount,to theextentappropriate,whetherthehomecountryoftheforeignbankhasadopted,orismakingdemonstrableprogresstowardsadopting,anappropriatesystemoffinancialregulationforthefinancialsystemof suchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E). 7 See,e.g.,BancaPopolarediVicenzaS.C.p.A.(orderdatedSeptember27,2011),97FederalReserveBulletin11 (3rdQuar.2011);BoardlettertoLuigiL.DeGhenghidatedSeptember25,2007(comprehensiveconsolidated supervisionforIntesaSanpaoloS.p.A.);BancadiRoma,S.p.A.,2002WL1848520(2002);BancaIntesa,S.p.A., 86FederalReserveBulletin433(2000). 8 InformationregardingtheSSMisderivedfromCouncilRegulation1024/2013,2013O.J.(L287)63(EC); Regulation468/2014oftheEuropeanCentralBank,2014O.J.(L141)1(ECB);andDirective2013/36/EUof theEuropeanParliamentandoftheCouncil,2013O.J.(L176)338(EU).

LegalDevelopments:FirstQuarter,2016 243 coordinationwithon-siteinspectionteams;andliaisingwiththenationalcompetent authoritieswhererelevant. UndertheSSM,UBIissubjecttoregularon-siteandoff-siteexaminations;supervisory reviews,includingstresstests;andsupervisiononaconsolidatedbasisbytheECB.The ECBreviewscompliancewithallrelevantEuropeanUnionlaw,includingdirectives concerningcapitalrequirementsasimplementedbynationallegislationandEuropean Unionregulations.TheECBmayalsoimposeadditionalcapitalorliquidityrequirements orotherprudentialmeasuresthatareprovidedforunderapplicableEuropeanUnionlaw.9 InfulfillingtheirresponsibilitiesundertheSSM,theECBandtherelevantnationalcompetentauthoritiesagreetoprovideinformationtoeachotherinatimelyandaccurate manner,withregularaccesstoupdatedinformationasnecessary. Basedonallthefactsof record,includingtheaboveinformation,theBoardhasdeterminedthatUBIissubjecttocomprehensivesupervisiononaconsolidatedbasisbythe ECBandtheBankof ItalyactingthroughtheSSM. TheBoardhasalsoconsideredthefollowingadditionalstandardssetforthintheIBAand RegulationK:(1)whetherthebankhasprocedurestocombatmoneylaundering, whetherthereisalegalregimeinplaceinthehomecountrytoaddressmoneylaundering, andwhetherthehomecountryisparticipatinginmultilateraleffortstocombatmoney laundering;(2)thefinancialandmanagerialresourcesof thebank;(3)whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthebank’soperations withtheBoard;and(4)whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentof theoffice.10 Italyisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordance withthoserecommendations,Italyhasenactedlawsandcreatedlegislativeandregulatory standardstodetermoneylaundering,terroristfinancing,andotherillicitactivities.Money launderingisacriminaloffenseinItaly,andcreditinstitutionsarerequiredtoestablish internalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.UBIhaspoliciesandproceduresto complywiththeselawsandregulationsthataremonitoredbygovernmentalentities responsibleforanti-money-launderingcompliance. UBIappearstohavetheexperienceandcapacitytosupporttheproposedrepresentative office.Inaddition,UBIhasestablishedcontrolsandproceduresfortheproposedrepresentativeofficetoensurecompliancewithU.S.law,aswellascontrolsandproceduresforits worldwideoperationsgenerally.TakingintoconsiderationUBI’srecordof operationsinits homecountry,itsoverallfinancialresources,anditsstandingwithitshomecountrysupervisors,financialandmanagerialfactorsareconsistentwithapprovalof theproposedrepresentativeoffice. UBIhascommittedtomakeavailabletotheBoardsuchinformationontheoperationsof UBIandanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeIBA,theBankHoldingCompanyActof 1956,asamended,andother applicablefederallaw.TotheextentthatprovidingsuchinformationtotheBoardmaybe prohibitedbylaworotherwise,UBIhascommittedtocooperatewiththeBoardtoobtain anynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesforthedisclo- 9 Articles4(1)(f)and16ofCouncilRegulation1024/2013,2013O.J.(L287)63,74,81(EC). 10 See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2).

244 FederalReserveBulletin|June2016 sureof suchinformation.Inaddition,subjecttocertainconditions,theECBandtheBank of ItalymayshareinformationonUBI’soperationswithothersupervisors,includingthe Board.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,ithasbeendeterminedthatUBIhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest.Inaddition,theBankof ItalyandtheECBhavenoobjectiontotheestablishmentof theproposedrepresentative office. TheBoardhasalsoconsideredwhetherUBI’sproposalwouldpresentarisktothestability of theUnitedStates.Theproposalwouldnotappeartoaffectfinancialstabilityinthe UnitedStates.Inparticular,theabsoluteandrelativesizeof UBIinitshomecountry;the scopeof UBI’sactivities,includingthetypesof activitiesitproposestoconductinthe UnitedStatesandthepotentialforthoseactivitiestoincreaseortransmitfinancialinstability;andtheframeworkinplaceforsupervisingUBIinitshomecountrydonotappear tocreatesignificantrisktothefinancialstabilityof theUnitedStates.Basedontheseand otherfactors,financialstabilityconsiderationsinthisproposalareconsistentwith approval. Onthebasisof allthefactsof recordandsubjecttocommitmentsmadebyUBI,the BoardhasdeterminedthatUBI’sapplicationtoestablishtheproposedrepresentativeoffice shouldbe,andherebyis,approved.Shouldanyrestrictionsonaccesstoinformationonthe operationsoractivitiesof UBIanditsaffiliatessubsequentlyinterferewiththeBoard’s abilitytoobtaininformationtodetermineandenforcecompliancebyUBIoritsaffiliates withapplicablefederalstatutes,theBoardmayrequireterminationof anyof UBI’sdirect orindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecifically conditionedoncompliancebyUBIwiththeconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththisapplication.11Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditionsimposedbythe Boardinwritinginconnectionwiththisdecisionand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Byorderof theBoardof Governors,effectiveJanuary19,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 11 TheBoard’sauthoritytoapprovetheestablishmentoftheproposedrepresentativeofficeparallelsthe continuingauthorityoftheStateofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalof thisapplicationdoesnotsupplanttheauthorityoftheStateofNewYorkoritsagent,theNewYorkState DepartmentofFinancialServices,tolicensetheproposedofficeofUBIinaccordancewithanytermsor conditionsthattheymayimpose.

245 Federal Reserve BULLETIN September 2016 Vol. 102, No. 4 Legal Developments: Second Quarter, 2016 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Republic Bancorp, Inc. Louisville, Kentucky OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2016-04(May2,2016) RepublicBancorp,Inc.(“Republic”),Louisville,Kentucky,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2tomergewithCornerstoneBancorp,Inc.(“Cornerstone”),andtherebyindirectlyacquireCornerstoneCommunityBank(“CornerstoneBank”),bothof St.Petersburg,Florida.Immediatelyfollowing theproposedmerger,CornerstoneBankwouldbemergedintoRepublic’ssubsidiarybank, RepublicBank&TrustCompany(“RepublicBank”),Louisville,Kentucky.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister68870(November6,2015)).4Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. Republic,withconsolidatedassetsof approximately$4.1billion,isthe263rdlargest insureddepositoryorganizationintheUnitedStates.Republiccurrentlycontrolsapproximately$2.3billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.5Republic controlsRepublicBank,whichoperatesinKentucky,Indiana,Ohio,Tennessee,and Florida.RepublicBankisthe208thlargestinsureddepositoryinstitutioninFlorida, controllingdepositsof approximately$72.9million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 ThemergerofCornerstoneBankintoRepublicBankissubjecttotheapprovaloftheFederalDepositInsurance Corporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).The FDICapprovedthebankmergeronFebruary10,2016. 4 12CFR262.3(b). 5 Assetdataandnationwidedeposit-rankingdataareasofJune30,2015,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2015,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutions includecommercialbanks,savingsandloanassociations,andsavingsbanks.

246 FederalReserveBulletin|September2016 Cornerstone,withconsolidatedassetsof approximately$241.2million,isthe2,615th largestinsureddepositoryorganizationintheUnitedStates.Cornerstonecurrentlycontrols approximately$206millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates. CornerstonecontrolsCornerstoneBank,whichoperatessolelyinFlorida.Cornerstone Bankisthe138thlargestinsureddepositoryinstitutioninFlorida,controllingdepositsof approximately$206million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Republicwouldbecomethe257thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$4.3billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Republicwouldcontrolconsolidateddepositsof approximately $2.5billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryorganizationsintheUnitedStates.InFlorida,RepublicBankwouldbecome the110thlargestdepositoryorganization,controllingdepositsof approximately $278.8million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.7Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.8Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates,or30percentormoreof thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateorin anystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof RepublicisKentucky,andCornerstone Bank’shomestateisFlorida.10Republiciswellcapitalizedandwellmanagedunderapplicablelaw,andRepublicBankhasasatisfactoryCommunityReinvestmentAct(“CRA”)11 rating.Floridadoesnothaveminimumagerequirements,12andCornerstoneBankhas beeninexistenceformorethanfiveyears. 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).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.§2901etseq. 12 Fla.Stat.Ann.§658.2953.

LegalDevelopments:SecondQuarter,2016 247 Onconsummationof theproposedtransaction,Republicwouldcontrollessthan1percent of thetotalamountof consolidateddepositsininsureddepositoryinstitutionsinthe UnitedStates.Inaddition,thecombinedorganizationwouldcontrollessthan30percentof thetotalamountof depositsof insureddepositoryinstitutionsinFlorida,theonlystatein whichRepublicandCornerstonehaveoverlappingbankingoperations.Accordingly,in lightof allthefactsof record,theBoardmayapprovetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitytobeserved.13 RepublicandCornerstonehavesubsidiarydepositoryinstitutionsthatcompetedirectlyin onegeographicbankingmarket,TampaBayArea,Florida(“TampaBaymarket”).14The Boardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketinlight of allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativeshareof totaldepositsininsured depositoryinstitutionsinthemarket(“marketdeposits”)thatRepublicwouldcontrol;15 theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsasmeasuredby theHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheTampaBaymarket.Onconsummation,theTampaBaymarketwouldremainmoderatelyconcentrated,asmeasuredbythe HHI,accordingtotheDOJBankMergerGuidelines.ThechangeintheHHIwouldbe small,andnumerouscompetitorswouldremaininthemarket.17 13 12U.S.C.§1842(c)(1). 14 TheTampaBaymarketisdefinedasHernando,Hillsborough,Pinellas,andPascocounties,Florida. 15 DepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50-percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 16 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html. 17 Republicoperatesthe44thlargestdepositoryinstitutionintheTampaBaymarket,controllingapproximately $72.9millionindeposits,whichrepresent0.1percentofmarketdeposits.Cornerstoneoperatesthe28thlargest depositoryinstitutioninthesamemarket,controllingdepositsofapproximately$206million,whichrepresent about0.3percentofmarketdeposits.Onconsummationoftheproposedtransaction,Republicwould

248 FederalReserveBulletin|September2016 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheTampaBaymarketorinanyotherrelevantbankingmarket. Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialcondition of theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellas informationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsand theorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof publicandsupervisoryinformationregardingcapitaladequacy,asset quality,andearningsperformance,aswellaspubliccommentsontheproposal.TheBoard evaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecosts of theproposalandtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobe especiallyimportant.TheBoardconsidersthefutureprospectsof theorganizations involvedintheproposalinlightof theirfinancialandmanagerialresourcesandthe proposedbusinessplan. RepublicandCornerstonearebothwellcapitalizedandwouldremainsoonconsummationof theproposedtransaction.Theproposedtransactionisabankholdingcompany mergerthatisstructuredasanexchangeof sharesforcash.18Theassetquality,earnings, andliquidityof RepublicBankandCornerstoneBankareconsistentwithapproval,and Republicappearstohaveadequateresourcestoabsorbthecostsof theproposalandto completeintegrationof theinstitutions’operations.Inaddition,futureprospectsare consideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Republic,Cornerstone,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyRepublic;theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;the becomethe25thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $278.8million,whichrepresent0.4percentofmarketdeposits.TheHHIfortheTampaBaymarketwould increasebylessthan1pointto1,054,and60competitorswouldremaininthemarket. 18 Asproposed,RepublicAcquisitionCorp.,asubsidiaryofRepublicrecentlyformedtofacilitatethetransaction,wouldmergewithandintoCornerstonewithCornerstoneasthesurvivingentity(“AcquisitionMerger”). AttheeffectivetimeoftheAcquisitionMerger,sharesofCornerstonewouldbeconvertedintotherightto receivecash,basedonanexchangeratio.Alloutstandingstockoptionswouldbecanceledinexchangeforcash paymentequaltothespreadbetweentheoptionexercisepricesandtheexchangeratio.Immediatelyafterthe AcquisitionMerger,CornerstonewouldmergewithandintoRepublic,withRepublicasthesurvivingentity, andCornerstoneBankwouldmergewithandintoRepublicBank,withRepublicBankasthesurvivingentity. Republichasthefinancialresourcestofundthesemergertransactions.

LegalDevelopments:SecondQuarter,2016 249 organizations’recordsof compliancewithapplicablebanking,consumerprotection,and anti-money-launderinglaws;aswellasinformationprovidedbythecommenter. Republic,Cornerstone,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.Republic’sexistingrisk-managementprogramanditsdirectorateand seniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutive officersof Republichavesubstantialknowledgeof andexperienceinthebankingand financialservicessectors. TheBoardalsohasconsideredRepublic’splansforimplementingtheproposal.Republic hasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.Republic wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,whichareconsideredacceptablefromasupervisoryperspective.Inaddition, Republic’smanagementhastheexperienceandresourcestoensurethatthecombined organizationoperatesinasafeandsoundmanner,andRepublicplanstointegrateCornerstone’sexistingmanagementandpersonnelinamannerthataugmentsRepublic’s management.19 Basedonallthefactsof record,includingRepublic’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof RepublicandCornerstoneincombattingmoney-laundering activities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.20Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,21andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.22 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheappli- 19 Onconsummation,fiveindividualscurrentlyservingasseniormanagementofficialsatCornerstoneorCornerstoneBankwillserveasseniormanagementofficialsatRepublicBank,includingCornerstoneBank’sCEO whowillberetainedasRepublicBank’sMarketPresidentoftheFloridamarket. 20 12U.S.C.§1842(c)(2). 21 12U.S.C.§2901(b). 22 12U.S.C.§2903.

250 FederalReserveBulletin|September2016 cant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Republic BankandCornerstoneBank;thefairlendingandcompliancerecordsof bothbanks;the supervisoryviewsof theFDIC;confidentialsupervisoryinformation;information providedbyRepublic;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromacommenterwhoobjectstotheproposal onthebasisof allegeddisparitiesinthenumberof residentialrealestateloansmadeto AfricanAmericansandHispanics,ascomparedtowhites,byRepublicBankinthe Louisville-JeffersonCounty,Kentucky-IndianaMetropolitanStatisticalArea(“Louisville MSA”)andtheNashville,TennesseeMSA(“NashvilleMSA”),asreflectedindatareported undertheHomeMortgageDisclosureAct(“HMDA”)for2014.23Thecommenteralso criticizestherateatwhichRepublicBankdeniedapplicationsbyAfricanAmericans, comparedtothatforwhites,forhomepurchaseandhomeimprovementloansintheLouisvilleMSA,asreportedunderHMDAfor2014.Inaddition,thecommenterexpresses generalconcernsregardingRepublicBank’sBuildCardprogram,arecentlylaunched creditcardthatthecommenterdescribesasasubprimecreditcard.Thecommenter expressesconcernsovertheannualizedinterestratethatthebankchargescardholders.The commenteralsogenerallycontendsthatRepublicBank’spasttaxrefundanticipationloan productisanexampleof problemswithRepublicBank’slendingrecord.24TheFDIC consideredthesamecommentsinconnectionwithitsreviewof theunderlyingbankmerger applicationandfoundtheCRArecordandconvenienceandneedsfactorconsistentwith approvalof theproposalonFebruary10,2016.25 Businessesof theInvolvedInstitutionsandResponsetoComments RepublicBankisafull-servicebank,offeringabroadrangeof financialproductsand servicestoconsumersandbusinesses.ThroughitsbranchnetworkinKentucky,Indiana, Florida,Ohio,andTennessee,itoffersavarietyof traditionalbankingproductsto consumers,includingmortgageloanproducts,consumerloans,creditcards,andchecking andsavingsproducts.RepublicBank’sbusiness-focusedproductsandservicesinclude communitydevelopmentloans,SmallBusinessAdministrationloans,commercialreal estateanddevelopmentloans,andequipmentfinanceproducts. 23 Thecommenter’sconcernsfocusonthenumberofhomepurchaseloans,homerefinanceloans,andhome improvementloansthatRepublicBankofferedtoAfricanAmericansandHispanicscomparedtowhitesinthe LouisvilleMSA,aswellasthenumberofhomepurchaseloansthatRepublicBankofferedtoAfricanAmericansandHispanicscomparedtowhitesintheNashvilleMSA. 24 Throughpartnershipswithtaxpreparersandtaxsoftwarepreparationcompanies,RepublicBankofferedtax refundanticipationloanswherebythebankextendedtaxrefundadvancestotaxpayersshortlyaftertheyfiled theirtaxreturns.Theadvancesweresecuredbythetaxpayers’refunds.Inresponsetosafetyandsoundnessand consumercomplianceconcernsraisedbytheFDICregardingthistaxrefundanticipationloanproductoffered byRepublicBank,theproductwasdiscontinuedin2012pursuanttoanagreementbetweentheFDICand RepublicBank.RepublicBankrecentlylaunchedanewproductthatoffersadvancesoftaxpayers’refunds; however,asdiscussedinmoredetailbelow,Republicrepresentsthatthenewproducthassignificantlydifferent termsandprotectionsthataddresstheFDIC’sconcernsregardingthepriorproduct. 25 LetterfromM.AnthonyLowe,RegionalDirectorofFDICChicagoRegionalOffice,toCynthiaW.Young, Wyatt,Tarrant&Combs,LLP(February10,2016).

LegalDevelopments:SecondQuarter,2016 251 CornerstoneBankisafull-servicebankthatoffersamorelimitedrangeof retailand commercialbankingproductsandservicesthroughfourbranchesinPinellasCounty, Florida.Itsproductsandservicesincludehomeequityloans,autoloans,avarietyof checkingandsavingsproducts,constructionandlandacquisitiondevelopmentloans, equipmentfinancing,andloansforbusinessacquisitionsandexpansions. RepublicdeniesthattheHMDAdatapresentedbythecommenterreflectdiscriminatoryor unfairlendingpracticesbyRepublicBankintheLouisvilleorNashvilleMSAs.Republic representsthatitsdenialratestoAfricanAmericansintheLouisvilleMSAreflectjudgmentsbasedoncredithistory,loan-to-valueratios,debt-to-incomeratios,andother nondiscriminatoryfactors.Republicalsorepresentsthatitcontinuouslydeploysstrategies toincreaseitslendingtominoritiesintheLouisvilleMSA,aswellasinitsothermarkets. RepublicrepresentsthattheseeffortshaveresultedinitsapplicationsfromAfricanAmericansincreasingby45percentbetweenthe2014and2015calendaryearsandinitsoriginationstoAfricanAmericansincreasingby100percentintheLouisvilleMSAduringthe sameperiod. Inresponsetoallegationsaboutlowlevelsof lendingtoAfricanAmericansintheNashvilleMSA,RepublicexplainsthatthebankenteredtheNashvillemarketin2012after acquiringafailedbankwithasinglebranchthatwasprimarilyengagedincommercial lendingandhadnominorityapplicants.Sincetheacquisition,Republicrepresentsthatit hasaddedasecondbranchinthemarket,conductedsignificantoutreachtocommunity organizations,andengagedinmarketingeffortsinareaswithhighminorityconcentrations. Republicrepresentsthattheseeffortshaveresultedinrecentimprovementsinitsconsumer lendingfootprintinthemarket,includingincreasesinapplicationsbyandoriginationsto minorityapplicants. Republicassertsthatithaspoliciesandprocedurestoensurecompliancewithfairlending lawsandtomonitorfairlendingrisk,includingannualfairlendingriskassessments,and HMDAandfairlendingmonitoringconductedbydedicatedstaff aswellasanoutside firmtogainadditionalinsightintoapplicablerisks. RepublicarguesthatitsBuildCardprogramisanaffordablealternativetoothershort-term financingoptions,suchaspaydayloans.RepubliccontendsthatitsBuildCardisappropriatelypricedforrisk,providescustomerswithtransparencyregardingthetotalcostof credit,doesnothavehiddenfeesoradd-onproducts,andhassimplepricingthatiseasyfor consumerstounderstand. Republicacknowledgesthatitdiscontinuedataxrefundanticipationloanproductin2012 andlaunchedanewtaxrefundproductinJanuary2016underthebrandnameEasy Advance.However,Republicrepresentsthatthenewproductwasdesignedwithtermsand featuresthataddresssupervisoryconcernswiththepriorproduct,andthatthebank reviewedtheproductwiththeFDICpriortolaunch.Republicrepresentsthat,unlikethe priorproduct,nofeeorinterestischargedtothecustomerforanEasyAdvanceloan; rather,foreachoriginationaflatfeeispaidbythebank’staxpreparationpartners,whoare contractuallyprohibitedfrompassingthecostof thefeetothecustomer.26Further, RepublicrepresentsthatitsEasyAdvanceloansarecappedatamuchloweramountthan thepriorproduct,andthatthereisnorecourseagainstthecustomerif thetaxrefundis insufficienttorepaytheloan.Republicalsorepresentsthatitrequireseachtaxpreparer thatofferstheEasyAdvanceproducttoundergotrainingforcompliancewithrelevant 26 RepublicrepresentsthatitstaxpreparationpartnersoffertheEasyAdvanceproductasamarketingtoolfor attractingcustomerstotheirtaxpreparationservices.Republicassertsthatitcloselymonitorsitspartnersfor compliancewiththeprohibitionagainstpassingtheoriginationfeestocustomers.

252 FederalReserveBulletin|September2016 laws,regulations,andprogramterms,andthatitmonitorsitspartnersthroughon-site reviewsandaudits. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardevaluatesaninstitution’sperformanceinlightof examinationsandother supervisoryinformation,informationprovidedbypubliccommenters,andinformationand viewsprovidedbytheappropriatefederalsupervisors.27 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.28Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’slendingperformanceisbasedon(1)thenumberand amountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable) intheinstitution’sassessmentareas;(2)thegeographicdistributionof suchloans, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloansbasedonborrowercharacteristics,includingthe numberandamountof homemortgageloanstolow-,moderate-,middle-,andupperincomeindividuals;29(4)theinstitution’scommunitydevelopmentlending,includingthe numberandamountof communitydevelopmentloansandtheircomplexityand innovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.30 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinforma- 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642, 11665(March11,2010). 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 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

LegalDevelopments:SecondQuarter,2016 253 tionregardingthelendingrecordof aninstitution.Inassessingtheconvenienceandneeds factorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof RepublicBankandCornerstoneBank,thefair lendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theFDIC,confidentialsupervisoryinformation,informationprovidedbyRepublic,andthepublic commentsreceivedontheproposal. CRAPerformanceof RepublicBank RepublicBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof June23,2014(“RepublicBankEvaluation”).31 Thebankreceived“HighSatisfactory”ratingsforboththeLendingTestandtheInvestmentTestandan“Outstanding”ratingfortheServiceTest.32 ExaminersfoundthatRepublicBank’soveralllendinglevelsreflectedgoodresponsiveness tocreditneedsinitsassessmentareas.Accordingtoexaminers,thebankusedinnovative andflexiblelendingpracticesinordertoserveassessmentareacreditneeds.Examiners foundthatasubstantialmajorityof thebank’sloansweremadetoborrowerswithinits assessmentareas.Overall,theexaminersalsofoundthatgeographicdistributionof the bank’sloansreflectedadequatepenetrationthroughoutitsassessmentareas.33Exceptionally,intheNashvilleMSA,examinersfoundthegeographicdistributionof thebank’s loanstobepoor;however,examinersnotedthatthebankdidnotenterthisassessment areauntil2012andoperatedonlytwobranchesintheassessmentarea.Further,examiners foundthat,overall,thebankexhibitedadequateresponsivenesstothecreditneedsof the assessmentarea. Examinersfoundthatthedistributionof thebank’sborrowersreflectedadequatepenetrationamongcustomersof differentincomelevelsandbusinessesof differentsizes.ExaminersnotedthatRepublicBankexhibitedanadequaterecordof servingthecreditneedsof themosteconomicallydisadvantagedareasof itsassessmentareas,low-incomeindividuals, andverysmallbusinesses.Forexample,examinersfoundthatthebankmadearelatively highlevelof communitydevelopmentloanswithinitsassessmentareas.RepublicBank’s communitydevelopmentlendingeffortsprimarilyfocusedonlendingtocommunitydevelopmentorganizationsthatprovideessentialservicestoLMIindividualsandrevitalizing andstabilizingeconomicallydistressedgeographieswithinthebank’sassessmentareas. ExaminersfoundthatRepublicBankmadeasignificantlevelof qualifiedcommunity developmentinvestmentsandgrantswithinitsassessmentareas,includingtheLouisville MSA.Thebankwasoccasionallyfoundtobealeaderinprovidinginvestmentsnot routinelyprovidedbyprivateinvestors.Examinersfoundthatthetypesof qualifiedinvestmentsheldbyRepublicBankdemonstratedacommitmenttomeetingcommunityneeds. Theseinvestmentsincludedlow-incomehousingtaxcreditsandequityinvestmentsin communitydevelopmenthousinganddevelopmentorganizationswithinthebank’sassessmentareas. 31 TheRepublicBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedloansreported,pursuanttoHMDAandCRAdatacollectionrequirements(geographicdistributionandborrowerdistribution)in2012and2013.Theevaluationperiodforcommunitydevelopmentlending, investments,andserviceswasSeptember12,2011,throughJune23,2014. 32 TheRepublicBankEvaluationincludedafull-scopeevaluationoftheLouisvilleMSA;Lexington-Fayette, KentuckyMSA;andNashvilleMSA. 33 Examinersalsoconcludedthatgeographicdistributionofthebank’shomepurchaselendinginLMIcensus tractswasadequate,andnotedstrongcompetitionintheLouisvilleMSAforhomepurchaseloansandother residentialandsmallbusinessloans.

254 FederalReserveBulletin|September2016 ExaminersfoundRepublicBank’sdeliverysystemstobeaccessibletoallportionsof the bank’sassessmentareas.ThehoursandservicesofferedatRepublicBank’sbranchlocationswerefoundtobecomparable,regardlessof theincomelevelof thecensustract. Examinersfoundthatthebankwasaleaderinprovidingcommunitydevelopmentservices andtechnicalassistancetoorganizationsthatprovidecommunitydevelopmentservices, particularlyintheLouisvilleMSA.Inparticular,examinersnotedthatthebankisaleader insupportingprogramsthatconnectindividualswholackadequateaccesstofinancial serviceswithfinancialinstitutionsthatprovidefreeorlow-costproducts.Examinersalso notedthatthebankisaleaderinsupportingprogramsthatpromotefinancialliteracy withinitsassessmentareas. RepublicBank’sEffortsSincethe2014CRAEvaluation Republicrepresentsthat,sincetheRepublicBankEvaluation,RepublicBankhasremained activeinmarketingawideselectionof productsandservicesspecificallydesignedforLMI borrowersandhasmadeanumberof communitydevelopmentloanstosupportaffordable housingandsmallbusinessesinitsassessmentareas.Republicrepresentsthatthebankhas engagedinvariousoutreacheffortsandcommunityserviceopportunitieswithorganizationsthatserveLMIpersonsandcommunities,includingorganizationsthatfocuson financialeducationinitiatives,neighborhoodrehabilitationefforts,andaffordablehousing. Inaddition,Republicrepresentsthatthebankhasroutinelyadvertisedandmarketedproductsandservicesincensustractswithhighminoritypopulationswithinitsassessment areas. CRAPerformanceof CornerstoneBank CornerstoneBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof June1,2015(“CornerstoneBankEvaluation”).34Examinersconcludedthatthebankoffersavarietyof businessandconsumer creditproductsthatmeettheneedsof thecommunitiesthatitserves.Examinersfoundthat thebank’sloan-to-depositratiowasreasonablegiventhebank’ssize,financialcondition, andthecreditneedsof itsassessmentarea.Examinersalsonotedthatasubstantial majorityof thebank’ssmallbusinessloanswereoriginatedwithinitsassessmentarea. Further,examinersfoundthatthegeographicdistributionof thebank’sloansreflecteda reasonabledispersionthroughoutitsassessmentarea,andthatthebank’sdistributionof loanstoborrowersreflectedexcellentpenetrationamongbusinessesof differentsizes. Viewsof OtherRegulators,andFDICApprovalof theBankMerger TheBoardhasconsultedwiththeFDIC,theprimaryfederalsupervisorof RepublicBank, regardingtheFDIC’sreviewof theproposedmergerof RepublicBankandCornerstone Bank.TheFDICconductedareviewof thesamecommentsthatweresubmittedtothe Board,takingintoconsiderationtheHMDAdatacitedbythecommenter;Republic Bank’sCRA,consumercompliance,andfairlendingrecords;andthebank’soutreachto AfricanAmericansandHispanicsandinLMIcommunities.35TheFDICalsoconducteda recentconsumercomplianceexaminationandfairlendingreviewof RepublicBank.The BoardreviewedtheexaminationreportandconsultedwiththeFDICregardingRepublic 34 TheCornerstoneBankEvaluationwasconductedusingSmallInstitutionCRAExaminationProcedures. Examinersreviewedthebank’slendingactivityfromJune22,2009,throughJune1,2015.TheCornerstone BankEvaluationreviewedthebank’sPinellasCountyassessmentarea. 35 TheFDICalsoconsideredthecommentsregardingRepublicBank’sBuildCardandformertaxrefund product.Further,asnoted,RepublicBankinformedtheFDICofanewtaxrefundloanproductpriortoits launch.TheFDICwillcontinuetomonitorRepublicBank’sproductofferingsaspartoftheongoingsupervisoryprocess.

LegalDevelopments:SecondQuarter,2016 255 Bank’srecordof compliancewithfairlendingandotherconsumerprotectionlawsand regulationsandthebank’spoliciesandprocedurestohelpensurecompliancewithfair lendingandotherconsumerprotectionlawsandregulations.RepublicBankintendsto implementthosepoliciesandproceduresatthecombinedorganizationfollowingconsummationof thetransaction. Afterafullreviewof theproposal,includingconsiderationof thepubliccomments,the FDICdeterminedthattheproposalmetthestandardsof theBankMergerActand approvedtheproposal.TheFDICdidnotimposeanyspecialconditionsrelatedtofair lendingorCRAperformance. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Republicrepresentsthatuponconsummationof theproposal,existingcustomersof Cornerstonewouldhaveaccesstoacomplementof productsandservicesthataremoreexpansivethanthosecurrentlyavailabletoCornerstonecustomers,includingawidervarietyof checkingandsavingsproducts,enhanced smallbusinessaccounts,treasurymanagementservices,creditcards,homemortgageloans, andenhancedinternetandmobilebankingplatforms.Republicalsorepresentsthatno productswouldbediscontinuedasaresultof theproposal.Moreover,Republicassertsthat customersof bothinstitutionswouldbenefitfromamoreexpansivebranchandATM network. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,consultationswiththeFDIC,confidentialsupervisoryinformation,informationprovidedbyRepublic,thepubliccomments ontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneeds of thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof 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’sdeci- 36 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 37 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

256 FederalReserveBulletin|September2016 sion.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.38 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,Republicwouldhaveapproximately$4.3billioninconsolidatedassetsand,byanyof anumberof alternativemeasures of firmsize,Republicwouldnotbelikelytoposesystemicrisks.TheBoardgenerally presumesthataproposalthatinvolvesanacquisitionof lessthan$2billioninassets,or thatresultsinafirmwithlessthan$25billioninconsolidatedassets,willnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransaction wouldresultinasignificantincreaseininterconnectedness,complexity,cross-border activities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthis transaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.39Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyBank HoldingCompanyAct(BHCAct),ordersissuedunderRepublicwithalltheconditions imposedinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthe commitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof St.Louis,actingunder delegatedauthority. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 39 ThecommenterrequestedthattheBoardholdpublichearingsormeetingsontheproposal.Section3(b)ofthe BHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfrom theappropriatesupervisoryauthorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublic hearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwritten commentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenter’srequestin lightofallthefactsofrecord.IntheBoard’sview,thecommenterhashadampleopportunitytosubmit commentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtotheBoard’sdecision andthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywritten commentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublic hearingormeetingontheproposalisdenied.

LegalDevelopments:SecondQuarter,2016 257 Byorderof theBoardof Governors,effectiveMay2,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

258 FederalReserveBulletin|September2016 BNC Bancorp High Point, North Carolina OrderApprovingtheMergerof BankHoldingCompaniesFRBOrderNo. 2016-0(June2,2016) BNCBancorp(“BNC”),HighPoint,NorthCarolina,abankholdingcompany,has requestedtheBoard’sapprovalundersection3of theBankHoldingCompanyActof 1956,asamended(“BHCAct”),1toacquireSouthcoastFinancialCorporation (“Southcoast”),abankholdingcompany,andtherebyindirectlyacquireitssubsidiary state-charteredbank,SouthcoastCommunityBank(“SouthcoastBank”),bothof Mount Pleasant,SouthCarolina.Followingtheproposedacquisition,SouthcoastBankwouldbe mergedintoBNC’sonlysubsidiarystate-charteredbank,Bankof NorthCarolina (“BNCBank”),Thomasville,NorthCarolina.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister63224(October19,2015)).3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. BNC,withconsolidatedassetsof approximately$5.7billion,isthe225thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$4.2billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.4BNCcontrolsBNCBank,which operatesinNorthCarolina,SouthCarolina,andVirginia.BNCisthe17thlargestinsured depositoryorganizationinSouthCarolina,controllingapproximately$542millionin deposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepository institutionsinthatstate.5 Southcoast,withconsolidatedassetsof approximately$503million,isthe1,481stlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $366millionindeposits,whichrepresentlessthan1percentof nationwidedeposits. SouthcoastcontrolsSouthcoastBank,whichoperatesonlyinSouthCarolina.Southcoast isthe25thlargestinsureddepositoryorganizationinSouthCarolina,controlling $366millionindeposits,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. Onconsummationof thisproposal,BNCwouldbecomethe219thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$6.2billion,which representlessthan1percentof thetotalassetsof insureddepositoryinstitutionsinthe UnitedStates.BNCwouldcontroltotaldepositsof approximately$4.5billion,which representlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InSouthCarolina,BNCwouldbecomethe11thlargest depositoryorganization,controllingdepositsof approximately$908million,whichrepre- 1 12U.S.C.§1842. 2 ThemergerofSouthcoastBankintoBNCBankissubjecttotheapprovaloftheFederalDepositInsurance Corporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct(“BankMergerAct”). 12U.S.C.§1828(c).TheFDICapprovedthebankmergeronApril29,2016. 3 12CFR262.3(b). 4 Nationwidedeposit-rankingdataareasofJune30,2015,andassetdataareasofDecember31,2015,unless otherwisenoted.ThedepositsforBNChavebeenadjustedtoaccountforitsacquisitionofValleyFinancial Corporation,whichwasconsummatedonJuly1,2015. 5 StatedepositdataareasofJune30,2015,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations.

LegalDevelopments:SecondQuarter,2016 259 sentapproximately1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. 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’shomestateorinanystateinwhichtheacquirerandtargethaveoverlapping bankingoperations.8 Forpurposesof theBHCAct,BNC’shomestateisNorthCarolina,andSouthcoast’s homestateisSouthCarolina.9BNCiswellcapitalizedandwellmanagedunderapplicable lawandhasasatisfactoryCommunityReinvestmentAct(“CRA”)rating.10SouthCarolina hasafive-yearminimumagerequirement,11andSouthcoastBankhasbeeninexistencefor morethanfiveyears. Onconsummationof theproposedtransaction,BNCwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.Inaddition,thecombinedorganizationwouldcontrollessthan1percentof the totalamountof depositsof insureddepositoryinstitutionsinSouthcoast’shomestateof SouthCarolina,theonlystateinwhichBNCandSouthcoasthaveoverlappingbanking operations.Accordingly,inlightof allthefactsof record,theBoardmayapprovethe proposalundersection3(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.§2901etseq.Therearenostatecommunityreinvestmentlawsapplicabletothiscase. 11 SeeS.C.CodeAnn.§34-25-50(c)(imposingafive-yearagerequirementforinterstateacquisitionsofSouth Carolinabanks).

260 FederalReserveBulletin|September2016 theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.12 BNCandSouthcoasthavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Charleston,SouthCarolinabankingmarket(the“Charlestonbankingmarket”).13The Boardhasconsideredthecompetitiveeffectsof theproposalinthismarketinlightof all thefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthebankingmarket;therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatBNCwouldcontrol;14the concentrationlevelof marketdepositsandtheincreaseinthatlevel,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);15andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheCharlestonbankingmarket.On consummationof theproposal,theCharlestonbankingmarketwouldremainmoderately concentrated,asmeasuredbytheHHI.TheHHIchangewouldbeminimal,andnumerous competitorswouldremaininthemarket.16 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheCharlestonbankingmarketorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. 12 12U.S.C.§1842(c)(1). 13 TheCharlestonbankingmarketincludestheCharlestonRanallyMetroArea(“RMA”);thenon-RMA portionsofthecountiesofCharlestonandBerkeley,SouthCarolina;andthesoutheasternportionofColleton County,SouthCarolina,locatedeastoftheSouthEdistoRiveronEdistoIsland. 14 DepositandmarketsharedataareasofJune30,2015,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(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html. 16 BNCoperatesthe12thlargestdepositoryinstitutionintheCharlestonbankingmarket,controllingapproximately$250millionindeposits,whichrepresentapproximately2.3percentofmarketdeposits.Southcoastoperatesthe8thlargestdepositoryorganizationinthesamemarket,controllingdepositsofapproximately $366million,whichrepresent3.3percentofmarketdeposits.Onconsummationoftheproposedtransaction, BNCwouldbecomethe7thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately $616million,whichrepresentapproximately5.6percentofmarketdeposits.TheHHIfortheCharleston bankingmarketwouldincreaseby15pointsto1224,and32othercompetitorswouldremaininthemarket.

LegalDevelopments:SecondQuarter,2016 261 Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationonthefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformationonthe financialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,assetquality,andearningsperformance,aswellas publiccommentsontheproposal.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalso considerstheabilityof theorganizationtoabsorbthecostsof theproposalandto completefullytheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. BNCandBNCBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisabankholdingcompanymergerthatisstructuredasashareexchange,withasubsequentmergerof thesubsidiarydepositoryinstitutions.17Theassetquality,earnings,andliquidityof BNCBankandSouthcoastBankare consistentwithapproval,andBNCappearstohaveadequateresourcestoabsorbthecosts of theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition, futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BNC,Southcoast,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyBNC;theBoard’ssupervisoryexperienceswithBNC andSouthcoastandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicablebanking,consumer protection,andanti-money-launderinglaws. BNC,Southcoast,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobe wellmanaged.BNC’sexistingrisk-managementprogramanditsdirectorateandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof BNChavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors. TheBoardalsohasconsideredBNC’splansforimplementingtheproposal.BNChas conductedcomprehensiveduediligenceandisdevotingsufficientfinancialandother resourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal. BNCwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,BNC’sandSouthcoast’smanagementshavetheexperienceandresources toensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andBNC planstointegrateSouthcoast’sexistingmanagementandpersonnelinamannerthat augmentsBNC’smanagement. 17 Aspartoftheproposedtransaction,eachshareofSouthcoastcommonstockwouldbeconvertedintoaright toreceiveBNCcommonstockbasedonacertainexchangeratio.

262 FederalReserveBulletin|September2016 Basedonallthefactsof record,includingBNC’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof BNCandSouthcoastincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.18TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,19andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.20 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloan applicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainother characteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe applicantinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’s plansafterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof BNCBank andSouthcoastBank,thefairlendingcompliancerecordsof bothbanks,supervisory viewsof theFDIC,confidentialsupervisoryinformation,informationprovidedbyBNC, andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromacommenterwhoobjectstotheproposal onthebasisof allegeddisparitiesinthenumberof conventionalhomepurchaseloans madetoAfricanAmericansandHispanics,ascomparedtowhites,byBNCBankinthe Charleston-NorthCharleston-Summerville,SouthCarolina(“Charleston”)Metropolitan StatisticalArea(“MSA”),andthenumberof refinanceloansmadetoAfricanAmericans, ascomparedtowhites,byBNCBankintheCharlestonMSA,asreflectedindatareported undertheHomeMortgageDisclosureAct(“HMDA”)21for2014.Thecommenteralso objectedtotheproposalonthebasisof allegeddisparitiesinthenumberof conventional 18 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 19 12U.S.C.§2901(b). 20 12U.S.C.§2903. 21 12U.S.C.§2801etseq.

LegalDevelopments:SecondQuarter,2016 263 homepurchaseloansandrefinanceloansmadetoAfricanAmericans,ascomparedto whites,bySouthcoastBankintheCharlestonMSA,asreflectedinHMDAdatafor2014. WithrespecttotheGreenvilleMauldin-Easley,SouthCarolina(“Greenville”)MSA,the commenterallegedthatthereweredisparitiesinthenumberof conventionalhome purchaseloansandrefinanceloansmadetoAfricanAmericansandHispanics,as comparedtowhites,byBNCBank,asreflectedinHMDAdatareportedfor2013. Businessesof theInvolvedInstitutionsandResponsetoComments BNCBankisastate-chartered,commercialbank,headquarteredinThomasville,North Carolina.Itoffersafullrangeof bankingandfinancialservicesthatincludedeposit accounts;commercial,realestate,andconsumerloanproducts;mortgagebrokerage services;andafulllineof commercialandconsumerinsuranceandinvestmentproducts andservices.Thebank’smainloanfocusissmallandmedium-sizedbusinesses. SouthcoastBankisacommercialbank,headquarteredinMountPleasant,SouthCarolina. Itoffersafullarrayof consumerandcommercialdepositproducts,aswellascommercial, realestate,andconsumerloanproducts.Thebank’sprimaryfocusisresidentiallending followedbycommerciallending. BNCassertsthatBNCBank’slendingrecordtominoritiesintheCharlestonMSA,as reflectedinHMDAdata,isattributabletoitsrecententryintheMSAinmid-2012.BNC furtherassertsthatalthoughthebankdidnotoriginatemanymortgageapplicationsto minoritiesintheCharlestonMSA,thebank’sapprovalratesforminoritieswereveryfavorable.BNCrepresentsthatforconventionalhomepurchaseapplications,minorityapplicantswereapprovedmoreoftenthanwhiteapplicantsandthatsinceitsentryintothe CharlestonMSA,BNCBankhasmadeeffortstoincreaseitslendingtoAfricanAmericans andHispanics,asreflectedinHMDAdatafor2014.BNCexpectsthattheacquisitionof SouthcoastandSouthcoastBankwillsignificantlyexpandBNCBank’sCharlestonbranch networkandprovidethebankwithgreaterabilitytoservethecommunitieswithinthe CharlestonMSA.BNCalsomaintainsthatSouthcoastBank’sapprovalpercentagesfor applicationsreceivedfromminorityapplicantsarecomparabletoorbetterthanits approvalpercentageforwhiteapplicantsintheCharlestonMSA. BNCcontendsthatBNCBank’slendingrecordtominoritiesintheGreenvilleMSA,as reflectedinHMDAdatafor2013,isalsorelatedtothebank’srecententryinthemarketin late2011.BNCassertsthatthebankismakingprogressinprovidinggreaterbanking servicestothoseinthecommunitybyexpandingitsbankingnetworkintheGreenville MSAthroughbranchacquisitionsandemployingadditionalmortgageloanoriginators. BNCfurtherassertsthat,althoughthebankdidnotoriginatemanymortgageapplications forminorities,includingAfricanAmericansandHispanics,intheGreenvilleMSA,its approvalratesforminoritieswereveryfavorable.BNCrepresentsthatin2014,allhome purchaseandrefinanceapplicationsforminorityapplicantswereapproved.BNCfurther representsthatBNCBankiscommittedtocontinuallyimprovingitsperformanceinthe GreenvilleandCharlestonMSAsandtomeetingtheneedsof allmembersof thecommunities.BNCnotesthatthecommenterfiledsimilarcommentswiththeFDIConanapplicationforanunrelatedacquisition,whichwasapprovedontheconditionthatBNCBank developandsubmitasupplementtoitsexistingcomplianceplanthatwouldstrengthenthe bank’sfairlendingcomplianceprogram.BNCassertsthatthesupplementtoBNCBank’s complianceplan,whichhasbeenapprovedbytheFDICandimplementedbythebank, adequatelyaddressestheconcernsraisedbythecommenteronthisproposal.

264 FederalReserveBulletin|September2016 Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.22Inthiscase,theBoardconsideredthe supervisoryviewsof andinformationprovidedbytheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.23Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’slendingperformanceisbasedon(1)thenumberand amountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable) intheinstitution’sassessmentareas;(2)thegeographicdistributionof suchloans, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloansbasedonborrowercharacteristics,includingthe numberandamountof homemortgageloansmadetolow-,moderate-,middle-,and upper-incomeindividuals;24(4)theinstitution’scommunitydevelopmentlending,including thenumberandamountof communitydevelopmentloansandtheircomplexityand innovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.25 22 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 23 12U.S.C.§2906. 24 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloansmadetobusinesses andfarmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamount atorigination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals. See,e.g.,12CFR228.22(b)(3). 25 Otherdatarelevanttocreditdecisionscouldincludecredithistoryproblems,debt-to-incomeratios,andloanto-valueratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditional informationbeforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

LegalDevelopments:SecondQuarter,2016 265 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof BNCBank BNCBankwasassignedanoverall“Satisfactory”ratingbytheFDICatitsmostrecent CRAperformanceevaluation(“BNCBankEvaluation”),asof April28,2014.26BNC Bankreceiveda“HighSatisfactory”ratingforboththeLendingTestandtheServiceTest, anda“LowSatisfactory”ratingfortheInvestmentTest.27TheBoardhasconsultedwith theFDICregardingtheBNCBankEvaluation. Examinersfoundthatthebank’soveralllendingactivityreflectedgoodresponsivenessto theassessmentareas’creditneeds.Examinersnotedthatthebankoriginatedasignificant majorityof homemortgageloansandsmallbusinessloanswithinitscombinedassessment areasandthatthegeographicdistributionof theloansreflectedgoodpenetration throughouttheassessmentareas.Examinersalsonotedthatthebankoriginatedarelatively highlevelof communitydevelopmentloansinitsassessmentareasandmadegooduseof flexiblelendingpracticesinordertoservetheassessmentareas’creditneeds.BNCBankis qualifiedasaU.S.SmallBusinessAdministration(“SBA”)lender,andexaminershighlightedthatthebankwasoneof themostactiveSBAlendersinNorthCarolinaoverthe evaluationperiodandthatitrankedamongthetoptenof alllenders,withthebanks rankedaheadof BNCBankhavinglargerassetsizesandnationalorregionalpresences. ThebankalsoofferedflexiblemortgageloanproductsthroughtheFederalHousing Administration,theSBA,theU.S.Departmentof VeteransAffairs,theU.S.Departmentof Agriculture,andtheNorthCarolinaHousingFinanceAgency. ExaminersfoundthatBNCBankhadanadequatelevelof qualifiedcommunitydevelopmentinvestmentsandgrantsandthatitexhibitedadequateresponsivenesstothecredit needsof theassessmentareas.Examinersnotedthatthebank’slevelof qualifiedequity investmentsandcharitabledonationshadsignificantlyimprovedfromthelastexamination. Examinershighlightedthatnearlyallof thebank’squalifiedCRAgrantsanddonations weremadedirectlytocommunitydevelopment-relatedorganizationslocatedwithinthe bank’sassessmentareas.Theremainderof thebank’sCRAgrantsanddonationswere madetoqualifiedindividualsandcommunitydevelopment-relatedorganizationsinthe broaderregionalareathatincludedthebank’sassessmentareas.Examinersnotedthatthe grantsanddonationsprovidedmuchneededfinancialassistancetoorganizationswiththe primarypurposeof economicdevelopment,communityrevitalization,affordable housing,financialeducation,scholarshipsforlow-andmoderate-incomestudents,and basichumanservicestolow-andmoderate-incomeindividuals. 26 TheBNCBankEvaluationwasconductedusingtheCRALargeBankExaminationProceduresandcovered thetimeperiodfromJune27,2011,toApril28,2014.FortheLendingTest,theevaluationincludedareviewof loansreportableunderHMDAandCRAdatacollectionrequirementsfor2012and2013,focusingonhome purchaseandhomerefinanceloansonly.FortheInvestmentandServiceTests,theevaluationalsocoveredthe periodfromJune27,2011,toApril28,2014.TheInvestmentTestalsoincludedinvestmentspriortoJune27, 2011,thatwerestilloutstandingasofApril28,2014. 27 DuringtheBNCBankEvaluation,examinersreviewedeightassessmentareasofthebankinNorthCarolina andfourassessmentareasofthebankinSouthCarolina.Examinersplacedgreaterweightonthebank’s performanceinNorthCarolinainassigningtheoverallCRArating,because35ofthebank’s45brancheswere locatedinNorthCarolina,andover86percentofthebank’slendingoccurredwithinthestate.Threeofthe bank’seightassessmentareasinNorthCarolinareceivedfull-scopereviews.Examinersassignedthemost weighttotheCharlotte-Gastonia-RockHillMSAassessmentareainNorthCarolinaandtotheMyrtleBeach- NorthMyrtleBeach-ConwayMSAassessmentareainSouthCarolina,basedonthesignificantvolumeof lending,deposits,andnumberofbranchesinthoseareas,toarriveattheindividualstateratings.Examiners alsoconsideredthetimingofBNCBank’sentryintotheCharlestonMSAinJune2012,theBurlington,NC MSAin2013,andtheDurham-ChapelHill,NCMSAinSeptember2012,alongwithotherextenuatingfactors inperforminglimited-scopereviewsoftheseassessmentareas.

266 FederalReserveBulletin|September2016 Examinersnotedthatthebank’soverall“HighSatisfactory”ratingundertheServiceTest wasbasedprimarilyonthecommunitydevelopmentservices,butexaminersalsoconsideredthebank’sretailaccountservices.ExaminershighlightedthatBNCBank’smanagement,directorate,andotherpersonnelprovidedarelativelyhighlevelof communitydevelopmentservicesinthebank’sassessmentareas.Examinersalsonotedthatthebankoffered afullarrayof financialservicesthroughoutitsassessmentareastoensurethattheneedsof thecommunitiesweremetthroughseveraldeliverymethodsandthatthebank’sdelivery systemswerereasonablyaccessibletoessentiallyallportionsof theinstitution’sassessment areas.Inaddition,examinersnotedthatthequantity,quality,andaccessibilityof servicedeliverysystemstoallsegmentsof itsassessmentareassupporteda“HighSatisfactory” rating. BNCBank’sEffortsSincetheBNCBankEvaluation BNCassertsthat,sincetheBNCBankEvaluation,BNCBankhasinitiatedanumberof effortstoenhanceitssupportof allthecommunitiesinwhichthebankoperates.For example,BNCrepresentsthatBNCBankhascreatedanewdepositaccounttargetedto individualsworkingtoestablishorreestablishabankingrelationshipwiththeinstitution. BNCbelievesthatthisproductwillbeparticularlybeneficialorattractivetoyoungerindividualsandtotheunbankedorunderbankedpopulationinthecommunitiesthebank serves. BNCrepresentsthatBNCBankisdevelopinginitiativesandprogramsfocusedonlending, investment,andserviceactivitiesinitscommunities,withemphasisondeveloping programsforlower-tomoderate-incomeresidents.BNCfurtherrepresentsthatthebank hasformedaFairBankingTeamresponsibleforcompliancewithfairlending,CRA, HMDA,andUnfair,Deceptive,AbusiveActsandPracticeslaws.Additionally,thebank hasformedaCRACommittee,whichconsistsof anumberof seniorofficersof thebank, includingthedirectorof mortgagebanking,chief creditofficer,andthebank’sCRA officer.BNCalsorepresentsthatthebankhascreatedanewdirectorpositionthatwillbe directlyresponsibleforhelpingtoincreaseinteractionwiththecommunitiesthebank serves. CRAPerformanceof SouthcoastBank SouthcoastBankwasassignedanoverall“Satisfactory”ratingbytheFDICatitsmost recentCRAperformanceevaluation(“SouthcoastBankEvaluation”),asof January3, 2014.28SouthcoastBankreceiveda“Satisfactory”ratingforboththeLendingTest29and theCommunityDevelopmentTest. ExaminersnotedthatSouthcoastBank’saveragenetloan-to-depositratioreflectedan excellentresponsivenesstoareacreditneeds,consideringtheinstitution’ssize,financial 28 TheSouthcoastBankEvaluationwasconductedbytheFDICusingtheIntermediateSmallBankCRAExaminationProcedures,whichincludetheLendingandCommunityDevelopmentTests.UndertheLendingTest, examinersevaluatedthebank’shomemortgageloansfrom2011throughSeptember30,2013,anditssmall businessloansbetweenOctober25,2012,andOctober24,2013.AspartoftheCommunityDevelopmentTest, qualifiedcommunitydevelopmentloans,investments,andservicesthatwereoriginated,invested,orparticipatedin,respectively,fromSeptember8,2010,toJanuary3,2014,werereviewed.Examinersreviewedallofthe CharlestonMSA. 29 TheLendingTestapplicabletointermediatesmallbanksspecificallyevaluatestheinstitution’sloan-to-deposit ratioandotherlending-relatedactivities,suchasloanoriginationsforsaletothesecondarymarkets,communitydevelopmentloans,orqualifiedinvestments;thepercentageofloansandotherlending-relatedactivities locatedinthebank’sassessmentareas;thebank’srecordoflendingtoandengaginginotherlending-related activitiesforborrowersofdifferentincomelevelsandforbusinessesandfarmsofdifferentsizes;thegeographic distributionofthebank’sloans;andthebank’srecordoftakingactioninresponsetowrittencomplaints aboutitsperformanceinhelpingtomeetcreditneedsinitsassessmentareas.See,e.g.,12CFR228.26(b).

LegalDevelopments:SecondQuarter,2016 267 condition,andassessmentareacreditneeds.Examinersfoundthatthebank’slendinglevels reflectedthatasubstantialmajorityof itsloans,intermsof numberanddollaramount, wereoriginatedinsidetheassessmentarea.Examinersalsofoundthatthebank’s geographicdistributionof borrowersreflectedanexcellentdispersionforhomemortgage loansandareasonablepenetrationforsmallbusinesses,giventhedemographicsof the assessmentarea. ExaminersnotedthatSouthcoastBankdemonstratedanadequateresponsivenesstothe communitydevelopmentneedsof thebank’sassessmentareathroughcommunitydevelopmentloans,investments,andservices. Viewsof FDIC TheBoardhasconsultedwiththeFDIC,theprimarysupervisorof bothBNCBankand SouthcoastBank,inconnectionwiththeFDIC’sreviewof thebankmergerunderlying thisproposal.AlthoughtheFDICdidnotdirectlyreceiveanycommentsonthebank mergerapplication,itwasprovidedwiththecommentsreceivedbytheBoardthatopposed thetransactiononthebasisof thelendingrecordsof SouthcoastBankandBNCBankin theCharlestonandGreenvilleMSAs.TheFDICconsideredthecommentsinconnection withitsreviewof thebankmergerapplication. Initsreview,theFDICconsideredbothinstitutions’recordsof compliancewithrespectto consumerprotectionlawsandregulations;theinstitutions’performanceundertheCRA; thelendingrecordsof bothinstitutionsintheCharlestonMSA;HMDAdatafortheinstitutions;andthelendingrecordof BNCBankbothintheGreenvilleMSAandonan enterprise-widebasis. TheFDICindicatedthatBNCBankcurrentlyoperatesunderacomplianceplanthathas beenapprovedbyBNCBank’sboardof directorsandincludesprovisionsformanagingits fairlendingrisk,andanFDIC-approvedsupplementtotheplanthatincludesprovisions thatensurethatthebankwillcontinueitseffortstoimplementstrategiestofurther strengthenitsfairlendingcomplianceprogram.TheFDICalsoindicatedthatthesupplementtothecomplianceplanincludesspecificprovisionspertainingtothebank’s enterprise-widebranchingstrategiesandmarketingplansthatconsideravailableaggregate data,demographics,andsafeandsoundlendingconsiderations.TheFDIC-approved supplementrequiresperiodicreviewsof thebank’slendingdistributionsandmarketing effortsinordertomeasureandassessthebank’sprogressunderthecomplianceplan. AccordingtotheFDIC,thesupplementtothecomplianceplanrequiresthebankto providequarterlywrittenreportstothebank’sboardof directorsandtheFDIC. Afterafullreviewof theproposalforBNCBanktomergewithSouthcoastBank,the FDICdeterminedthattheproposalmetthestandardsof theBankMergerActand approvedtheproposalapplyingthesamestandardsasmustbereviewedbytheBoard undertheBHCAct.Inaddition,theFDIChasindicatedno-objectiontotheproposal beforetheBoard.TheBoardexpectsBNCtoensurethatBNCBankcomplieswithits complianceplanandthesupplementapprovedbytheFDIC. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof aproposalontheconvenienceand needsof thecommunitiestobeserved.BNCrepresentsthattheproposalwouldprovide customersof thecombinedorganizationwithaccesstoadditionalorexpandedservices, duetoanexpandednetworkof branchlocationsintheCharlestonMSA.Inaddition, BNCexpectsthatthemergerwouldenableittocompetemoreeffectivelywithotherfinan-

268 FederalReserveBulletin|September2016 cialinstitutionsinitsmarketareasandtoimproveitsabilitytomeettheneedsof its customersandthecommunitiesinitsmarketareas.BNCalsorepresentsthatnosignificant reductionsinproductsorserviceswouldbeexpectedasaresultof theproposal.Moreover,BNChasalsoindicatedthatBNCBankstaff iscurrentlydevelopinginitiativesand programsfocusedonlending,investment,andserviceactivitiesinitscommunities,withan emphasisondevelopingprogramsforLMIindividualsandcommunities,andthatthese programswouldbebeneficialtoBNCBankcustomersandformerSouthcoastBank customersuponconsummationof theproposal. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,consultationswiththeFDIC,confidentialsupervisoryinformation,informationprovidedbyBNC,thepubliccommentson theproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedrisktothestabilityof 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, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.32 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,BNCwouldhaveapproximately $6.2billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,BNCwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthata mergerthatinvolvesanacquisitionof lessthan$2billioninassets,orthatresultsinafirm withlessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothe 30 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,123Stat.1376,1601(2010),codifiedat12U.S.C. §1842(c)(7). 31 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 32 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

LegalDevelopments:SecondQuarter,2016 269 financialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultin asignificantincreaseininterconnectedness,complexity,cross-borderactivities,orother riskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.33Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebyBNCwithall theconditionsimposedinthisOrder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Richmond,actingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveJune2,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard 33 ThecommenterrequestedthattheBoardholdapublichearingontheproposal.Section3(b)oftheBHCAct doesnotrequirethattheBoardholdapublichearingonanapplicationunlesstheappropriatesupervisory authoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialoftheapplication. 12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisory authorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallow interestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequately representtheirviews.TheBoardhasconsideredtherequestinlightofallthefactsofrecord.IntheBoard’s view,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitted writtencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentsdonotpresentthe commenter’sviewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

270 FederalReserveBulletin|September2016 Ohio Valley Banc Corp. Gallipolis, Ohio OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2016-10(June28,2016) OhioValleyBancCorp.(“OVBC”),Gallipolis,Ohio,afinancialholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2tomergewithMiltonBancorp,Inc. (“MiltonBancorp”),andtherebyindirectlyacquireitssubsidiarybank,TheMilton BankingCompany(“MiltonBank”),bothof Wellston,Ohio. Inaddition,OVBC’ssubsidiarystatememberbank,TheOhioValleyBankCompany (“OhioValleyBank”),alsoof Gallipolis,hasrequestedtheBoard’sapprovaltomergewith MiltonBankpursuanttosection18(c)of theFederalDepositInsuranceAct(“Bank MergerAct”),withOhioValleyBankasthesurvivingentity.3OhioValleyBankalsohas appliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperate branchesatthemainofficeandbranchesof MiltonBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister26,231(2016)).5Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct,theBankMergerAct,andtheFRA. AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwas requestedfromtheUnitedStatesAttorneyGeneral. OVBC,withtotalconsolidatedassetsof approximately$795.6million,isthe910thlargest depositoryorganizationintheUnitedStates,controllingdepositsof approximately $663.3million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.6OVBCcontrolsOhioValleyBank, whichoperatesinOhioandWestVirginia.OhioValleyBankisthe38thlargestinsured depositoryorganizationinOhio,controllingdepositsof approximately$533.4million, whichrepresentlessthan1percentof thetotaldepositsininsureddepositoryinstitutions inthatstate.7 MiltonBancorp,withconsolidatedassetsof approximately$142.5million,isthe3,768th largestdepositoryorganizationintheUnitedStates.MiltonBancorpcontrolsMilton Bank,anonmemberbankthatoperatesonlyinOhio.MiltonBankisthe112thlargest insureddepositoryorganizationinOhio,controllingapproximately$120.6millionin deposits,whichrepresentlessthan1percentof thetotaldepositsheldbyinsureddepositoryinstitutionsinOhio. Onconsummationof thisproposal,OVBCwouldbecomethe760thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedinAppendixA. 5 12CFR262.3(b). 6 Nationwidedeposit,asset,andrankingdataareasofDecember31,2015.Inthiscontext,insureddepository institutionsincludecommercialbanks,savingsbanks,savingsassociations,andnon-deposittrustcompanies. 7 Statedeposit,marketshare,andrankingdataareasofJune30,2015.

LegalDevelopments:SecondQuarter,2016 271 $938.1million,whichrepresentlessthan1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.OVBCwouldcontroldepositsof approximately $789.4million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InOhio,OVBCwouldbecomethe 32ndlargestdepositoryinstitution,controllingdepositsof approximately$654.0million, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anyattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.8 OVBCandMiltonBancorphavesubsidiarydepositoryinstitutionsthatcompetedirectlyin theJackson,Ohio,bankingmarket(the“Jacksonmarket”).9TheBoardhasreviewedthe competitiveeffectsof theproposalinthisbankingmarketinlightof allthefactsof record. Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremainin thebankingmarket;therelativeshareof thetotaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatOVBCwouldcontrol;10theconcentrationlevel of marketdepositsandtheincreaseinthatlevelasmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”);11andothercharacteristicsof the market. Usingtheinitialcompetitivescreeningdata,intheJacksonmarket,OVBCisthesixth largestdepositoryorganization,controllingdepositsof approximately$44.3million,which representapproximately7.4percentof marketdeposits.MiltonBancorpisthethird largestdepositoryorganizationinthemarket,controllingdepositsof approximately $92.7million,whichrepresentapproximately15.4percentof marketdeposits.Onconsummationof theproposal,thecombinedentitywouldbethethirdlargestdepositoryorganizationintheJacksonmarket,controllingdepositsof approximately$137.1million,which wouldrepresentapproximately22.8percentof marketdeposits.TheHHIinthemarket wouldincreaseby227points,from2094to2321. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton 8 12U.S.C.§§1842(c)(1)and1828(c)(5). 9 TheJacksonmarketisdefinedasJacksonandVintoncountiesinOhio. 10 DepositandmarketsharedataareasofJune30,2015,andarebasedondatareportedbyinsureddepository institutionsintheFederalDepositInsuranceCorporation’sSummaryofDepositsdata. 11 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August/ 10-at-938.html.

272 FederalReserveBulletin|September2016 competitionintheJacksonmarket.12Factorsindicatethattheincreaseinconcentrationin theJacksonmarket,asmeasuredbytheaboveHHIandmarketshare,overstatesthepotentialcompetitiveeffectsof theproposalinthemarket.Inparticular,acommunitycredit unionexertsacompetitiveinfluenceintheJacksonmarket.Theinstitutionoffersawide rangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroad membershipcriteriathatincludealmostallof theresidentsintherelevantbanking market.13TheBoardfindsthatthesecircumstanceswarrantincludingthedepositsof this creditunionata50-percentweightinestimatingmarketinfluence.Thisweightingtakes intoaccountthelimitedlendingdonebythiscredituniontosmallbusinessesrelativeto commercialbanks’lendinglevels. Thisadjustmentsuggeststhattheresultingmarketconcentrationof theproposedtransactionintheJacksonmarketislesssignificantthanwouldappearfromtheinitialcompetitive screeningdata,whichfocusedoncommercialbankcompetitors.Inparticular,adjustingto reflectcompetitionbythecreditunion,themarketconcentrationlevelintheJackson marketasmeasuredbytheHHIwouldincreaseby207,fromalevelof 1932to2139,and themarketshareof OVBCresultingfromthetransactionwouldbe21.8percent.After consummationof theproposal,sixdepositoryinstitutionswouldremainintheJackson market,includingtwodepositoryinstitutionswithhighermarketsharethanOVBC.One depositoryinstitutionwouldcontrol29.7percentof deposits,whileanotherwouldcontrol over24percentof marketdeposits.Theproposedtransactionwouldcreateacompetitor that,whilestillsmallerthanthetwolargestcompetitorsinthemarket,isbettersituatedto competeinthemarketwiththeselargercompetitors.14 TheDOJhasalsoanalyzedtheeffectof thetransactiononcompetitionintherelevant marketsandhasadvisedtheBoardthatconsummationof theproposalwouldnotlikely haveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentand havenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheJacksonmarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBankMergerAct,andtheFRA,the Boardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof the institutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformation regardingthefinancialconditionof theorganizationsinvolvedonbothparent-onlyand consolidatedbases,aswellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In 12 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsbankCorp.,84 FederalReserveBulletin129(1998). 13 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.See,e.g.,ChemicalFinancialCorporation,FRBOrderNo.2015-13(April20,2015); MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14,2012);OldNationalBancorp, FRBOrderNo.2012-9(August30,2012);UnitedBankshares,Inc.(orderdatedJune20,2011),97Federal ReserveBulletin19(2ndQuar.2011);ThePNCFinancialServicesGroup,Inc.,94FederalReserveBulletinC38 (2008);ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);PassumpsicBancorp,92 FederalReserveBulletinC175(2006);andWachoviaCorporation,92FederalReserveBulletinC183(2006). 14 See,e.g.,FarmersBankofNorthernMissouri,FRBOrderNo.2015-32(November13,2015).

LegalDevelopments:SecondQuarter,2016 273 thisevaluation,theBoardconsidersavarietyof publicandsupervisoryinformation regardingcapitaladequacy,assetquality,andearningsperformance.TheBoardevaluates thefinancialconditionof thecombinedorganization,includingitscapitalposition,asset quality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsistentlyconsiderscapitaladequacyto beespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizations involvedintheproposalinlightof theirfinancialandmanagerialresourcesandthe proposedbusinessplan. OVBCandOhioValleyBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposedtransaction.Theproposedtransactionisabankholdingcompany mergerthatisstructuredasacashandshareexchange,withasubsequentmergerof the subsidiarydepositoryinstitutions.15Theassetquality,earnings,andliquidityof OVBCand MiltonBancorpareconsistentwithapproval,andOVBCappearstohaveadequate resourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of OVBC,MiltonBancorp,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyOVBC;theBoard’ssupervisoryexperiences andthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andantimoney-launderinglaws. OVBCandOhioValleyBankareeachconsideredtobewellmanaged.OVBC’sexisting risk-managementprogramanditsdirectorateandseniormanagementareconsideredtobe satisfactory.Thedirectorsandseniorexecutiveofficersof OVBChavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredOVBC’splansforimplementingtheproposal.OVBChas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.OVBC wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredtobeacceptablefromasupervisoryperspective.In addition,OVBC’smanagementhastheexperienceandresourcestoensurethatthe combinedorganizationoperatesinasafeandsoundmanner,andOVBCplanstointegrate MiltonBancorp’sexistingmanagementandpersonnelinamannerthataugments OVBC’smanagement.16 Basedonallthefactsof record,includingOVBC’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsumma- 15 Toeffecttheholdingcompanymerger,20percentofMiltonBancorp’scommonstockandallofMilton Bancorp’spreferredshareswillbeconvertedintoarighttoreceivecash.TheremainingportionofMilton Bancorp’scommonstockwillbeconvertedintoarighttoreceiveOVBCcommonstock.OVBCexpectstofund thecashportionoftheexchangeinpartthroughfinancingfromathird-partylender.OVBChasthefinancial resourcestosupportthisobligation. 16 Onconsummation,adirectorandofficerofMiltonBancorpandMiltonBankwillberetainedasPresidentof theMiltonBankDivisionofOhioValleyBank;andtheVicePresident,ChiefFinancialOfficer,andSecretaryofMiltonBankwillbecometheChiefOperatingOfficeroftheMiltonBankDivision,SeniorVicePresidentofOhioValleyBank,andVicePresidentofOVBC,respectively.

274 FederalReserveBulletin|September2016 tion,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof OVBCandMiltonBancorpincombattingmoney-laundering activitiesandcomplyingwiththeBankSecrecyAct,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.17Initsevaluationof theeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,18andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods.19 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheapplicant institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans followingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Ohio ValleyBankandMiltonBank;thefairlendingandcompliancerecordsof bothbanks;the supervisoryviewsof theFederalDepositInsuranceCorporation(“FDIC”);confidential supervisoryinformation;andinformationprovidedbyOVBC. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardevaluatesaninstitution’sperformanceinlightof examinationsandother supervisoryinformationandinformationandviewsprovidedbytheappropriatefederal supervisors.20 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.21Aninstitution’smostrecentCRA 17 12U.S.C.§1842(c)(2). 18 12U.S.C.§2901(b). 19 12U.S.C.§2903. 20 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11,642, 11,665(2010). 21 12U.S.C.§2906.

LegalDevelopments:SecondQuarter,2016 275 performanceevaluationisaparticularlyimportantconsiderationintheapplications processbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimary federalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailableHomeMortgageDisclosureAct(“HMDA”)data,automatedloan reports,andotherreportsgeneratedbytheinstitutiontoassesstheinstitution’slending activitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedontheinstitution’sloan-to-depositratio,loanoriginationsforsaletothesecondarymarket,lending-relatedactivitiesinitsassessmentareas, recordof engaginginlending-relatedactivitiesforborrowersof differentincomelevelsand businessesandfarmsof differentsizes,geographicdistributionof loans,andrecordof takingactioninresponsetowrittencomplaintsaboutitsperformance.Inadditiontothe lendingtest,intermediatesmallinstitutionssuchasOhioValleyBankarealsosubjecttoa communitydevelopmenttestthatevaluatesthenumberandamountof theinstitution’s communitydevelopmentloansandqualifiedinvestments,theextenttowhichtheinstitutionprovidescommunitydevelopmentservices,andtheinstitution’sresponsiveness throughsuchactivitiestocommunitydevelopmentlending,investment,andservice needs.22 CRAPerformanceof OhioValleyBank OhioValleyBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceexaminationbytheFederalReserveBankof Cleveland,asof April28,2014 (“OhioValleyBankEvaluation”).23OhioValleyBankreceived“Satisfactory”ratingsfor boththelendingtestandthecommunitydevelopmenttest.24 Examinersdeterminedthatthebank’sloan-to-depositratiowasreasonablegiventhe bank’ssize,financialcondition,andassessmentareacreditneeds.Examinersnotedthat, giventhenumberanddollaramountsof HMDA,consumer,andsmallbusinessloans originated,aswellasthebank’sstrategicobjectives,economicconditions,andcompetitive factors,OhioValleyBankdemonstratedagoodresponsivenesstolocalcreditneeds.In addition,examinersnotedthatamajorityof OhioValleyBank’sloansandotherlendingrelatedactivitieswereinitsassessmentareas.ExaminersalsofoundthatOhioValleyBank’s geographicdistributionof loansreflectedareasonabledispersionthroughouttheassessmentareasandareasonablepenetrationamongindividualsof differentincomelevels (includingLMIindividuals)andbusinessesof differentrevenuesizes. Examinersfoundthatthebank’scommunitydevelopmentperformancedemonstrateda reasonablelevelof responsivenesstothecommunitydevelopmentneedsof itsassessment areas,andthebankhadarelativelyhighlevelof communitydevelopmentloans.Examiners notedthatthebank’sretaildeliverysystemswerereasonablyaccessibletoallgeographies, includingLMIgeographies,individualsof differentincomelevels,andbusinessesof 22 See12CFR228.26. 23 TheOhioValleyBankEvaluationwasconductedusingIntermediateSmall-BankCRAExaminationProcedures,consistingofthelendingandcommunitydevelopmenttestsdescribedabove.TheOhioValleyBank EvaluationreviewedlendingdatafromJanuary1,2012,toDecember31,2013,andcommunitydevelopment activitiesfromSeptember13,2010,toApril28,2014. 24 TheOhioValleyBankEvaluationincludedfull-scopereviewsofthebank’sactivitiesinnonmetropolitanOhio, nonmetropolitanWestVirginia,andtheHuntington-Ashlandmetropolitanstatisticalarea(“MSA”).

276 FederalReserveBulletin|September2016 differentrevenuesizes.Examinersalsonotedthatthebankprovidedahighlevelof communitydevelopmentservices. OhioValleyBank’sEffortsSincetheOhioValleyBankEvaluation OVBCrepresentsthat,sincetheOhioValleyBankEvaluation,OhioValleyBankhasmade anumberof communitydevelopmentloans,investments,anddonationstosupportLMI individualsandsmallbusinesseswithinitsassessmentareas.OVBCrepresentsthatthe bankhasalsoengagedinvariouscommunityserviceandtechnicalassistanceopportunities withorganizationsthatsupportLMIindividuals,communitydevelopment,andsmall businesses,andhasbeenactivelyinvolvedinseveralprogramsfocusedonincreasingthe financialliteracyandeducationof individualswithinitsassessmentareas.Inaddition, OVBCrepresentsthatsincetheOhioValleyBankEvaluation,thebankhasinstituteda CRACommitteetoassistitsCRAOfficerinensuringthatthebankcontinuestomeetits responsibilitiesundertheCRAinlightof thebank’splannedfuturegrowth. CRAPerformanceof MiltonBank MiltonBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFDIC,asof November26,2012(“MiltonBankEvaluation”).25 Examinersfoundthatthebank’saverageloan-to-depositratiowasreasonablegivenitssize, financialcondition,andassessmentareacreditneeds.Examinersnotedthatamajorityof theinstitution’sresidentialmortgageloansandsmallbusinessloanswereinitsassessment areas,anditsdistributionof borrowersreflectedreasonablepenetrationamongindividuals of differentincomelevels(includingLMIindividuals)andbusinessesof differentsizes. Examinersalsofoundthatthegeographicdistributionof thebank’sloansreflectedreasonabledispersionthroughoutitsassessmentareas. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.OVBCrepresentsthatcustomersof MiltonBank willbenefitbygainingaccesstothefullrangeof productsandservicescurrentlyofferedby OhioValleyBank.Forexample,customersof MiltonBankwillgainaccesstonewdeposit productsandservices,suchasbusinessdebitcards,healthsavingsaccounts,andvacation savingsaccounts.Customersof MiltonBankwillalsogainaccesstonewloanproducts, includinghomeequitylinesof credit,anequipmentleasingandloanprogram,andprofessionalandphysicianloanprograms.OVBCalsorepresentsthatcustomersof MiltonBank willbenefitfromexpandedbankinghoursandawidervarietyof internet-basedbanking services.ThecombinedinstitutionwillalsoofferexpandedATMandbranchnetworksto customersof bothbanks. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyOVBC,andotherpotentialeffectsof theproposalonthe 25 TheMiltonBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures,consistingof thelendingtestdescribedabove.TheMiltonBankEvaluationreviewedallloansreportedonthebank’s HMDAloanapplicationregistersandasampleofsmallbusinesslendingduring2010and2011.TheMilton BankEvaluationincludedreviewsofthebank’sactivitiesinallofthenon-MSAcountiesofJackson,Vinton, andFayetteinOhioandallofMadisonandPickawaycountiesintheColumbus,Ohio,MSA.

LegalDevelopments:SecondQuarter,2016 277 convenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBHCActandtheBankMergerActtorequiretheBoardtoconsider“the extenttowhichaproposedacquisition,merger,orconsolidationwouldresultingreateror moreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancial system.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.28 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,OVBCwouldhaveapproximately $938.1millioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize,wouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthata proposalthatinvolvesanacquisitionof lessthan$2billioninassets,orresultsinafirm withlessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothe financialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultin asignificantincreaseininterconnectedness,complexity,cross-borderactivities,orother riskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches OhioValleyBankhasappliedundersection9of theFRAtoestablishandoperate branchesatthecurrentlocationsof MiltonBank,andtheBoardhasconsideredthefactors itisrequiredtoconsiderwhenreviewinganapplicationunderthatsection.29Specifically, 26 Dodd-FrankAct§§604(d)and(f),Pub.L.No.111-203,124Stat.1376,1601,1602(2010),codifiedat12U.S.C. §§1828(c)(5)and1842(c)(7). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 29 12U.S.C.§322;12CFR208.6.

278 FederalReserveBulletin|September2016 theBoardhasconsideredOhioValleyBank’sfinancialcondition,management,capital, actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRA performance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,the Boardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.TheBoard’s approvalisspecificallyconditionedoncompliancebyOVBCandOhioValleyBankwithall theconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals, andonthecommitmentsmadetotheBoardinconnectionwiththeapplications.For purposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,as such,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoard,orbytheFederalReserveBankof Clevelandactingpursuant todelegatedauthority. Byorderof theBoardof Governors,effectiveJune28,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard AppendixA BranchestoBeAcquiredbyTheOhioValleyBankCompany 1. 400EastMainStreet,Jackson,Ohio45640 2. 116JacksonStreet,OakHill,Ohio45656 3. 25NorthMainStreet,NewHolland,Ohio43145 4. 123SouthOhioAvenue,Wellston,Ohio45692 5. 255YankeetownStreet,MountSterling,Ohio43143

LegalDevelopments:SecondQuarter,2016 279 Bank of the Ozarks, Inc. Little Rock, Arkansas OrderApprovingtheMergerof BankHoldingCompaniesandElectionof FinancialHolding CompanyStatus FRBOrderNo.2016-11(June28,2016) Bankof theOzarks,Inc.(“Ozarks”),LittleRock,Arkansas,abankholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2tomergewithCommunity&SouthernHoldings,Inc.(“C&SHoldco”),andtherebyindirectlyacquireitssubsidiarybank,Community&SouthernBank(“C&SBank”),bothof Atlanta,Georgia. Followingtheproposedmerger,C&SBankwouldbemergedintoOzarks’subsidiarybank, Bankof theOzarks(“BOTO”),alsoof LittleRock.3OzarksalsohasfiledwiththeBoard anelectiontobecomeafinancialholdingcompanypursuanttosections4(k)and(l)of the BHCActandsection225.82of theBoard’sRegulationY.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister74105(November27,2015)).5Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. Ozarks,withconsolidatedassetsof approximately$9.9billion,isthe152ndlargestinsured depositoryorganizationintheUnitedStates.Ozarkscontrolsapproximately$8.0billion inconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.6OzarkscontrolsBOTO, whichoperatesinAlabama,Arkansas,Florida,Georgia,NorthCarolina,NewYork, SouthCarolina,andTexas.BOTOisthe28thlargestdepositoryorganizationinGeorgia, controllingdepositsof approximately$689million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.7BOTOisthe58thlargest depositoryinstitutioninFlorida,controllingdepositsof approximately$747million,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. C&SHoldco,withconsolidatedassetsof approximately$4.2billion,isthe265thlargest insureddepositoryorganizationintheUnitedStates.C&SHoldcocontrolsapproximately $3.7billionindeposits.C&SHoldcocontrolsC&SBank,whichoperatesinGeorgiaand Florida.C&SBankisthe8thlargestinsureddepositoryinstitutioninGeorgia,controlling depositsof approximately$3.1billion,whichrepresentapproximately1.4percentof the totaldepositsof insureddepositoryinstitutionsinthatstate.C&SBankisthe234thlargest depositoryinstitutioninFlorida,controllingdepositsof approximately$10.5million, 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 OnMay12,2016,theFederalDepositInsuranceCorporation(“FDIC”)approvedthemergerofC&SBank intoBOTO,pursuanttosection18(c)oftheFederalDepositInsuranceAct. 4 12U.S.C.§§1843(k)and(l);12CFR225.82. 5 12CFR262.3(b). 6 AssetanddepositdataareasofJune30,2015,unlessotherwisenoted. 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsandloanassociations,and savingsbanks.

280 FederalReserveBulletin|September2016 whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate.8 Onconsummationof thisproposal,Ozarkswouldbecomethe121stlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$14.1billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Ozarkswouldcontrolconsolidateddepositsof approximately $11.7billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.Ozarkswouldbecomethe8thlargestdepositoryorganizationinGeorgia,controllingdepositsof approximately$3.8billion,which represent1.8percentof thetotalamountof depositsof insureddepositoryinstitutionsin thatstate.Ozarkswouldbecomethe57thlargestdepositoryorganizationinFlorida, controllingdepositsof approximately$757million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.9Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.10Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,if thebankholdingcompanywoulduponconsummationcontrol30percentor moreof thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestate orinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.11 Forpurposesof theBHCAct,thehomestateof OzarksisArkansas,andC&SBank’s homestateisGeorgia.12C&SBankalsoislocatedinFlorida.Ozarksiswellcapitalizedand wellmanagedunderapplicablelaw,andBOTOhasasatisfactoryCommunityReinvestmentAct(“CRA”)13rating.Georgiahasathree-yearminimumagerequirement,14and C&SBankhasbeeninexistenceformorethanthree-years.Floridahasnominimumage requirementthatappliestoOzarks’acquisitionof C&SHoldcoandC&SBank. 8 TheamountofC&SBank’sdepositsinFloridaisbasedondepositsheldattheJacksonville,Floridabranchof CertusBank,N.A.,asofJune30,2015.C&SBankenteredtheFloridamarketinOctober2015throughits acquisitionofthisbranchfromCertusBank,N.A. 9 12U.S.C.§1842(d)(1)(A). 10 12U.S.C.§1842(d)(1)(B). 11 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). 12 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 13 12U.S.C.§2901etseq. 14 SeeGa.CodeAnn.§7-1-622(b).

LegalDevelopments:SecondQuarter,2016 281 Onconsummationof theproposedtransaction,Ozarkswouldcontrollessthan1percent of thetotalamountof consolidateddepositsininsureddepositoryinstitutionsinthe UnitedStates.Inaddition,thecombinedorganizationwouldcontrol1.8percentof the totalamountof depositsof insureddepositoryinstitutionsinGeorgiaandlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsinFlorida,the onlystatesinwhichOzarksandC&SHoldcohaveoverlappingbankingoperations. Accordingly,inlightof allthefactsof record,theBoardmayapprovetheproposalunder section3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.15 OzarksandC&SHoldcohavesubsidiarydepositoryinstitutionsthatcompetedirectlyin theAthensArea,Georgiabankingmarket(“Athensmarket”)andtheAtlanta,Georgia bankingmarket(“Atlantamarket”).16TheBoardhasconsideredthecompetitiveeffectsof theproposalinthesebankingmarketsinlightof allthefactsof record.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthebanking markets;therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarkets (“marketdeposits”)thatOzarkswouldcontrol;17theconcentrationlevelsof market depositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”);18andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheAthensmarketandtheAtlanta market.Onconsummationof theproposal,theAthensmarketwouldremain unconcentrated,andtheAtlantamarketwouldremainmoderatelyconcentrated,asmeas- 15 12U.S.C.§1842(c)(1). 16 TheAthensmarketisdefinedasBarrow(excludingthetownsofAuburnandWinder),Clarke,Jackson, Madison,Oconee,andOglethorpecounties,allinGeorgia.TheAtlantamarketisdefinedasBartow,Cherokee, Clayton,Cobb,Coweta,Dawson,DeKalb,Douglas,Fayette,Forsyth,Fulton,Gwinnett,Henry,Newton, Paulding,Rockdale,andWaltoncounties;HallCounty(excludingthetownofClermont);thetownsofAuburn andWinderinBarrowCounty;andLuthersvilleinMeriwetherCounty,allinGeorgia. 17 DepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50-percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 18 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html.

282 FederalReserveBulletin|September2016 uredbytheHHI.ThechangeintheHHIwouldbesmall,andnumerouscompetitors wouldremaininthemarkets.19 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheAthensorAtlantamarketorinanyotherrelevantbankingmarket. Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof publicandsupervisoryinformationregardingcapital adequacy,assetquality,andearningsperformance,aswellaspubliccommentsonthe proposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization, includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtocompleteeffectivelytheproposed integrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoard considerscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. OzarksandBOTOarebothwellcapitalizedandwouldremainsoonconsummationof the proposedacquisition.Theproposedtransactionisabankholdingcompanymergerthatis structuredasanexchangeof shares,withasubsequentmergerof thesubsidiarydepository institutions.20Theassetquality,earnings,andliquidityof BOTOandC&SBankare consistentwithapproval,andOzarksappearstohaveadequateresourcestoabsorbthe costsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddi- 19 Ozarksoperatesthe22ndlargestdepositoryinstitutionintheAthensmarket,controllingapproximately $20.7millionindeposits,whichrepresentlessthan1percentofmarketdeposits.C&SHoldcooperatesthe ninthlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$186.8million,which represent4.1percentofmarketdeposits.Onconsummationoftheproposedtransaction,Ozarkswouldbecome theninthlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$207.5million, whichrepresent4.6percentofmarketdeposits.TheHHIfortheAthensmarketwouldincreaseby4pointsto 839,and21competitorswouldremaininthemarket.Ozarksoperatesthe30thlargestdepositoryinstitutionin theAtlantamarket,controllingapproximately$311.6millionindeposits,whichrepresentlessthan1percentof marketdeposits.C&SHoldcooperatesthe12thlargestdepositoryinstitutioninthesamemarket,controlling depositsofapproximately$1.7billion,whichrepresent1.2percentofmarketdeposits.Onconsummationofthe proposedtransaction,Ozarkswouldbecomethe12thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$2billion,whichrepresent1.4percentofmarketdeposits.TheHHIforthe Atlantamarketwouldincreasebyonepointto1573,and86competitorswouldremaininthemarket. 20 Asproposed,C&SHoldcowouldbemergedintoOzarks,andsharesofC&SHoldcowouldbeconvertedinto arighttoreceivesharesofOzarkscommonstock,basedonanexchangeratio.

LegalDevelopments:SecondQuarter,2016 283 tion,thefutureprospectsof theinstitutionsundertheproposalareconsideredconsistent withapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Ozarks,C&SHoldco,andtheirsubsidiarydepositoryinstitutions,includingassessments of theirmanagement,riskmanagementsystems,andoperations.Inaddition,theBoard hasconsideredinformationprovidedbyOzarks,theBoard’ssupervisoryexperienceswith OzarksandC&SHoldcoandthoseof otherrelevantbanksupervisoryagencieswiththe organizations,andtheorganizations’recordsof compliancewithapplicablebanking, consumerprotection,andanti-money-launderinglaws,aswellasinformationprovidedby thecommenter. Ozarks,C&SHoldco,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobe wellmanaged.Ozarks’existingrisk-managementprogramanditsdirectorsandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Ozarkshavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors. TheBoardalsohasconsideredOzarks’plansforimplementingtheproposal.Ozarkshasa demonstratedrecordof successfullyintegratingorganizationsintoitsoperationsand risk-managementsystemsfollowingacquisitions.Ozarkshasconductedcomprehensivedue diligenceandisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal.Ozarkswouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,andthese areconsideredacceptablefromasupervisoryperspective.Inaddition,Ozarks’management hastheexperienceandresourcestoensurethatthecombinedorganizationoperatesina safeandsoundmanner,andOzarksplanstointegrateC&SHoldco’sexistingmanagement andpersonnelinamannerthataugmentsOzarks’management.21 Basedonallthefactsof record,includingOzarks’supervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof OzarksandC&SHoldcoincombattingmoney-laundering activities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.22Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey 21 Onconsummation,thechiefexecutiveofficerandfounderofC&SBankwillbecomeresponsibleforOzarks’ officesandoperationsinGeorgia. 22 12U.S.C.§1842(c)(2).

284 FederalReserveBulletin|September2016 operate,consistentwiththeirsafeandsoundoperation,23andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.24 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheacquiring institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof BOTOand C&SBank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviews of theFDIC,confidentialsupervisoryinformation,informationprovidedbyOzarks,and thepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromacommenterwhoobjectstotheproposal onthebasisof allegeddisparitiesinthenumberof homepurchaseandrefinanceloans madebyBOTOtoAfricanAmericansascomparedtowhitesintheAtlanta,Georgia MetropolitanStatisticalArea(“MSA”)andtheLittleRock,ArkansasMSA,asreflectedby datareportedundertheHomeMortgageDisclosureActof 1975(“HMDA”)for2014.25 ThecommenteralsoallegesthattheproposalraisesCRAandconsumercomplianceissues andcitesamediareportof aconsumerclassactionlawsuitrelatingtothebank’soverdraftfeepractices.TheFDICconsideredthesamecommentsinconnectionwithitsreview of theunderlyingbankmergerapplicationandfoundtheCRArecordandconvenience andneedsfactorconsistentwithapprovalof theproposalonMay12,2016.26 Businessesof theInvolvedInstitutionsandResponsetoComments BOTOprovidesabroadrangeof retailandcommercialbankingproductsandservices includingcommercial,agricultural,homemortgage,andconsumerloans,personal checkingandsavingsaccounts,moneymarketdepositaccounts,certificatesof deposit,and debitcards.BOTOalsoofferstrustandwealthmanagementservices.BOTOhas159 brancheslocatedthroughoutAlabama,Arkansas,Florida,Georgia,NewYork,North Carolina,SouthCarolina,andTexas. C&SBankofferstraditionalretailbankingservicesincludingpersonal,auto,home,and commercialloansandpersonalandbusinesssavingsandcheckingaccounts.Thebankwas establishedinJanuary2010andhasexpandedthroughtheacquisitionof severalfirmsover thepastfewyears.C&SBankhas42brancheslocatedinGeorgiaandFlorida. 23 12U.S.C.§2901(b). 24 12U.S.C.§2903. 25 12U.S.C.§2801etseq. 26 SeeletterfromSerenaL.Owens,AssistantRegionalDirectorofFDIC’sDallasRegionalOffice,toBankofthe Ozarks(May12,2016).

LegalDevelopments:SecondQuarter,2016 285 OzarksassertsthatBOTOhasastrongrecordof compliancewiththeCRAandfair lendinglaws,asdemonstratedbyitsratingof “Satisfactory”orbetterineachof itsCRA performanceevaluationssince1992. Ozarksrepresentsthatthebank’slendingactivityreportedunderHMDAintheAtlanta MSAisnotrepresentativeof itsoveralllendingactivitybecausetheAtlantaMSArepresentedonly2.8percentof thebank’sHMDAapplicationsand2.2percentof thebank’s HMDAoriginationsin2014.Ozarksrepresentsthattheproposalwouldexpandthebank’s presenceintheAtlantaMSAandwouldallowittobetterserveLMIandminority customersinthearea. Ozarksassertsthatthebank’soverallapprovalrateforHMDA-reportableapplications fromAfricanAmericansin2014was15percenthigherthantheapprovalratefortheaggregateof allHMDAlendersintheLittleRockMSA.27OzarksalsorepresentsthatBOTO hastakenstepstoincreaseHMDAapplicationsandoriginationsfromLMIandminority applicantsintheLittleRockMSA,includingbyhiringstaff tobetterservetheseapplicants,creatingnewloanproductsdesignedforLMIborrowers,andengaginginmarketing campaignsdesignedtoreachmajority-minoritygeographies. Ozarksrepresentsthattheclassactionlawsuitcitedbythecommenterwasvoluntarily dismissedbytheplaintiff inDecember2012andthatBOTOhasnotappliedthepayment processingmethodologythatformedthebasisfortheplaintiffs’complaintsinceJuly2011. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardevaluatesaninstitution’sperformanceinlightof examinationsandother supervisoryinformation,informationprovidedbypubliccommenters,andinformationand viewsprovidedbytheappropriatefederalsupervisors.28 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.29Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sHMDAdata,inadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulations,toassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedon(1)thenumberand 27 Thelendingdataoftheaggregatelendersrepresentthecumulativelendingforallfinancialinstitutionsthat havereportedHMDAdatainagivenmarket.Inthiscontext,aggregatelendingisconsideredapotentialindicatorofthelendingopportunitiesinthegeographicareainwhichthebankislocated. 28 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642, 11665(March11,2010). 29 12U.S.C.§2906.

286 FederalReserveBulletin|September2016 amountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable) intheinstitution’sassessmentareas;(2)thegeographicdistributionof suchloans, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloansbasedonborrowercharacteristics,includingthe numberandamountof homemortgageloanstolow-,moderate-,middle-,andupperincomeindividuals;30(4)theinstitution’scommunitydevelopmentlending,includingthe numberandamountof communitydevelopmentloansandtheircomplexityand innovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.31 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution.Inassessingtheconvenienceandneeds factorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof BOTOandC&SBank,thefairlendingand compliancerecordsof bothbanks,thesupervisoryviewsof theFDIC,confidentialsupervisoryinformation,informationprovidedbyOzarks,andthepubliccommentsreceived ontheproposal. CRAPerformanceof BOTO BOTOwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformance evaluationbytheFDIC,asof September14,2015(“BOTOEvaluation”).32BOTOreceived overallratingsof “LowSatisfactory”fortheLendingTest,“Outstanding”fortheInvestmentTest,and“HighSatisfactory”fortheServiceTest.33TheBoardhasconsultedwith theFDICregardingtheBOTOEvaluation. Examinersnotedthatthebankgrantedahighpercentageof itsloansinitsassessment areasandthebankestablishedanadequaterecordregardingitsborrowerprofileloan distribution.Examinersalsofoundthatthebankachievedanadequaterecordregardingits geographicloandistributionandgrantedarelativelyhighlevelof communitydevelopmentloans.ExaminersalsonotedthatBOTOmadeuseof innovativeorflexiblelending practices. 30 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 31 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 32 TheBOTOEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Theevaluation includedareviewofthebank’shomemortgageloans,smallbusinessloans,andsmallfarmloansfortheyears 2013and2014andforJanuarythroughJuneof2015.Additionally,examinersreviewedthebank’scommunitydevelopmentloansfromMarch2013throughJune2015andallinvestmentandserviceactivitiestransacted sinceMarch2013.Qualifiedinvestmentswerealsoconsiderediftheywereoriginatedpriortotheevaluation periodandremainedoutstandingasofthedateoftheevaluation. 33 TheBOTOEvaluationincludedfull-scopereviewsofthefollowingMSAs:Atlanta,GeorgiaMSA;Charlotte, NorthCarolinaMSA;Dallas,TexasMSA;HiltonHead,SouthCarolinaMSA;LittleRock,ArkansasMSA; Mobile,AlabamaMSA;NorthPort,FloridaMSA;andTexarkana,TexasandArkansasMSA.Limited-scope reviewswereperformedin19additionalassessmentareasinAlabama,Arkansas,Florida,Georgia,North Carolina,andTexas.

LegalDevelopments:SecondQuarter,2016 287 ExaminersfoundthatBOTOmadeuseof anexcellentlevelof qualifiedinvestments. ExaminersnotedthatBOTOestablishedanexcellentresponsivenesstocommunitydevelopmentneedsandmadeoccasionaluseof innovativeorcomplexinstruments.Examiners statedthatmanyof BOTO’squalifiedinvestmentswereof thetypethatwouldnototherwisehavebeenmadebytheprivatesector.Examinersconcludedthat,relativetoits capacityandtheareas’opportunities,BOTOdemonstratedanexcellentrecordforthebank asawholeundertheInvestmentTest. ExaminersnotedthatBOTOestablishedanoverallgoodrecordundertheServiceTestand providedarelativelyhighlevelof communitydevelopmentservices.Examinersfoundthat BOTOmadeitsdeliverysystemsreasonablyaccessiblethroughoutitsassessmentareas. ExaminersalsonotedthatchangestoBOTO’sbranchlocationsimprovedaccessibilityof thebank’sdeliverysystems,particularlyinLMIgeographiesandtoLMIindividuals. CRAPerformanceof C&SBank C&SBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFDIC,asof May30,2014(“C&SBankEvaluation”).34C&S Bankreceivedoverallratingsof “LowSatisfactory”forboththeLendingTestandthe InvestmentTestanda“HighSatisfactory”ratingfortheServiceTest.35 ExaminersfoundthatC&SBankdemonstratedagoodresponsivenesstocreditneedsinits assessmentareas.Examinersnotedthatahighpercentageof thebank’sloansweremade inthebank’sassessmentareas,andthegeographicdistributionof loansreflectedgood penetrationthroughouttheassessmentareas.Examinersalsofoundthatlendingto borrowersreflectedagooddistributionamongbusinessesof differentsizesandretail customersof differentincomes.Examinersnoted,however,thatthebankoriginateda limitednumberof communitydevelopmentloansandmadelimiteduseof flexiblelending practicestoaddressthecreditneedsof LMIindividualsorgeographies. ExaminersfoundthatC&SBankhadanadequatelevelof qualifiedinvestments,particularlythosethatarenotroutinelyprovidedbyprivateinvestors.ExaminersnotedthatC&S Bankexhibitedanadequateresponsivenesstocreditandcommunityeconomicdevelopmentneeds.Examinersalsofound,however,thatthebankdidnotuseinnovativeor complexinvestmentstosupportcommunitydevelopmentinitiatives. ExaminersfoundC&SBank’sdeliverysystemstobeaccessibletoessentiallyallportionsof thebank’sassessmentareas.Examinersnotedthatthebank’srecordof openingand closingbranchesdidnotadverselyaffecttheaccessibilityof itsdeliverysystemsandthat thebankprovidedanadequatelevelof communitydevelopmentservicesthatbenefited organizationsthroughoutitsassessmentareas. BOTO’sPlansfortheCombinedBank Ozarksrepresentsthatithasundertakeneffortstoidentifytheneedsof communitiesserved byC&SBankthroughconsultationswithC&SBankandtheFDIC’sCommunityAffairs DepartmentfortheAtlantaRegion.Ozarksstatesthattheseconsultationshaveidentified eightnonprofitorganizationsforBOTOtopartnerwithtoenhanceitsabilitytoeffectively 34 TheC&SBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.TheevaluationperiodfortheLendingTestandtheServiceTestwasfromJanuary1,2012,throughMay30,2014.The evaluationperiodfortheInvestmentTestwasfromJanuary28,2011,throughMay30,2014. 35 TheC&SBankEvaluationincludedafull-scopereviewoftheAtlanta-SandySprings-Marietta,GeorgiaMSA andtheGeorgiaNon-MetropolitanStatewideArea.Alimited-scopereviewwasconductedintheAthens- ClarkeCounty,GeorgiaMSAandtheDalton,GeorgiaMSA.

288 FederalReserveBulletin|September2016 servelocalLMIcommunities.Ozarksfurtherrepresentsthatitplanstoplaceadedicated CRAloanofficerintheAtlantaMSAtohelppromoteproductsforLMIborrowers. OzarksalsostatesthatBOTOiscurrentlyworkingwithanexternaladvertisingagencyto developmarketingcampaignstopromotenewmortgageandhomeimprovementloan productsthatarespecificallyavailabletoLMIborrowers. Viewsof theFDIC TheBoardhasconsultedwiththeFDIC,theprimaryfederalsupervisorof BOTO, regardingtheFDIC’sreviewof theproposedmergerof BOTOandC&SBank.TheFDIC conductedareviewof thesamecommentsthatweresubmittedtotheBoard,takinginto considerationtheHMDAdatacitedbythecommenter;BOTO’sCRA,consumercompliance,andfairlendingrecords;andBOTO’soutreachtoAfricanAmericanandLMI borrowers.TheFDICalsorecentlyconductedaconsumercomplianceexaminationanda CRAevaluationof BOTO.TheBoardreviewedtheexaminationreportsandconsulted withtheFDICregardingBOTO’srecordof compliancewithfairlendingandother consumerprotectionlawsandregulationsandthebank’spoliciesandprocedurestohelp ensurecompliancewithfairlendingandotherconsumerprotectionlawsandregulations. BOTOintendstoimplementthosepoliciesandproceduresatthecombinedorganization followingconsummationof thetransaction. TheFDICalsoconsideredtheproposalinlightof theCRAactionplanadoptedbyC&S BankinconnectionwiththeFDIC’sapprovalof C&SBank’sacquisitionof certain branchesof CertusBank,N.A.(the“C&SActionPlan”).36Afterafullreviewof the proposal,includingconsiderationof thepubliccomments,theFDICdeterminedthatthe proposalmetthestandardsof theBankMergerActandapprovedtheproposal,subjectto theconditionthatBOTOdevelopanactionplan(the“BOTOActionPlan”)within60days of consummationof theproposalthatdoesthefollowing:(1)ensuresthattheobjectives andprovisionsintheC&SActionPlanaretakenintoaccountandappropriatelyreflected withrespecttoC&SBank’sCRAassessmentareas;(2)includesprovisionspertainingto branchingandofficestrategies,residentiallendingdistribution,marketingplans,andinteractionwithcommunityorganizations,takingintoconsiderationavailableaggregateand peerdata,demographics,andsafeandsoundlendingconsiderations;(3)includesaprovisiontoevaluatethebank’sCRAassessmentareasandmakeadjustmentsasnecessaryin accordancewiththerequirementsof 12CFR345.41;and(4)includesprovisionswhereby BOTOwillcontinuetomonitoritslevelof applicationsandoriginationsfromhigh minoritycensustractsorareasandfromminoritiesagainstpeerperformance.If gapsare identifiedinBOTO’sperformancecomparedtoitspeers,theFDIC’sapprovalconditions providethatmanagementshouldconsideradditionalstepstoincreaseapplicationsand/or originationsandthoroughlydocumentthestepsittakestoreducethegaps. TheBoardexpectsBOTOtoaddresstheobjectivesof theBOTOActionPlanfullyand promptly.TheBoardwillevaluateBOTO’seffortsinthisregardasitreviewsanyfuture expansionaryproposalsbyOzarks.37 36 InconnectionwithC&SHoldco’s2014acquisitionofVerityCapitalGroup,Inc.,C&SHoldcocommittedto theBoardtodevelopandadoptastatementofgoalsandobjectivestocontinuemeetingthecreditneedsofthe communitiesthatthecombinedorganizationwouldserve.Tofulfillthecommitment,C&SHoldcoadopteda statementofgoalsandobjectives(the“Statement”)onApril30,2014,thatprovidedageneralframeworkfor evaluatingtheinstitution’sCRAperformanceandthecreditneedsofthecommunitiesitserves.C&SBank thenadoptedtheC&SActionPlanpursuanttoaconditionthattheFDICimposedinconnectionwithC&S Bank’sacquisitionofcertainbranchesofCertusBank,N.A.TheC&SActionPlansetsforthspecificactions thatC&SBankwilltakeinordertoenhanceitsachievementofthegoalsandobjectivesoutlinedintheStatement.TheFDICreviewedandapprovedtheC&SActionPlanonJanuary26,2016. 37 TheFederalReserveBankofSt.Louis,actingunderdelegatedauthority,approvedaproposalbyOzarksto acquireC1Financial,Inc.,St.Petersburg,Florida,onJune28,2016,subjecttothissameprovision.

LegalDevelopments:SecondQuarter,2016 289 AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.OzarksrepresentsthatitwouldapplyBOTO’s lending,investment,andserviceprogramstotheoperationsandactivitiesof C&SBank andthecommunitiesitserves.Ozarksrepresentsthattheproposalwouldprovide customersof thecombinedorganizationaccesstoadditionalorexpandedservicesthatare notcurrentlyofferedtoC&SBankcustomers,includingservicesrelatingtotrustand wealthmanagement,estateplanning,employeebenefits,andleasefinancing.Ozarksalso representsthattheproposalwouldallowBOTOtomakeitsspecialpurposeloanproducts forLMIborrowersavailabletotheentireAtlantaMSA,includinghomemortgageloans andhomeimprovementloansthatarespecificallytailoredtomeetthecreditneedsof borrowersinLMIareas. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,consultationswiththeFDIC,confidentialsupervisoryinformation,informationprovidedbyOzarks,thepubliccomments ontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneeds of thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”38 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.39These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.40 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,Ozarkswouldhaveapproximately 38 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 39 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 40 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

290 FederalReserveBulletin|September2016 $14.1billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,Ozarkswouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthat aproposalthatinvolvesanacquisitionof lessthan$2billioninassets,orthatresultsina firmwithlessthan$25billioninconsolidatedassets,willnotposesignificantriskstothe financialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultin asignificantincreaseininterconnectedness,complexity,cross-borderactivities,orother riskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. FinancialHoldingCompanyElection Asnotedabove,Ozarkshaselectedtobecomeafinancialholdingcompanyinconnection withtheproposal.OzarkshascertifiedthatitandBOTOarewellcapitalizedandwell managedandhasprovidedalltheinformationrequiredundertheBoard’sRegulationY.41 Basedonallthefactsof record,theBoarddeterminesthatOzarks’electionwillbecome effectiveuponconsummationof theproposalif,onthatdate,Ozarksiswellcapitalizedand wellmanagedandalldepositoryinstitutionsitcontrolsarewellcapitalized,wellmanaged, andhaveCRAratingsof atleast“Satisfactory.” Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.42Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyOzarkswithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof St.Louisactingunderdelegated authority. 41 SeeDodd-FrankAct§606(a),124Stat.at1607,amending12U.S.C.§1843(l)(1);12CFR225.82(f). 42 ThecommenterrequestedthattheBoardholdpublichearingsormeetingsontheproposal.Section3(b)ofthe BHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromthe appropriatesupervisoryauthorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearing ifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencomments wouldnotadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofall thefactsofrecord.IntheBoard’sview,commentershavehadampleopportunitytosubmitcommentsonthe proposaland,infact,thecommentersubmittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenter’srequestdoesnotidentifydisputedissuesoffactmaterialtotheBoard’sdecision andthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdoesnotdemonstratewhythewritten commentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublic hearingormeetingontheproposalisdenied.

LegalDevelopments:SecondQuarter,2016 291 Byorderof theBoardof Governors,effectiveJune28,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

292 FederalReserveBulletin|September2016 Orders Issued Under Section 4 of the Bank Holding Company Act Sumitomo Mitsui Trust Holdings, Inc. and Sumitomo Mitsui Trust Bank, Limited Tokyo, Japan OrderApprovingNoticetoEngageinNonbankingActivities FRBOrderNo.2016-07(June10,2016) SumitomoMitsuiTrustHoldings,Inc.,anditswhollyownedsubsidiary,SumitomoMitsui TrustBank,Limited(“SMTB”),bothof Tokyo,Japan(collectively“SuMiTrust”),have requestedtheBoard’sapprovalundersection4(c)(8)of theBankHoldingCompanyActof 1956(“BHCAct”)1andsection225.24of theBoard’sRegulationY2toacquire50percent of thevotingsharesof MarubeniRailTransport,Inc.(“MRTI”),aDelawarecorporation,andtherebyacquireitswhollyownedsubsidiary,MidwestRailcarCorporation (“MRC”),anIllinoiscorporation,engagedinrailcarleasingandrelatedactivitiesinNorth America.3Asaresultof theproposedacquisition,SuMiTrustwouldengageincertain nonbankingactivities.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister7341(February11,2016)).Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredthenoticeandallcommentsreceived inlightof thefactorssetforthinsection4of theBHCAct. SuMiTrust,withconsolidatedassetsof approximately$518billion,isthesixthlargest bankingorganizationinJapan.Throughitssubsidiaries,SuMiTrustprimarilyengagesin trust,banking,andotherfinancialservicebusinessesinJapanandconductscommercial banking,assetmanagement,andcustodialoperationsintheUnitedStates,theUnited Kingdom,andSingapore.IntheUnitedStates,SMTBmaintainsanuninsuredstatelicensedbranchinNewYork,NewYork,andSMTBisthesoleownerof SuMiTrustUSA, astatenonmemberbankinNewJerseythatisinsuredbytheFederalDepositInsurance Corporation.SuMiTrustandSMTBalsoownNikkoAssetManagementAmericas,Inc., NewYork,NewYork,anonbankassetmanagementcompany. TheBoardhasdeterminedbyregulationthateachof theproposedactivitiesisclosely relatedtobankingforpurposesof section4(c)(8)of theBHCAct.5SuMiTrusthas committedtoconducttheproposedactivitiesinaccordancewiththelimitationssetforthin RegulationYandtheBoard’sorders. Inreviewingtheproposal,theBoardisrequiredbysection4(j)(2)(A)of theBHCActto determinethattheproposal“canreasonablybeexpectedtoproducebenefitstothepublic ...thatoutweighpossibleadverseeffects,suchasundueconcentrationof resources, 1 12U.S.C.§§1843(c)(8)and1843(j). 2 12CFR225.24. 3 SuMiTrustissubjecttotheBHCActbyvirtueofitsownershipofaU.S.bankingsubsidiary,Sumitomo MitsuiTrustBank(U.S.A.)Limited(“SuMiTrustUSA”),Hoboken,NewJersey. 4 Thesenonbankingactivitiesincluderailcarleasingandtheprovisionofcertainrailcarfleetmanagement servicespursuanttosection225.28(b)(3)(leasingpersonalpropertyandactingasagent,broker,oradviserin leasingpersonalproperty)andsection225.21(a)(2)(engaginginincidentalactivitiesthatarenecessaryto carryingonpermissiblenonbankingactivities),bothoftheBoard’sRegulationY(12CFRpart225). 5 12CFR225.28(b)(3).

LegalDevelopments:SecondQuarter,2016 293 decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orrisk tothestabilityof theUnitedStatesbankingorfinancialsystem.”6 Aspartof itsevaluationof thesefactors,theBoardconsidersthefinancialandmanagerial resourcesof thecompaniesinvolvedandtheeffectof theproposalonthoseresources.7In assessingthefinancialandmanagerialresourcesof thecompaniesinvolved,theBoardhas considered,amongotheritems,informationprovidedbySuMiTrust,apubliccommenton theproposal,confidentialreportsof examination,otherconfidentialsupervisoryinformation,andpubliclyreportedfinancialandotherinformation. Inevaluatingthefinancialconsiderationsof thisproposal,theBoardhasconsidereda numberof factors,includingcapitaladequacyandthenatureof thetransaction.SuMi Trusthascapitalratiosinexcessof theminimumlevelsthatwouldberequiredbytheBasel CapitalAccordandthatareconsideredequivalenttothecapitalthatwouldberequiredof aU.S.bankingorganization.Thetransactionwillbestructuredasapurchaseof common stockfundedbycashonhandandwillnothaveasignificantimpactonSuMiTrust’sfinancialcondition. Inaddition,theBoardhasconsideredthemanagerialresourcesof SuMiTrust,thesupervisoryexperiencesof therelevantsupervisoryagencieswithSuMiTrust,andSuMiTrust’s recordof compliancewithapplicableU.S.bankinglaws.TheBoardhasalsoconsidered publiccommentontheproposalandreviewedreportsof examinationfromtheappropriate federalandstatesupervisorsof theU.S.operationsof SuMiTrustassessingitsmanagerial resources.8Basedonallthefactsof record,theBoardhasconcludedthatconsiderations relatingtothefinancialandmanagerialresourcesof theorganizationsinvolvedareconsistentwithapproval. Section4(j)(2)(A)of theBHCActalsorequirestheBoardtoconsiderwhethertheproposal islikelytoposeasignificantrisktothestabilityof theUnitedStatesbankingorfinancial system.Theproposedacquisitionislimitedinsizeandsubstituteprovidersof theproposed activitiesarereadilyavailable.TheinvestmentproposedbySuMiTrustinMRCisrelativelysmallcomparedtoSuMiTrust’stotalconsolidatedassets,andMRCissmallrelative toothermarketparticipants.TheBoardbelievesthattheproposalwouldnotposeasignificantrisktotheUnitedStatesbankingorfinancialsystem. TheBoardalsohasconsideredthecompetitiveeffectsof theproposalinlightof allthe factsof record.Themarketfortheproposedleasingactivitiesisunconcentratedandhighly competitive.Theinvestmentwillnoteliminateanymarketparticipantsorotherwise diminishthepresenceof competitorsinthemarket.Basedonallthefactsof record,the Boardconcludesthatconsummationof theproposalwouldhaveademinimiseffecton competitionfortherelevantnonbankingactivities. 6 12U.S.C.§1843(j)(2)(A). 7 12CFR225.26. 8 Acommenterexpressedconcernsaboutthecompliancerecordofthecompanythatproposestosellsharesof MRTItoSuMiTrustandtobeSuMiTrust’sco-venturerinMRTI.Thiscompany,MarubeniCorporation, Tokyo,Japan,hadbeenchargedwithviolationsoftheForeignCorruptPracticesAct(“FCPA”)formisconduct thatoccurredinthelate1990sand2000s.TheBoardhasconsideredthesecommentsinlightofallthefactsof record,includingthatSuMiTrustisinvestinginMRTI,notMarubeniCorporation;neitherMRTInorMRC wereinvolvedinMarubeniCorporation’sFCPAviolations;andMRC’sactivitiestakeplaceexclusivelyinthe UnitedStatesandCanada,wheretherailindustryishighlyregulated.SuMiTrustisalsoexpectedtoimplementanypoliciesandproceduresnecessaryaspartofitsoverallriskmanagementframeworktoeffectively overseeMRCanddesignatespecificemployeestoensureongoingcompliancebyMRCwithallapplicablelaws andregulations.

294 FederalReserveBulletin|September2016 TheBoardexpectsthatSuMiTrust’sperformanceof theactivitieswouldresultinbenefits tothepublicbyenablingSuMiTrusttoprovideexpandedpersonalpropertyleasingand otherrelatedservicestoitscustomersandthepublic.TheinvestmentbySuMiTrustin MRTImayalsostrengthenanddiversifytherailcarleasingindustryinNorthAmerica throughMRTI’spartnershipwithaglobalfinancialinstitution.TheBoardconcludesthat theproposedactivities,conductedinaccordancewiththeBoard’sRegulationYandBoard precedent,9isnotlikelytoresultinadverseeffects,suchasundueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests,unsoundbankingpractices,orasignificantrisktothestabilityof theUnitedStatesbankingorfinancialsystem, thatwouldoutweighthepublicbenefitsof theproposaldiscussedabove.Accordingly, basedonallthefactsof record,theBoardhasdeterminedthatthebalanceof thepublic benefitsfactorthatitmustconsiderundersection4(j)of theBHCActisconsistentwith approvalof thisproposal. Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe noticeshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.TheBoard’sapprovalisspecificallyconditionedoncompliancebySuMiTrust withtheconditionsimposedinthisorderandthecommitmentsmadetotheBoardin connectionwiththenotice.TheBoard’sapprovalisalsosubjecttoalltheconditionsset forthinRegulationY,includingthoseinsections225.7and225.25(c),10andtotheBoard’s authoritytorequiresuchmodificationorterminationof theactivitiesof SuMiTrustand anyof itssubsidiariesastheBoardfindsnecessarytoensurecompliancewith,andto preventevasionof,theprovisionsof theBHCActandtheBoard’sregulationsandorders issuedthereunder.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisorderunlesssuchperiodisextendedforgoodcausebytheBoardortheFederal ReserveBankof NewYork,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveJune10,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 9 ThecommenterexpressedconcernsaboutensuringthatSuMiTrust’sleasingactivities,conductedthrough MRC,wouldconformtotherequirementsoftheBoard’sRegulationY.Amongothercommitments,SuMi TrusthascommittedthatitwillensurethatMRCconductsitsrailcarleasingandrelatedactivitiesinaccordancewithsection4oftheBHCActandpart225oftheBoard’sRegulationY,includingthatsuchleasesbe onanonoperatingbasis. 10 12CFR225.7and225.25(c).

LegalDevelopments:SecondQuarter,2016 295 Orders Issued Under Federal Reserve Act Origin Bank Choudrant, Louisiana OrderApprovingEstablishmentof Branches FRBOrderNo.2016-05(May4,2016) OriginBank,Choudrant,Louisiana,astatememberbanksubsidiaryof OriginBancorp, Inc.(“OriginBancorp”),Ruston,Louisiana,hasrequestedtheBoard’sapprovalunder section9of theFederalReserveAct(“FRA”)1andtheBoard’sRegulationH2toestablish abranchat2049WestGrayStreet,Houston,Texas,andtoestablishamobilebranchto serveHarrisCounty,Texas(the“mobilebranch”).3Theproposedmobilebranchwouldbe abranchunderfederallawbecauseitwouldtakedepositsfromOriginBank’scustomers, paychecks,andmakesmallconsumerloans.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.5Thetimefor submittingcommentshasexpired,andtheBoardhasreceivedonecommentonthe proposal. OriginBancorpisthe56thlargestdepositoryorganizationinTexaswith17branches throughoutTexas,controllingapproximately$1.1billionindeposits,whichrepresentsless than1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthat state.6OriginBank’smainofficeisinChoudrant,Louisiana,anditoperates44branches throughoutLouisiana,Mississippi,andTexas. Undersection208.6of theBoard’sRegulationH,whichimplementssection9of theFRA, thefactorsthattheBoardmustconsiderinactingonbranchapplicationsinclude(1)the financialhistoryandconditionof theapplyingbankandthegeneralcharacterof its management;(2)theadequacyof thebank’scapitalanditsfutureearningsprospects; (3)theconvenienceandneedsof thecommunitytobeservedbythebranch;(4)inthecase of brancheswithdeposit-takingcapability,thebank’sperformanceundertheCommunity 1 Section9oftheFRA,12U.S.C.§321,whichappliestheinterstatebranchingprovisionsoftheNationalBank Act,12U.S.C.§36(c)(2),permitsastatememberbankwithabranchinastateotherthanthebank’shome statetoestablishadditionalbranchesinthatstatetothesameextentasabankcharteredinthatstate.Origin BankcurrentlyoperatesbranchesinTexasandispermittedundersection9oftheFRAandTexasstatelawto establishadditionalbranchesinTexas.See12U.S.C.§36(c)(2);Tex.Fin.CodeAnn.§203.006(permittingan out-of-statebankthathasestablishedoracquiredabranchinTexastoestablishoracquireadditionalbranches inTexastothesameextentthataTexasstate-charteredbankcouldunderstateorfederallaw). 2 12CFRpart208. 3 Themobilebranchwouldprovidebankingservicestooneormoreretirementcommunitiesandseniorcare facilitiesinHarrisCounty,Texas,andOriginBankwouldnotoperatethemobilebranchinanyothercountyin Texas.OriginBankispermittedtooperateamobilebranchinTexasunderbothTexasandLouisianastatelaw. SeeTex.Dep’tofBanking,OpinionNo.95-15(Mar.13,1995)(authorizingaTexasstate-charteredbankto establishandoperateamobilebranchwithinanidentifiableserviceormarketingarea);Tex.Fin.CodeAnn. §203.002(permittinganout-of-statebanktoestablishandmaintainabranchinTexassubjecttoapplicable statelaw);La.Stat.Ann.§6:537.1(permittingaLouisianastatebanktoestablishabranchinanyotherstateto thesameextentas,andtohavetherightandpowertoexerciseandenjoyallrights,powers,privileges,and immunitiesaccordedto,anystate-charteredbank,nationalbank,foreignbank,orothersimilarinstitutionin thehoststate). 4 TheBoard’sRegulationHdefinesabranchas“anybranchbank,branchoffice,branchagency,additional office,oranybranchplaceofbusinessthatreceivesdeposits,payschecks,orlendsmoney.”12CFR208.2(c)(1). RegulationHspecificallyprovidesthatabranchmayincludeamobilefacility. 5 12CFR262.3(b). 6 DataareasofJune30,2015.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savings andloanassociations,andsavingsbanks.

296 FederalReserveBulletin|September2016 ReinvestmentAct(“CRA”);7and(5)whetherthebank’sinvestmentinbankpremisesin establishingthebranchsatisfiescertaincriteria.8TheBoardhasconsideredtheapplications inlightof thesefactorsandthepubliccommentreceivedontheproposal. Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof OriginBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,informationprovided byOriginBank,andthecommentreceived.OriginBankiswellcapitalizedandwould remainsouponconsummationof theproposal.Afterconsideringallthefactsof record, theBoardconcludesthatthefinancialhistoryandcondition,capitaladequacy,andfuture earningsprospectsof OriginBankareconsistentwithapprovalof theproposal.TheBoard alsohasreviewedOriginBank’sproposedinvestmentinthebranchesandconcludesthat itsinvestmentisconsistentwithregulatorylimitationsoninvestmentinbankpremises.9 InconsideringOriginBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithOrigin Bankandthebank’srecordof compliancewithapplicablebankinglaws,includingantimoney-launderinglaws,andthebanksecurityproceduresthatwouldapplytothemobile branch.10OriginBankisconsideredtobewellmanaged.Basedonthisreviewandallthe factsof record,theBoardconcludesthatthecharacterof OriginBank’smanagement,as wellasOriginBank’seffectivenessincombattingmoney-launderingactivitiesandits branchsecurityprocedures,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations Inconsideringtheeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe creditneedsof thecommunitiesitserves,aswellasotherpotentialeffectsof theproposal ontheconvenienceandneedsof thecommunitiestobeserved.11Inthisevaluation,the Boardplacesparticularemphasisontherecordof therelevantdepositoryinstitutionunder theCRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,12andrequiresthe appropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods.13 Inaddition,theBoardconsidersthebank’soverallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheappli- 7 12U.S.C.§2901etseq. 8 12CFR208.6(b). 9 12CFR208.21(a). 10 See12CFR208.61(c). 11 12CFR208.6(b)(3). 12 12U.S.C.§2901(b). 13 12U.S.C.§2903.

LegalDevelopments:SecondQuarter,2016 297 cant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof OriginBank, thefairlendingandcompliancerecordsof thebank,confidentialsupervisoryinformation, informationprovidedbyOriginBank,andthepubliccommentreceivedontheproposal. Onecommenterobjectstotheproposal,allegingthatOriginBankhasengagedindiscriminatorypracticesinHoustonandDallas,bothinTexas.Inparticular,thecommenter allegesthatOriginBankdisfavorscertainAfricanAmericanneighborhoodsinHouston andDallasandhaslimiteditslending,marketingactivities,communitydevelopmentactivities,andbranchinginthoseneighborhoods. Businessof theInvolvedInstitutionandResponsetoComment OriginBankisafullservicebankthatoffersawiderangeof financialservicesthroughout Louisiana,Mississippi,andTexas.OriginBankisarelativelyrecententrantinthe Houston–SugarLand–BaytownMetropolitanStatisticalArea(“HoustonMSA”)banking market.OriginBankfirstenteredthemarketin2013throughtheestablishmentof two branches,followedbyanadditionalbranchestablishmentin2014andtheacquisitionof fourbranchesin2015.AlthoughOriginBank’slendingactivitiesintheHoustonMSA primarilyconsistof commerciallending,asthebankexpandeditsfootprintinthemarket, itslendingportfolioalsohasincludedincreasingamountsof residentialrealestateloans, consumerloans,andsmallbusinessandsmallfarmloans.OriginBankenteredtheDallas bankingmarketin2008andoperatessevenbranchesinthatbankingmarket. OriginBankdeniesthecommenter’sallegations,arguingthatitsrecordof homemortgage andsmallbusinesslendingintheHoustonMSAreflectsagrowingdistributionof lending inminorityandLMIcensustractsanddemonstratesthebank’seffortasarecententrant intothemarkettoincreasinglyservethesecommunities.Moregenerally,OriginBank assertsthatthebank’sproductsandservicesarereviewedinaccordancewiththebank’s policiesandprocedureswithrespecttoallfairlendinglawsandregulations.Thebank furtherassertsthatitslendingpracticesarebasedoncriteriathatensuresafeandsound lendingandequalaccesstocreditbycreditworthyapplicants,andthatthebankhas comprehensivepoliciesandproceduresinplacetoaccomplishthesegoals.Thesepolicies andproceduresincludeannualfairlendingtrainingforallbankemployeesandperiodic analysesof thegeographicdistributionof allloanstoensurethatnominorityandLMI areasareexcludedfromthebank’slendingactivityandtodelineatethebank’sassessment areas.OriginBankalsorepresentsthatitconductsanongoingfairlendingmonitoring processthatincludesadherencetoratesheets,anannualreviewof advertisingtoensure therearenoexclusionsof minorityorLMIareas,andanannualindependentthird-party complianceaudit. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedby commentersandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationandinformationandviewsprovidedbytheappropriatefederalsupervisors.14 14 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642, 11665(March11,2010).

298 FederalReserveBulletin|September2016 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.15Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sdatareportedundertheHomeMortgageDisclosureActof 1975,16inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollectedand reportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedon(1)thenumberandamountof homemortgage,smallbusiness, smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)the geographicdistributionof suchloans,includingtheproportionanddispersionof the institution’slendinginitsassessmentareasandthenumberandamountof theseloansin low-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloans basedonborrowercharacteristics,includingthenumberandamountof homemortgage loanstolow-,moderate-,middle-,andupper-incomeindividuals;17(4)theinstitution’s communitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. CRAPerformanceof OriginBank OriginBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalReserveBankof Dallas(“ReserveBank”),asof September16,2013(“OriginBankEvaluation”).18OriginBankreceived“HighSatisfactory”ratingsforeachof theLendingTest,theInvestmentTest,andtheServiceTest.19 ExaminersnotedthatOriginBankoriginatedahighpercentageof loanswithinitsassessmentareasandshowedgoodresponsivenesstocreditneedsthroughoutitsassessment areas.ExaminersalsonotedthatOriginBank’sgeographicdistributionof loansreflected 15 12U.S.C.§2906. 16 12U.S.C.§2801etseq. 17 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 18 TheOriginBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.TheevaluationperiodfortheLendingTestwasfromJanuary1,2012,throughDecember31,2012.Theevaluationperiod fortheInvestmentTestandtheServiceTestwasfromJanuary18,2012,throughAugust31,2013. 19 TheOriginBankEvaluationincludedafull-scopereviewoffourassessmentareas:theMonroe,Louisiana, MetropolitanStatisticalArea(“MSA”);theLincolnParish,Louisiana,assessmentarea;aportionofthe Dallas–Plano–Irving,Texas,MetropolitanDivision(“Dallasassessmentarea”);andaportionoftheJackson, Mississippi,MSA.Alimited-scopereviewwasperformedoftheMorehouseParish,Louisiana,assessment area;theShreveport–Bossier,Louisiana,MSA;aportionoftheFortWorth–Arlington,Texas,Metropolitan Division(TarrantCounty);andtheLafayetteCounty,Mississippi,assessmentarea.TheOriginBankEvaluationdidnotincludeareviewoftheHoustonMSAbecauseOriginBankdidnotenterintothatmarketuntil aftertheevaluationperiod.

LegalDevelopments:SecondQuarter,2016 299 goodpenetrationthroughouttheassessmentareas.Further,examinersfoundthatthebank hadagooddistributionof borrowersof differentincomelevelsandbusinesscustomersof differentsizes.ExaminersalsonotedthatOriginBankmadeanadequatelevelof communitydevelopmentloansinsideitsassessmentareas.Thebankalsoexhibitedagood recordof servingthecreditneedsof low-incomeindividualsandareasandsmallbusinesses.Forinstance,OriginBank’scommunitydevelopmentloansprovidedfundingfor organizationsthatprovidecommunityservicestoLMIindividuals,schooldistricts,and affordablehousingprojects. IntheDallasassessmentarea,anareaof concerntothecommenter,examinersfoundthat OriginBankexhibitedadequatelendingperformance.Examinersdeterminedthatthe bank’slendingactivityreflectedadequateresponsivenesstoassessmentareacreditneeds andthatthebank’sgeographicdistributionof loansreflectedadequatepenetration throughouttheassessmentarea.Thebank’sdistributionof borrowerswasjudgedtoreflect adequatepenetrationamongborrowersof differentincomelevelsandbusinessesof differentrevenuesizes.OriginBankalsowasfoundtohavemadeanadequatelevelof communitydevelopmentloansintheassessmentarea. ExaminersfoundthatOriginBankhadprovidedagoodlevelof qualifiedcommunity developmentinvestmentsandgrantsandwasinaleadershippositionintheseinvestments. Examinersalsonotedthatthebankdemonstratedgoodresponsivenesstocreditand communitydevelopmentneedsintheareasinwhichitoperates.Examinersalsofoundthat OriginBank’sinvestmentsmetidentifiedneedsof itsassessmentareas. IntheDallasassessmentarea,OriginBank’sperformanceontheInvestmentTestwas foundbyexaminerstobeadequate.OriginBankexhibitedadequateresponsivenessto creditandcommunitydevelopmentneedsthroughitsinvestmentactivitiesintheassessmentarea,whichincludedgrantsfororganizationsservingdiversecommunitydevelopmentneeds. ExaminershighlightedthatOriginBankprovidedahighlevelof communitydevelopment servicesthroughoutitsassessmentareas.Examinersnotedthatmanyof thebank’s branchesarelocatedinorclosetoLMIgeographiesormiddle-incomedistressedorunderservedgeographies.Further,examinersnotedthatOriginBank’sservicesdidnotvaryina waythatinconveniencedthebank’sassessmentareas,particularlyLMIgeographiesand LMIindividuals.Examinersalsofoundthatthebank’sdeliverysystemswereaccessible throughoutthebank’sassessmentareasandtoindividualsof differentincomelevels. Examinersalsonotedthatthebank’srecordof openingandclosingbranchesdidnot adverselyaffecttheaccessibilityof itsdeliverysystems,particularlytoLMIgeographies andLMIindividuals. IntheDallasassessmentarea,examinersfoundthatOriginBank'sperformanceonthe ServiceTestwasadequate.Thebank’sretailandcommunitydevelopmentserviceswere judgedtobeaccessibletothebank’sassessmentareaandindividualsof differentincome levels.Inaddition,thebankprovidednumerouscommunitydevelopmentservicesthatwere responsivetothecommunityandcreditneedsof theassessmentarea. OriginBank’sActivitiessincethe2013CRAEvaluation OriginBankrepresentsthatsincetheOriginBankEvaluationin2013,ithascontinuedto provideavarietyof productsandservicesthataredesignedtomeettheneedsof LMIindividualsandgeographiesinitsassessmentareas,includingtheHoustonMSAandthe Dallasassessmentarea.Forexample,thebankoffersproductsandservicestailoredtoLMI individualsandgeographies,suchasaflexible-termdown-paymentprogramforfirst-time

300 FederalReserveBulletin|September2016 homebuyersandalow-costcheckingaccountwithnominimumdepositandnomonthly minimumbalancerequirement.OriginBankalsohaspartneredwiththeTexasState AffordableHousingCorporationtoofferaffordablemortgageproductswithdownpaymentassistancetoLMIconsumers.Inaddition,OriginBankrepresentsthatits employeeshavevolunteeredatorganizationsthatserveminorityandLMIresidentsof Houston,Texas.OriginBankalsorepresentsthatithasmadesignificantcommunitydevelopmentloans,investments,anddonationsthroughoutitsentireassessmentareas, includingtheHoustonMSAandtheDallasassessmentarea. Since2013,OriginBankalsohasmadeimprovementstoitscomplianceprogram,including itspoliciesandproceduresrelatedtofairlending.OriginBankhasenhanceditsfairlending policiesandprocedures,includingwithrespecttothedelineationof thebank’sassessment areasanditslending,branching,marketing,advertising,andoutreachactivities.Specifically,thebank’sfairlendingpolicyrequiresareviewof itsassessmentareasatleastannuallytoevaluateanysignificantchangesinassessmentareademographicsandtheimpacton anyof thebankingproductsandservicesofferedbythebank.Additionally,priorto enteringorpursuinganewmarket,OriginBank’sfairlendingpolicyrequiresthebankto reviewdemographicdatatoascertainthebank’sfairlendingrisksassociatedwiththe expansion. OriginBankalsohasstrengtheneditsinternalcontrolsrelatedtomortgagelending.Specifically,thebankhasimplementedsoftwaretomonitormortgageloanapplicationsandhas developedprocedurestobetterensurethattheapplicationsareprocessedinaccordance withthebank’sfairlendingpolicies.OriginBankalsohasrequiredadditionaltrainingfor itsemployeesonapplicablefairlendinglawsandregulations. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.OriginBankrepresentsthatthebrancheswould allowittobetterservetheresidentsof HarrisCountyandtostrengthenitsexistingbusinessrelationshipsinthecountyandthesurroundingcommunities.Inaddition,themobile branchwouldofferbankingservicestotheelderlyandhome-boundindividualsatretirementcentersinHarrisCountywhocannoteasilyaccessaphysicalbranchfacility. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof OriginBank undertheCRA,thebank’srecordsof compliancewithfairlendingandotherconsumer protectionlaws,confidentialsupervisoryinformation,informationprovidedbyOrigin Bank,thepubliccommentontheproposal,andotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,the Boardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.TheBoard’sapprovalisspecificallyconditioned onOriginBank’scompliancewithallthecommitmentsmadetotheBoardinconnection withtheproposalaswellasallconditionsimposedinthisorder.Theconditionsand commitmentsreliedonbytheBoardaredeemedtobeconditionsimposedinwritingin connectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw.

LegalDevelopments:SecondQuarter,2016 301 Approvalof theseapplicationsisalsosubjecttotheestablishmentof theproposed brancheswithinoneyearof thedateof thisorder,unlesssuchperiodisextendedbythe BoardortheReserveBankactingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveMay4,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

302 FederalReserveBulletin|September2016 Compass Bank Birmingham, Alabama OrderApprovingtheEstablishmentof aBranch FRBOrderNo.2016-08(June17,2016) CompassBank,Birmingham,Alabama,astatememberbanksubsidiaryof BancoBilbao VizcayaArgentaria,S.A.,Bilbao,Spain,hasrequestedtheBoard’sapprovalunder section9of theFederalReserveAct(“FRA”)1andtheBoard’sRegulationH2toestablish abranchat5900QuebecStreet,FortWorth,Texas. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.3Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredthecommentonthe proposal. CompassBankisthefifthlargestdepositoryinstitutioninTexas,controllingapproximately $35.7billionindeposits,whichrepresent4.9percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.4CompassBank’smainofficeisin Birmingham,Alabama.CompassBankoperatesatotalof 676officesinAlabama, Arizona,California,Colorado,Florida,NewMexico,andTexas. Undersection208.6of theBoard’sRegulationH,5whichimplementssection9of the FRA,thefactorsthattheBoardmustconsiderinactingonbranchapplicationsinclude (1)thefinancialhistoryandconditionof theapplyingbankandthegeneralcharacterof its management;(2)theadequacyof thebank’scapitalanditsfutureearningsprospects; (3)theconvenienceandneedsof thecommunitytobeservedbythebranch;(4)inthecase of brancheswithdeposit-takingcapability,thebank’sperformanceundertheCommunity ReinvestmentAct(“CRA”);6and(5)whetherthebank’sinvestmentinbankpremisesin establishingthebranchsatisfiescertaincriteria.7 TheBoardhasconsideredtheapplicationinlightof thesefactorsandthepubliccomment receivedontheproposal. Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof CompassBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,information providedbyCompassBank,andthecommentreceived.CompassBankiswellcapitalized 1 12U.S.C.§321.Undersection9oftheFRA,astatememberbankmayestablishandoperatebranchesonthe sametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,astate memberbankmayestablishbranchesatanypointinastateinwhichthebankhasitsmainofficeorabranch. See12U.S.C.§36(c)(2).CompassBankhasbranchesinTexasandispermittedtoestablishadditionalbranches underTexasstatelaw.SeeTex.Fin.CodeAnn.§203.006(permittinganout-of-statebankthathasestablishedor acquiredabranchinTexastoestablishoracquireadditionalbranchesinTexastothesameextentthataTexas state-charteredbankcoulddounderstateorfederallaw). 2 12CFRpart208. 3 12CFR262.3(b). 4 DepositdataareasofJune30,2015.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks, savingsassociations,andsavingsbanks. 5 12CFR208.6(b). 6 12U.S.C.§2901etseq. 7 12CFR208.21(a).

LegalDevelopments:SecondQuarter,2016 303 andwouldremainsoonconsummationof theproposal.Afterconsideringallthefactsof record,theBoardconcludesthatthefinancialhistoryandcondition,capitaladequacy,and futureearningsprospectsof CompassBankareconsistentwithapprovalof theproposal. TheBoardalsohasreviewedCompassBank’sproposedinvestmentinthebranchand concludesthatitsinvestmentisconsistentwithregulatorylimitationsoninvestmentin bankpremises.8 InconsideringCompassBank’smanagerialresources,theBoardhasreviewedCompass Bank’sexaminationrecord,includingassessmentsof itsmanagement,risk-management systems,andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswith CompassBankandthebank’srecordof compliancewithapplicablebankinglaws, includinganti-money-launderinglaws.Basedonthisreviewandallthefactsof record,the BoardconcludesthatCompassBank’smanagement,aswellastheeffectivenessof CompassBankincombattingmoney-launderingactivities,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations Inconsideringtheeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe creditneedsof thecommunitiesitserves,aswellasotherpotentialeffectsof theproposal ontheconvenienceandneedsof thecommunitiestobeserved.9Inthisevaluation,the Boardplacesparticularemphasisontherecordof therelevantdepositoryinstitutionunder theCRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,10andrequiresthe appropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods.11 Inaddition,theBoardconsidersthebank’soverallcompliancerecordandtheresultof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideloanapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,or certainothercharacteristics.TheBoardalsoconsiderstheassessmentsof otherrelevant supervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.Inaddition,the Boardmayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,the organization’splansafterconsummation,andanyotherinformationtheBoarddeems relevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Compass Bank,thefairlendingandcompliancerecordsof thebank,confidentialsupervisoryinformation,informationprovidedbyCompassBank,andthepubliccommentreceivedonthe proposal.Acommenterobjectstotheproposal,allegingthatCompassBankhasengaged indiscriminatorypracticesinHoustonandDallas,bothinTexas.Inparticular,the commenterallegesthatCompassBankdisfavorscertainAfricanAmericanneighborhoods inHoustonandDallasandhaslimiteditslending,marketingactivities,communitydevel- 8 12CFR208.21(a). 9 12CFR208.6(b)(3). 10 12U.S.C.§2901(b). 11 12U.S.C.§2903.

304 FederalReserveBulletin|September2016 opmentactivities,andbranchinginthoseneighborhoods.Thecommenterallegesthat CompassBankengagesin“redlining”and“reverseredlining”intheseareas.12The commenteralsoallegesthatthebranchisnotpermissibleundersupervisoryguidance regardingbranchingbystatememberbanks.13 CompassBankdeniesthecommenter’sallegations,statingthatithasimplementedsafeguardstopreventillegaldiscrimination.Forinstance,CompassBankhasadoptedaFair andResponsibleBankingProgram,underwhichthebankconductsfairlendingriskassessmentsandfairlendingmonitoring,trainsstaff,andprovidesregularreportstomanagementandboardcommitteesthatgovernthebank’sfairlendingprogram.CompassBank representsthat,in2015,thebankestablishedaseparatemortgageredliningriskassessment process,whichincludesareviewof branchdistribution,branchstaffing,assessmentarea delineations,andapplicationandoriginationmonitoringwithinmajority-minoritycensus tractsforallassessmentareas.Thebankalsoestablishedroutinemortgageredliningmonitoring.Inaddition,CompassBankcontendsthattheproposedbranch,whichwouldbe locatedinamoderate-incomecensustract,wouldpermitthebanktoservenewand existingcustomersinLMIcommunities. Recordof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbythe commenterandtheresponsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformationandinformationandviewsprovidedbytheappropriatefederalsupervisors.14 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.15Aninstitution’smostrecentCRA performanceevaluationisaparticularlyimportantconsiderationintheapplications processbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimary federalsupervisorof 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 (“HMDA”),16inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloan datacollectedandreportedundertheCRAregulations,toassessaninstitution’slending 12 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.Reverseredliningisthepracticeof targetingcertainborrowersorareaswithlessadvantageousproductsorservicesbasedonprohibitedcharacteristics.OfficeoftheComptrolleroftheCurrencyetal.,InteragencyFairLendingExaminationProcedures (August2009),availableathttps://www.ffiec.gov/pdf/fairlend.pdf. 13 SeeSRLetter13-7.TheBoardhastakenintoaccountthesupervisoryrecordofCompassBankinconsidering theproposal. 14 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FR11642,11665(March11, 2010). 15 12U.S.C.§2906. 16 12U.S.C.§2801etseq.

LegalDevelopments:SecondQuarter,2016 305 activitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedon(1)thenumberandamountof homemortgage, smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof suchloans,includingtheproportionand dispersionof theinstitution’slendinginitsassessmentareasandthenumberandamount of loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberandamountof home mortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;17(4)theinstitution’scommunitydevelopmentlending,includingthenumberandamountof community developmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. CRAPerformanceof CompassBank CompassBankwasassignedanoverall“Satisfactory”rating18atitsmostrecentCRA performanceevaluationbytheFederalReserveBankof Atlanta(“ReserveBank”),asof December7,2015(“CompassBankEvaluation”).19CompassBankreceiveda“HighSatisfactory”ratingforboththeLendingTestandtheInvestmentTest,anda“LowSatisfactory”ratingfortheServiceTest.20 ExaminersfoundthatCompassBank’soveralllendingactivityinitsassessmentareaswas goodinTexasandinfiveotherstates.21Accordingtoexaminers,thebank’sgeographic distributionof loansthroughtheassessmentareaswasgood.Examinersalsofoundthat thebankhadagooddistributionof loansamongborrowersof differentincomelevelsand businessesof differentsizes.Examinersnotedthatthebankmadeanadequatelevelof 17 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 18 ThecommentercontendsthatCompassBank’srecordofperformanceundertheCRAwarrantsdenialofthe proposalbecauseCompassBankreceivedanoverall“NeedstoImprove”ratingatitsCRAperformanceevaluationdatedOctober21,2013.Inassessingtheproposal,theBoardconsideredCompassBank’smostrecent CRAperformanceevaluationbecauseitrepresentsthemostup-to-dateevaluationofthebank’soverallrecord oflendinginitscommunities. 19 TheCompassBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examiners reviewedHMDA-reportableandCRAsmallbusinesslendingfromJanuary1,2014,throughDecember31, 2014,exceptforcommunitydevelopmentloans,whichwereevaluatedfromApril1,2013,throughMarch31, 2015.TheevaluationperiodfortheInvestmentTestandtheServiceTestwasfromApril1,2013,through March31,2015. 20 TheCompassBankEvaluationincludedafull-scopereviewofthebank’sassessmentareaswithinthefollowing areas:theBirmingham–Hoover,Alabama,MetropolitanStatisticalArea(“MSA”);theMobile,Alabama, MSA;thePhoenix–Mesa–Glendale,Arizona,MSA;theRiverside–SanBernardino–Ontario,California,MSA; theSanDiego–Carlsbad–SanMarcos,California,MSA;theStockton,California,MSA;theDenver–Aurora– Broomfield,Colorado,MSA;theJacksonville,Florida,MSA;theAlbuquerque,NewMexico,MSA;the Dallas–FortWorth–Arlington,Texas,MSA(“Dallasassessmentarea”);theHouston–SugarLand–Baytown, Texas,MSA(“Houstonassessmentarea”);theSanAntonio–NewBraunfels,Texas,MSA,andtheassessment areacomprisingValVerdeandMaverickcounties,bothinTexas.Alimited-scopereviewwasconductedin65 otherassessmentareasinAlabama,Arizona,California,Colorado,Florida,NewMexico,andTexas. ThecommenterallegedthatCompassBank’sdefinitionsoftheHoustonandDallasassessmentareasarbitrarilyexcludeAfricanAmericanneighborhoodsintheHoustonandDallasareas.TheBoard’sregulations prohibitthedelineationofaCRAassessmentareathatreflectsillegaldiscrimination.12CFR228.41(e)(2). Assessmentareasgenerallyshouldincludeentirepoliticalsubdivisions.InteragencyQuestionsandAnswers RegardingCommunityReinvestment,75FR11642,11666(March11,2010).TheHoustonassessmentarea comprisestheentiretyofAustin,Brazoria,FortBend,Galveston,Harris,andMontgomerycounties,allin Texas.TheDallasassessmentareacomprisestheentiretyofCollin,Denton,Dallas,Ellis,Hood,Johnson, Kaufman,Parker,andTarrantcounties,allinTexas.ReserveBankexaminersfoundthatthebank’sassessment areaswereappropriateandofferedopportunitiestolendinmajority-minoritygeographies. 21 CompassBankshowedgoodlendingperformanceinAlabama,Arizona,Colorado,Florida,NewMexico,and Texas.CompassBankshowedadequatelendingperformanceinCalifornia.

306 FederalReserveBulletin|September2016 communitydevelopmentloansduringthereviewperiod.CompassBank’scommunity developmentloansweremadeforavarietyof purposes,includingprovidingcommunity servicestargetedtoLMIindividuals,promotingeconomicdevelopmentbyfinancingsmall businesses,supportingaffordablehousing,andrevitalizingorstabilizingtargetedLMI censustracts. IntheHoustonassessmentarea,anareawherethecommenterfocused,examinersdeterminedthatCompassBankexhibitedgoodlendingperformance.Thebank’sgeographic distributionof loanswasjudgedtoreflectgoodpenetrationthroughouttheassessment area.Examinersfoundthatthebank’sdistributionof borrowersreflectedgoodpenetration amongborrowersof differentincomelevelsandbusinessesof differentrevenuesizes. CompassBankwasfoundtohavemadearelativelyhighlevelof communitydevelopment loansintheassessmentarea. IntheDallasassessmentarea,anotherareaof concerntothecommenter,CompassBank showedgoodlendingperformance.Examinersfoundthatthebank’sgeographicdistributionof loansreflectedgoodpenetrationthroughouttheassessmentarea.Thebank’sdistributionof borrowerswasfoundbyexaminerstoreflectexcellentpenetrationamong borrowersof differentincomelevelsandbusinessesof differentrevenuesizes.Compass Bankwasfoundtohavemadeanadequatelevelof communitydevelopmentloansinthe assessmentarea. ExaminersfoundthatCompassBank’soverallinvestmentperformancewasgoodinTexas andAlabamaandadequateintheotherstatesinwhichitoperates.22Amajorityof CompassBank’sinvestmentssupportedaffordablehousing.CompassBankpurchased securitiesbackedbygovernment-guaranteedmortgagestoqualifiedLMIborrowers,made investmentsinLowIncomeHousingTaxCreditprojects,23andmadeinvestmentsin communitydevelopmentfinancialinstitutionsthatfinanceaffordablehousingforLMI borrowersandpromoteeconomicdevelopmentviasmallbusinessloanfundsand microfinancing.Examinersfoundthatthemajorityof thebank’squalifiedcontributions providedsupportfororganizationsengagedincommunityservicesforLMIindividualsor communities,includingfinancialcounseling,youthandfamilyprograms,homerepairs, healthservices,andjobtraining. IntheHoustonandDallasassessmentareas,examinersfoundthatCompassBankmadea significantlevelof qualifiedinvestmentsandwasinaleadershippositionforsomeof its investments.ExaminersfoundthatCompassBank’scontributionswereresponsivetoidentifiedcommunitydevelopmentneedsintheseassessmentareasandincludedinvestments inprojectsthatsupportedaffordablehousing,financialeducationandliteracy,andsmall businessdevelopment. CompassBankdemonstratedgoodServiceTestperformanceinAlabamaandshowed adequateperformanceintheotherstatesinwhichitoperates,includingTexas.Examiners notedthatCompassBank’sretaildeliverysystemswerereasonablyaccessibletothegeographiesandindividualsof differentincomelevels.Examinersfoundthatthebank’s bankingservicesandbusinesshoursdidnotvaryinawaythatinconveniencedanyportion of thebank’sassessmentareas,particularlyLMIgeographiesandindividuals.Examiners alsonotedthatCompassBankofferedno-orlow-costdepositaccountsandvariousalternativedeliverysystems.However,examinersfoundthatCompassBank’sclosingof branchesadverselyaffectedtheaccessibilityof bankingservicesinsomeassessmentareas. 22 CompassBank’sperformanceinTexashadthegreatestimpactonitsperformanceundertheInvestmentTest duetotherelativelyhighconcentrationofbranches,deposits,andlending. 23 See26U.S.C.§42.

LegalDevelopments:SecondQuarter,2016 307 Duringthereviewperiod,thebankclosed39branches,and10of thesebrancheswere locatedinLMIcensustracts.24 Examinersindicatedthatthebankprovidedanadequatelevelof communitydevelopment servicesthroughoutthebank’sassessmentareas.Examinersnotedthatthebank’s employeeswereinvolvedinorganizationsandactivitiesthatpromoteorfacilitateaffordable housingforLMIindividuals;providecommunityservicesforLMIindividuals,suchas financialliteracyeducation;andpromoteeconomicdevelopmentandrevitalizationof LMI areas. IntheHoustonandDallasassessmentareas,CompassBank’sperformanceontheService Testwasfoundtobeadequate.IntheDallasassessmentarea,examinersdeterminedthat thebank’sdeliverysystemswerereasonablyaccessibletothebank’sgeographiesandindividualsof differentincomelevels;however,intheHoustonassessmentarea,thebank’s deliverysystemswereinaccessibletoportionsof thebank’sgeographies.IntheHouston andDallasassessmentareas,examinersfoundthatCompassBankprovidedrelativelyhigh andadequatelevels,respectively,of communitydevelopmentservices.Thebank’s communitydevelopmentserviceswerejudgedtoberesponsivetoidentifiedcommunity developmentneedsintheseassessmentareas. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Asnotedabove,theproposalwouldincreasethe availabilityof bankingservicesinamoderate-incomecensustract.CompassBankhas representedthatopeningtheproposedbranchwillincreasethenumberof branchesinLMI censustractsinthisassessmentareaandwillimproveitsabilitytoservenewandexisting customersinLMIcommunities. Moregenerally,CompassBankalsodevelopedaplantoprovide$11billioninproducts andservicesforLMIcommunitiesoverthenextfiveyears.Underthisplan,thebank intendstoincreaseinvestmentsinaffordablehousing,smallbusinesses,communityservices, andfinancialeducation. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof CompassBank undertheCRA,thebank’srecordsof compliancewithfairlendingandotherconsumer protectionlaws,confidentialsupervisoryinformation,informationprovidedbyCompass Bank,thepubliccommentontheproposal,andotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,the Boardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.TheBoard’sapprovalisspecificallyconditionedon CompassBank’scompliancewithallthecommitmentsmadetotheBoardinconnection withtheproposalaswellasallconditionsimposedinthisorder.Theconditionsand commitmentsreliedonbytheBoardaredeemedtobeconditionsimposedinwritingin 24 CompassBankrepresentsthatitcompletesafullCRAandfairlendingimpactanalysispriortoclosingor consolidatinganybranchesinaccordancewithitsbranchclosingpolicy.

308 FederalReserveBulletin|September2016 connectionwithitsfindingsanddecisionand,assuch,maybeenforcedinproceedings underapplicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranch withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBankactingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveJune17,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

LegalDevelopments:SecondQuarter,2016 309 Order Issued Under International Banking Act Banque SYZ SA Geneva, Switzerland OrderApprovingtheEstablishmentof aRepresentativeOffice FRBOrderNo.2016-09(June23,2016) BanqueSYZSA(“BanqueSYZ”),aforeignbankwithinthemeaningof theInternational BankingAct(“IBA”),hasappliedundersection10(a)of theIBA1toestablisharepresentativeofficeinMiami,Florida,followinganinternalreorganizationthatinvolvedBanque SYZ’smergerwithitssubsidiary,BanqueSYZSuisseSA(“SYZSuisse”),bothof Geneva, Switzerland.2TheIBAprovidesthataforeignbankmustobtaintheapprovalof the BoardtoestablisharepresentativeofficeintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinMiami,Florida(MiamiHerald, December7,2015).Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredallcommentsreceived. FinanciéreSYZSA(“FinanciéreSYZ”),Geneva,Switzerland,istheparentof Banque SYZ.Anoverwhelmingmajorityof FinanciéreSYZ’ssharesisownedbyanindividual. Twocompaniesown5.5and5.7percentof thecompany’sshares,each.Noothershareholderowns5percentormoreof FinanciéreSYZ’sshares. BanqueSYZhastotalassetsof approximately$3.2billion.3BanqueSYZengagesin privatebankingactivities,includingassetmanagementforprivateandcorporateSwissand foreignclientele,andsecuredloantransactions.OutsideSwitzerland,BanqueSYZhasa representativeofficeinDubai,UnitedArabEmirates.BanqueSYZhasnooperationsin theUnitedStates.4 TheproposedrepresentativeofficewouldactasaliaisonbetweenBanqueSYZandits customers.Theproposedrepresentativeofficewouldalsoengageinotherrepresentational activities,includingsolicitingbankingbusinessforBanqueSYZ.5 OnDecember10,2015,BanqueSYZreceivedapproval,pursuanttosection211.24(a)(6)of theBoard’sRegulationK,toproceedwiththemergerof BanqueSYZandSYZSuisse priortoBoardactiononBanqueSYZ’sapplicationtoestablisharepresentativeofficein 1 12U.S.C.§3107(a). 2 BanqueSYZacquiredRoyalBankofCanada(Suisse)SA(“RBCSuisse”),Geneva,Switzerland,onAugust28, 2015.Untilthatdate,RBCSuissemaintainedarepresentativeofficeinMiami,Florida.Followingtheacquisition,BanqueSYZrenamedRBCSuisseasBanqueSYZSuisseSA. 3 AssetdataareasofDecember31,2015. 4 FinanciéreSYZownsSYZAdvisors,Ltd.,aninvestmentadvisorthatdoesnothaveanofficeintheUnited StatesbutisregisteredwiththeU.S.SecuritiesandExchangeCommissionandhasclientslocatedintheUnited States. 5 Arepresentativeofficemayengageinrepresentationalandadministrativefunctionsinconnectionwiththe bankingactivitiesoftheforeignbank,includingsolicitingnewbusinessfortheforeignbank,conducting research,actingasaliaisonbetweentheforeignbank’sheadofficeandcustomersintheUnitedStates, performingpreliminaryandservicingstepsinconnectionwithlending,andperformingback-officefunctions. Arepresentativeofficemaynotcontractforanydepositordeposit-likeliability,lendmoney,orengageinany otherbankingactivity.12CFR211.24(d)(1).

310 FederalReserveBulletin|September2016 theUnitedStatesthroughretentionof theSYZSuisserepresentativeoffice.6Themergerof BanqueSYZandSYZSuissewascompletedonDecember11,2015. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablisharepresentativeoffice,theBoardmustconsiderwhether(1)theforeignbankhas furnishedtotheBoardtheinformationitneedstoassesstheapplicationadequately,(2)the foreignbankandanyforeignbankparentengagedirectlyinthebusinessof banking outsideof theUnitedStates,and(3)theforeignbankandanyforeignbankparentare subjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.7TheBoardalsoconsidersadditionalstandardssetforthintheIBAandRegulationK. Inthecaseof anapplicationtoestablisharepresentativeoffice,theBoardhasbyrule determinedthatthesupervisionstandardmaybemetif theBoarddeterminesthatthe applicantbankissubjecttoasupervisoryframeworkthatisconsistentwiththeactivitiesof theproposedrepresentativeoffice,takingintoaccountthenatureof suchactivities.8This isalesserstandardthanthecomprehensive,consolidatedsupervisionstandardapplicable toapplicationstoestablishbranchoragencyofficesof aforeignbank.TheBoard considersthelesserstandardsufficientforapprovalof representativeofficeapplications becauserepresentativeofficesmaynotengageinbankingactivities.Thisapplicationhas beenconsideredunderthelesserstandard. Asnotedabove,BanqueSYZengagesdirectlyinthebusinessof bankingoutsidethe UnitedStates.BanqueSYZalsohasprovidedtheBoardwithinformationnecessaryto assesstheapplicationthroughsubmissionsthataddresstherelevantissues. Withrespecttosupervisionbyhomecountryauthorities,theBoardhasconsideredthat BanqueSYZissupervisedbytheSwissFinancialMarketSupervisoryAuthority (“FINMA”).TheBoardhaspreviouslyconsideredthesupervisoryregimeinSwitzerland forfinancialinstitutionsinconnectionwithapplicationsinvolvingotherSwissbanks.9 BanqueSYZissupervisedbyFINMAonsubstantiallythesametermsandconditionsas thoseotherbanks.Basedonallthefactsof record,ithasbeendeterminedthatBanque SYZissubjecttoasupervisoryframeworkthatisconsistentwiththeactivitiesof the proposedrepresentativeoffice,takingintoaccountthenatureof suchactivities. TheBoardhasalsoconsideredthefollowingadditionalstandardssetforthintheIBAand RegulationK:(1)whetherthebank’shomecountrysupervisorhasconsentedtothe 6 SeeLetterdatedDecember10,2015,toBowmanBrown,Shutts&BowenLLP.Consistentwith12CFR 211.24(a)(6),BanqueSYZprovidedcommitmentstotheBoardnottoengageinanynewlinesofbusinessor expanditsU.S.activitiesuntilthedispositionoftheapplicationandtoabidebytheBoard’sdecisionon BanqueSYZ’sapplicationtoestablisharepresentativeoffice,including,ifnecessary,adecisiontorequirethe terminationoftheactivitiesoftherepresentativeoffice. 7 12U.S.C.§3107(a)(2);12CFR211.24(d)(2).Inassessingthesupervisionstandard,theBoardconsiders,among otherindiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors: (i)ensurethatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide; (ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,auditreports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipsbetween thebankanditsaffiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatare consolidatedonaworldwidebasis,orcomparableinformationthatpermitsanalysisofthebank’sfinancial conditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacy andriskassetexposure,onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformthe Board’sdetermination. 8 See12CFR211.24(d)(2).Inadoptingtheregulationsgoverningapplicationstoestablishrepresentativeoffices, theBoardnotedthat“[a]lesserstandardappliesbecauserepresentativeofficesdonotconductabankingbusiness,suchastakingdepositsormakingloans,andthereforepresentlessrisktoU.S.customersthando branchesoragencies.”66Fed.Reg.54365(October26,2001). 9 See,e.g.,UBSAG/UnionBankofSwitzerland,84FederalReserveBulletin684(June8,1998);CreditSuisse,85 FederalReserveBulletin68(November23,1998);UBSAG,86FederalReserveBulletin69(November24,1999).

LegalDevelopments:SecondQuarter,2016 311 establishmentof theoffice;(2)whetherthebankhasprocedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountrytoaddressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombat moneylaundering;(3)thefinancialandmanagerialresourcesof thebank;and(4)whether theappropriatesupervisorsinthehomecountrymayshareinformationonthebank’s operationswiththeBoard.10FINMAhasnoobjectiontotheproposedrepresentative office. Switzerlandisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandinternationalterrorism.In accordancewiththeserecommendations,Switzerlandhasenactedlawsandregulationsto determoneylaundering,terroristfinancing,andotherillicitactivities.Moneylaunderingis acriminaloffenseinSwitzerland,andfinancialinstitutionsarerequiredtoestablish internalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughouttheirworldwideoperations.BanqueSYZhaspoliciesandproceduresto complywiththeselawsandregulations,anditsoperationsaremonitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. BanqueSYZappearstohavetheexperienceandcapacitytosupporttheproposedrepresentativeoffice.Inaddition,BanqueSYZhasestablishedcontrolsandproceduresforthe proposedrepresentativeofficetoensurecompliancewithU.S.law,aswellascontrolsand proceduresforitsworldwideoperationsgenerally.TakingintoconsiderationBanqueSYZ’s recordof operationsinitshomecountry,itsoverallfinancialresources,anditsstanding withitshomecountrysupervisors,financialandmanagerialfactorsareconsistentwith approvalof theproposedrepresentativeoffice. BanqueSYZhascommittedtomakeavailabletotheBoardsuchinformationonitsoperationsandonthoseof anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineand enforcecompliancewiththeIBA,theBankHoldingCompanyActof 1956,andother applicablefederallaw.TotheextentthatprovidingsuchinformationtotheBoardmaybe prohibitedbylaworotherwise,BanqueSYZhascommittedtocooperatewiththeBoardto obtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfor disclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,it hasbeendeterminedthatBanqueSYZhasprovidedadequateassurancesof accesstoany necessaryinformationthattheBoardmayrequest. TheBoardalsohasconsideredwhetherBanqueSYZ’sproposalwouldpresentarisktothe stabilityof theUnitedStates.Theproposalwouldnotappeartoaffectfinancialstabilityin theUnitedStates.Inparticular,theabsoluteandrelativesizeof BanqueSYZinitshome country;thescopeof BanqueSYZ’sactivities,includingthetypesof activitiesitproposes toconductintheUnitedStatesandthepotentialforthoseactivitiestoincreaseortransmit financialinstability;andtheframeworkinplaceforsupervisingBanqueSYZinitshome countrydonotappeartocreatesignificantrisktothefinancialstabilityof theUnited States.Basedontheseandotherfactors,financialstabilityconsiderationsinthisproposal areconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBanque SYZ,BanqueSYZ’sapplicationtoestablishtheproposedrepresentativeofficeishereby approvedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withthe concurrenceof theGeneralCounsel,pursuanttoauthoritydelegatedbytheBoard.11 10 See12U.S.C.§3105(d)(3)–(4);12CFR211.24(c)(2). 11 12CFR265.7(d)(12).

312 FederalReserveBulletin|September2016 Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof Banque SYZanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecompliancebyBanqueSYZoritsaffiliateswithapplicable federalstatutes,theBoardmayrequireterminationof anyof BanqueSYZ’sdirectorindirectactivitiesintheUnitedStates.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyBanqueSYZwiththeconditionsimposedinthisorderandthe commitmentsmadetotheBoardinconnectionwiththisapplication.12Forpurposesof thisaction,thesecommitmentsandconditionsaredeemedtobeconditionsimposedbythe Boardinwritinginconnectionwiththisdecisionand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveJune23,2016 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 12 TheBoard’sauthoritytoapprovetheestablishmentofarepresentativeofficeparallelsthecontinuingauthority oftheStateofFloridatolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnot supplanttheauthorityoftheStateofFloridaanditsagent,theFloridaOfficeofFinancialRegulation,to licensetheproposedrepresentativeofficeofBanqueSYZinaccordancewithanytermsandconditionsthatthe FloridaOfficeofFinancialRegulationmightimpose.TheFloridaOfficeofFinancialRegulationapproved BanqueSYZ’sapplicationtoestablishtherepresentativeofficeonFebruary25,2016.

313 Federal Reserve BULLETIN November 2016 Vol. 102, No. 5 Legal Developments: Third Quarter, 2016 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act KeyCorp Cleveland, Ohio OrderApprovingtheMergerof BankHoldingCompaniesandtheAcquisitionof aBank FRBOrderNo.2016-12(July12,2016) KeyCorp,Cleveland,Ohio,afinancialholdingcompanywithinthemeaningof theBank HoldingCompanyAct(“BHCAct”),hasrequestedtheBoard’sapprovalundersection3 of theBHCAct,1toacquireFirstNiagaraFinancialGroup,Inc.(“FirstNiagara”),and therebyindirectlyacquireitssubsidiarybank,FirstNiagaraBank,NationalAssociation (“FirstNiagaraBank”),bothof Buffalo,NewYork.Followingtheproposedacquisition, FirstNiagaraBankwouldbemergedintoKeyCorp’ssubsidiarybank,KeyBankNational Association(“KeyBank”),Cleveland,Ohio.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(80FederalRegister75863(December4,2015)).3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. KeyCorp,withconsolidatedassetsof approximately$98.6billion,isthe32ndlargest depositoryorganizationintheUnitedStates.4KeyCorpcontrolsapproximately $72.6billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.5KeyCorp controlsKeyBank,whichoperatesinAlaska,Colorado,Florida,Idaho,Indiana,Maine, Michigan,NewYork,Ohio,Oregon,Utah,Vermont,andWashington.KeyBankisthe 15thlargestinsureddepositoryinstitutioninNewYork,controllingdepositsof approximately$15.0billion,whichrepresentapproximately1.1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. FirstNiagara,withconsolidatedassetsof approximately$40.1billion,isthe45thlargest depositoryorganizationintheUnitedStates.FirstNiagaracontrolsapproximately $29.0billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal 1 12U.S.C.§1842. 2 ThemergerofFirstNiagaraBankintoKeyBankissubjecttotheapprovaloftheOfficeoftheComptrollerofthe Currency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c). 3 12CFR262.3(b). 4 AssetdataareasofMarch31,2016,anddepositdataareasofJune30,2015,unlessotherwisenoted. 5 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsbanks,andsavings associations.

314 FederalReserveBulletin|November2016 amountof depositsof insureddepositoryinstitutionsintheUnitedStates.FirstNiagara controlsFirstNiagaraBank,whichoperatesinConnecticut,Massachusetts,NewYork, andPennsylvania.FirstNiagaraBankisthe14thlargestinsureddepositoryinstitutionin NewYork,controllingdepositsof approximately$18.8billion,whichrepresentapproximately1.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,KeyCorpwouldbecomethe26thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$138.7billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.KeyCorpwouldcontroltotaldepositsof approximately$101.6billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.6KeyCorpwouldbecometheninthlargestdepository organizationinNewYork,controllingdepositsof approximately$33.8billion,which representapproximately2.5percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. PublicCommentsontheProposal Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBoard’sRulesof Procedure.7TheBoardextended theinitialperiodforpubliccommenttoaccommodatethepublicinterestinthisproposal, providinginterestedpersonsuntilJanuary31,2016,atotalperiodof 62days,tosubmit writtencomments.Thetimeforsubmittingcommentshasexpired,andtheBoardreceived commentsconcerningtheproposalfrom439individualsandorganizations. TheBoardreceivedcommentsfrom388commenterssupportingtheproposal.Mostof thesecommentersarecharitableandcommunityorganizationsthatdescribefavorable experienceswithKeyCorpandKeyBankandcommendedthecompanyanditsmanagementforitssupportof variouscommunitydevelopmentprograms,initiatives,projects,and partnerships.SupportingcommentersalsoassertedthatKeyBankhas(i)workedto expandcreditindistressedareas,(ii)providedlow-andmoderate-income(“LMI”)householdswithaccesstofinancialservicesandprogramsinfinancialliteracy,and(iii)developed innovativeprojectstobenefitlow-incomeandminoritycommunities. TheBoardreceivedcommentsfrom51commenterseitheropposingorexpressingconcerns abouttheproposalorrequestingthattheBoardonlyapprovetheproposalsubjectto certainconditions.Manycommentersallegedthattheproposalwouldhavesignificant anticompetitiveeffectsincertainupstateNewYorkbankingmarkets,particularlyinthe Buffalo-NiagaraFalls,NewYorkbankingmarket(“Buffalomarket”).Manycommenters alsoallegedthatbranchclosuresandconsolidationscontemplatedbyKeyCorpinconnectionwiththetransactionwouldresultinsignificantjoblossesandareductioninthe availabilityof bankingservicesandproductsinupstateNewYork,particularlyinLMI communities.Severalcommentersallegedthattheproductsandservicesofferedby KeyBankareinferiortothoseofferedbyFirstNiagaraBank,andsomecriticized KeyBank’slendingrecordtominoritiesincertainMetropolitanStatisticalAreas (“MSAs”),basedonlendingdatareportedundertheHomeMortgageDisclosureActof 1975(“HMDA”).Somecommentersquestionedthemergerconsiderationtobepaidto FirstNiagarashareholders,andsomecriticizedthepaymentsthatcertainFirstNiagara executiveswouldreceiveuponconsummationof theproposal.Twocommentersalso 6 TheproformadepositsofthecombinedorganizationincludethedepositsthatKeyCorpproposestodivest throughitssaleof18FirstNiagaraBankbranchesinBuffalo,NewYork,discussedinmoredetailbelow. 7 See12CFR262.3(b).

LegalDevelopments:ThirdQuarter,2016 315 allegedthattheproposalwouldhaveanegativeimpactonthefinancialstabilityof the UnitedStates. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.8Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.9Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,if thebankholdingcompanywoulduponconsummationcontrol30percentor moreof thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestate orinanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.10 Forpurposesof theBHCAct,thehomestateof KeyCorpisOhioandthehomestateof FirstNiagaraisNewYork.11FirstNiagaraalsooperatesinConnecticut,Massachusetts, andPennsylvania.KeyCorpiswellcapitalizedandwellmanagedunderapplicablelaw,and KeyBankhasasatisfactoryCommunityReinvestmentAct(“CRA”)12rating.Massachusettshasathree-yearminimumagerequirementandNewYorkandConnecticuthavefiveyearrequirements.FirstNiagarahasbeeninexistenceformorethanfiveyears.13PennsylvaniadoesnothaveaminimumagerequirementthatappliestoKeyCorp’sacquisitionof FirstNiagaraandFirstNiagaraBank.14 Onconsummationof theproposedtransaction,KeyCorpwouldcontrollessthan1percent of thetotalamountof depositsininsureddepositoryinstitutionsintheUnitedStates.In addition,KeyCorpwouldcontrolapproximately2.5percentof thetotalamountof depositsof insureddepositoryinstitutionsinNewYork,theonlystateinwhichKeyCorp andFirstNiagarahaveoverlappingbankingoperations.Accordingly,inlightof allthe factsof record,theBoardmayapprovetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga 8 12U.S.C.§1842(d)(1)(A). 9 12U.S.C.§1842(d)(1)(B). 10 12U.S.C.§1842(d)(2)(A)and(B).Theacquiringandtargetinstitutionshaveoverlappingbankingoperationsin anystateinwhichanybanktobeacquiredislocatedandtheacquiringbankholdingcompanycontrolsany insureddepositoryinstitutionorabranch.Forpurposesofsection3(d)oftheBHCAct,theBoardconsidersa banktobelocatedinthestatesinwhichthebankischartered,headquartered,oroperatesabranch.See 12U.S.C.§1841(o)(4)–(7). 11 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Anationalbank’shomestateisthestateinwhichthemain officeofthebankislocated. 12 12U.S.C.§2901etseq. 13 SeeMass.Gen.Lawsch.167A,§2;N.Y.BankingLaw§142-a(1);Conn.Gen.Stat.§36a-411. 14 See7Pa.Stat.Ann.§§1601–1610.

316 FederalReserveBulletin|November2016 proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.15 KeyCorpandFirstNiagarahavesubsidiarydepositoryinstitutionsthatcompetedirectlyin 12bankingmarketsinthestateof NewYork:theAlbany,Binghamton,Buffalo,Franklin, Ithaca,Jamestown,MetroNewYorkCity,Rochester,SaintLawrence,Syracuse,Utica- Rome,andWatertownbankingmarkets(“NewYorkbankingmarkets”).16 TheBoardreceivedcommentsfrom23commentersobjectingtotheproposalonthe groundsthatitwouldhavesignificantanticompetitiveeffectsincertainupstateNewYork bankingmarkets,particularlytheBuffalomarket.Commentersexpressedconcernthat consummationof theproposalwould,amongotherthings,haveanadverseimpactonthe ratesandproductsofferedintheupstateNewYorkregion.Somecommentersassertedthat theupstateNewYorkregionisalreadyhighlyconcentratedandthattheproposalwould reduceconsumeraccesstobankingcompetitionintheregiontoanunacceptablylowlevel. TheBoardhasconsideredthecompetitiveeffectsof theproposalineachof therelevant markets.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthemarkets;therelativesharesof totaldepositsininsureddepositoryinstitutions inthemarkets(“marketdeposits”)thatwouldbecontrolledbyKeyCorp;17theconcentrationlevelsof marketdepositsandtheincreaseintheselevels,asmeasuredbythe HerfindahlHirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);18thecommentsreceived ontheproposal;othercharacteristicsof themarkets;and,asdiscussedbelow,commitmentsmadebyKeyCorptodivest18FirstNiagaraBankbranchesintheBuffalomarket. BankingMarketsWithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheAlbany,Binghamton,Franklin, Ithaca,Jamestown,MetroNewYorkCity,Rochester,SaintLawrence,Syracuse,Utica- Rome,andWatertownmarkets.19Onconsummationof theproposal,thechangeinthe HHIintheMetroNewYorkCity,Rochester,andUtica-Romemarketswouldbesmall, andthemarketswouldremainunconcentrated.AlthoughthechangeintheHHIinthe Albany,Jamestown,andSyracusemarketswouldbeabove200,eachof thesebanking 15 12U.S.C.§1842(c)(1). 16 ExceptfortheBuffalomarket,thesebankingmarketsaredefinedintheAppendix.CertainNewYorkbanking marketsincludeareasofConnecticut,NewJersey,andPennsylvania. 17 DepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserveBulletin743 (1984).Thus,theBoardregularlyhasincludedthriftdepositsinmarketsharecalculationsona50percent weightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 18 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html. 19 ThecompetitiveeffectsoftheproposalinthesemarketsaredescribedintheAppendix.

LegalDevelopments:ThirdQuarter,2016 317 marketswouldremainmoderatelyconcentrated.TheBinghamton,Franklin,Ithaca,Saint Lawrence,andWatertownmarketswouldremainhighlyconcentratedbutthechangesin theHHIinthesemarketswouldbesmall.Ineachof thesebankingmarkets,numerous competitorswouldremain. BankingMarketWarrantingSpecialScrutiny Thestructuraleffectsthatconsummationof theproposalwouldhaveintheBuffalo market20warrantadetailedreviewbecausetheconcentrationlevelonconsummation wouldexceedthethresholdsintheDOJBankMergerGuidelineswhenusinginitial competitivescreeningdata.Usingthatscreeningdata,KeyCorpisthethirdlargestdepositoryorganizationintheBuffalomarket,controllingapproximately$3.6billionindeposits, whichrepresentapproximately8.7percentof marketdeposits.FirstNiagaraisthesecond largestdepositoryorganizationintheBuffalomarket,controllingapproximately $10.4billionindeposits,whichrepresentapproximately25.0percentof marketdeposits. Onconsummation,KeyCorpwouldbecomethesecondlargestdepositoryorganizationin theBuffalomarket,controllingapproximately$14.1billionindeposits,whichrepresent approximately33.7percentof marketdeposits.TheHHIinthismarketwouldincreaseby 436points,from3167to3603. Tomitigatethepotentiallyadversecompetitiveeffectsof theproposalintheBuffalo market,KeyCorphascommittedtodivest18of FirstNiagaraBank’s55branchesinthe Buffalomarkettoacompetitivelysuitablepurchaser.21Inadditiontothedivestiture,the Boardalsohasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheBuffalomarket.22Thecompetitiveeffectsaremitigatedbyseveral factorsthatindicatethattheincreaseinconcentrationintheBuffalomarket,asmeasured bytheaboveHHI,overstatesthepotentialcompetitiveeffectsof theproposalinthe market.Onethriftinstitutioninthemarkethasacommercialandindustrialloanportfolio similartothoseof commercialbanksintheBuffalomarket,23asmeasuredintermsof the 20 TheBuffalomarketisdefinedasCattaraugus,Erie,andNiagaracounties;Allen,Alma,Amity,Angelica, Belfast,Bolivar,Caneadea,Centerville,Clarksville,Cuba,Friendship,Genesee,Granger,Hume,NewHudson, Rushford,Scio,andWirttowns,andOilSpringsreservationinAlleganyCounty;Bataviacity,Alabama, Alexander,Batavia,Darien,Oakfield,andPembroketowns,andTonawandareservationinGeneseeCounty; RidgewayandShelbytownsinOrleansCounty;andArcade,Attica,Bennington,Eagle,Java,Orangeville,Pike, Sheldon,andWethersfieldtownsinWyomingCounty,allinNewYork. 21 Asaconditionofconsummatingtheproposal,KeyCorphascommittedthatitwillexecute,beforeconsummationoftheproposal,asalesagreementwithacompetitivelysuitableinstitutionforthesaleof18branches. KeyCorpalsohascommittedtocompletethedivestiturewithin180daysafterconsummationoftheproposed merger.Inaddition,KeyCorphascommittedthat,iftheproposeddivestitureisnotcompletedwithinthe 180-dayperiod,KeyCorpwouldtransfertheunsoldbranchestoanindependenttrustee,whowouldbe instructedtosellthemtoanalternatepurchaserorpurchasersinaccordancewiththetermsofthisorderand withoutregardtoprice.BoththetrusteeandanyalternatepurchasersmustbedeemedacceptabletotheBoard. See,e.g.,BankAmericaCorporation,78FederalReserveBulletin338(1992);UnitedNewMexicoFinancial Corporation,77FederalReserveBulletin484(1991). 22 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorporation, 84FederalReserveBulletin129(1998). 23 Thestandardtreatmentofthriftsinthecompetitiveanalysisistogivetheirdeposits50-percentweightingto reflecttheirlimitedlendingtosmallbusinessesrelativetobanks’lendinglevels.However,theBoardpreviously hasindicatedthatitmayconsiderthecompetitivenessofathriftinstitutionatalevelgreaterthan50percentof itsdepositswhenappropriateifcompetitionfromtheinstitutioncloselyapproximatescompetitionfroma commercialbank.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703(1989).Where,ashere,the factsandcircumstancesofabankingmarketindicatethataparticularthriftservesasasignificantsourceof commercialloansandprovidesabroadrangeofconsumer,mortgage,andotherbankingproducts,theBoard hasconcludedthatcompetitionfromsuchathriftcloselyapproximatescompetitionfromacommercialbank andthatdepositscontrolledbytheinstitutionshouldbeweightedat100percentinmarket-sharecalculations. See,e.g.,RiverValleyBancorp,FRBOrderNo.2012-10(October17,2012);RegionsFinancialCorporation, 93FederalReserveBulletinC16(2007);andBanknorthGroup,Inc.,supra.

318 FederalReserveBulletin|November2016 ratiosof thosetypesof loanstototalloansandassets.24TheBoardhasconcludedthat depositscontrolledbythisinstitutionshouldbeweightedat100percentinthemarketsharecalculations. Inaddition,ninecreditunionsexertacompetitiveinfluenceintheBuffalomarket.Each institutionoffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe market.25TheBoardfindsthatthesecircumstanceswarrantincludingthedepositsof these creditunionsata50-percentweightinestimatingmarketinfluence.Thisweightingtakes intoaccountthelimitedlendingdonebythesecreditunionstosmallbusinessesrelativeto commercialbanks’lendinglevels. Takingintoaccountthedivestitureof the18FirstNiagaraBankbranches,andwiththe depositsof thethriftweightedat100percentandtheninecreditunionsat50percent,the Buffalomarketappearstobehighlyconcentratedbeforeandafterthetransaction,butthe HHIwouldincreasebylessthan200points.Uponconsummationof themerger,KeyCorp wouldcontrolapproximately29.1percentof marketdeposits,andtheHHIwouldincrease by190pointstoalevelof 3272,alevelthatwouldbewithintheDOJBankMerger Guidelines.Includingthrifts,19depositoryorganizationswouldcontinuetooperateinthe Buffalomarket,includingoneinstitutionwithamarketshareof almost50percent,and twootherinstitutionswithmarketsharesabove8percent. TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof themergerand hasadvisedtheBoardthatconsummationof theproposalwiththeproposeddivestitureof branchesasdiscussedabovewouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingtheBuffalomarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,includingtheproposeddivestiturecommitments,the Boardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverse effectoncompetitionorontheconcentrationof resourcesinthe12bankingmarketsin whichKeyCorpandFirstNiagaracompetedirectlyorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof the organizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformation regardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorgani- 24 Thisthriftinstitutionhasaratioofcommercialandindustrialloanstoassetsofslightlylessthan5percent, whichhasbeenincreasinginrecentyears.Thisiscomparabletotheratioforsomecommercialbanksinthe marketandgreaterthantheratioforsomethriftinstitutionsthattheBoardhaspreviouslyfoundtobefull competitorsofcommercialbanks.Id. 25 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.See,e.g.,MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14, 2012);OldNationalBancorp,FRBOrderNo.2012-9(August30,2012);UnitedBankshares,Inc.,(orderdated June20,2011),97FederalReserveBulletin19(2dQuar.2011);ThePNCFinancialServicesGroup,Inc., 94FederalReserveBulletinC38(2008);ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65 (2007);RegionsFinancialCorporation,93FederalReserveBulletinC16(2007);PassumpsicBancorp,92Federal ReserveBulletinC175(2006);andWachoviaCorporation,92FederalReserveBulletinC183(2006).

LegalDevelopments:ThirdQuarter,2016 319 zations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersa varietyof information,includingcapitaladequacy,assetquality,andearningsperformance, aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,earnings prospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalso considerstheabilityof theorganizationtoabsorbthecostsof theproposalandto completetheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoard considersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof their financialandmanagerialresourcesandtheproposedbusinessplan. KeyCorpandKeyBankarebothwellcapitalizedandwouldremainsoonconsummation of theproposal.Theproposedtransactionisabankholdingcompanymergerthatisstructuredasacashandstockpurchase,withasubsequentmergerof thesubsidiarydepositoryinstitutions.26Theassetquality,earnings,andliquidityof KeyBankandFirstNiagara Bankareconsistentwithapproval,andKeyCorpappearstohaveadequateresourcesto absorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations. Inaddition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of KeyCorp,FirstNiagara,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyKeyCorp;theBoard’ssupervisoryexperienceswithKeyCorpandFirstNiagaraandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicable banking,consumerprotection,andanti-money-launderinglaws. KeyCorp,FirstNiagara,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.KeyCorp’sdirectorsandseniorexecutiveofficershavesubstantial knowledgeof andexperienceinthebankingandfinancialservicessectors,anditsriskmanagementprogramappearsconsistentwithapprovalof thisexpansionaryproposal.27 TheBoardalsohasconsideredKeyCorp’splansforimplementingtheproposal.KeyCorp hasconductedcomprehensiveduediligenceandisdevotingsufficientfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.KeyCorp wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,KeyCorp’sandFirstNiagara’smanagementshavetheexperienceandresourcesto ensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andKeyCorp planstointegrateFirstNiagara’sexistingmanagementandpersonnelinamannerthat augmentsKeyCorp’smanagement.28 26 Toeffecttheholdingcompanymerger,eachshareofFirstNiagaracommonstockwouldbeconvertedintoa righttoreceiveKeyCorpcommonstockandcash,basedonanexchangeratio.KeyCorphasadequate resourcestofundthecashportionofthetransaction. 27 SeveralcommentersexpressedconcernsregardingthesharepriceofferedforFirstNiagara.Somecommenters alsoexpressedconcernsthatthetransactionwouldmostlybenefitFirstNiagaraexecutivesandcriticized paymentsthatcertainFirstNiagaraexecutivesmayreceiveuponconsummationoftheproposal.TheBoard notesthatKeyCorpandFirstNiagarafiledwiththeU.S.SecuritiesandExchangeCommissioninformation regardingtheproposedtransaction,includinginformationconcerningthecompensationofcertainFirst Niagaraexecutives,andshareholdersofbothorganizationsapprovedtheproposal. 28 KeyCorpplanstoincreasethenumberofseatsonitsboardofdirectorsand,onconsummation,FirstNiagara wouldselectthreeofitscurrentdirectorstojoinKeyCorp’sboard.Inaddition,KeyCorpanticipatesinviting othercurrentFirstNiagaradirectorstoserveononeormoreofKeyCorp’sregionaladvisoryboards.

320 FederalReserveBulletin|November2016 Basedonallthefactsof record,includingKeyCorp’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andcommentsreceivedontheproposal,theBoardconcludesthatconsiderationsrelating tothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof KeyCorpandFirst Niagaraincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.29Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.30Inaddition,theBoardconsidersthebanks’overallcompliancerecord,theresults of recentfairlendingexaminations,andothersupervisoryassessments;thesupervisory viewsof examiners;andothersupervisoryinformation.TheBoardalsomayconsiderthe applicantinstitution’sbusinessmodel,itsmarketingandoutreachplans,theinstitution’s plansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,31andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includingLMIneighborhoods,inevaluating bankexpansionaryproposals.32Inaddition,fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,or certainothercharacteristics. TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRAperformanceof KeyBankandFirstNiagaraBank,thefairlendingandcompliance recordsof bothbanks,thesupervisoryviewsof theOCCandtheConsumerFinancial ProtectionBureau(“CFPB”),confidentialsupervisoryinformation,informationprovided byKeyCorp,andthepubliccommentsreceivedontheproposal. Summaryof PublicCommentsonConvenienceandNeeds Asnotedabove,theBoardreceivedcommentsfrom388commenterssupportingthe proposal.Amajorityof thesecommentersarecharitableandcommunityorganizations thatpointedtothebenefitsthatKeyCorphasprovidedtothecommunitiesthattheyserve. ThesecommentersdescribednumerousgrantsanddonationsmadebyKeyCorptocharitableorganizationsandeducationalprovidersincommunitiesacrossthecountryandnoted thatKeyCorphasprovidedfinancialaidtoLMIstudentsandfundedfinancialliteracy programs.ThesecommentersalsodescribedKeyCorp’sparticipationincommunity-related activities,suchastaxpreparationservicesforindigentpersonsandparticipationinfinancialliteracyprograms. 29 12U.S.C.§1842(c)(2). 30 12U.S.C.§2901etseq. 31 12U.S.C.§2901(b). 32 12U.S.C.§2903.

LegalDevelopments:ThirdQuarter,2016 321 Twenty-eightcommentersarguedthattheproposalwouldnegativelyaffecttheconvenience andneedsof thecommunitiesservedbyKeyCorpandFirstNiagara.Thesecommenters expressedconcernsthatthebranchclosures,consolidations,anddivestituresplannedby KeyCorpinconnectionwiththeproposalwouldadverselyimpacttheBuffalomarketand theupstateNewYorkregiongenerally,becauseportionsof theregionarealreadyunderservedfromabankingperspective.Thesecommentersfurtherassertedthatcertainportions of thelocalpopulation,includingLMIindividuals,personslivinginLMIneighborhoods, anddisabledpersons,dependupontheirphysicalaccesstobankbranchesandATMs, andthattheplannedbranchclosureswouldhavetheeffectof limitingthataccess.Several commentersclaimedthatFirstNiagaraBankcustomerswouldexperienceservicedisruptionsduringthemergerintegrationprocess.Inaddition,manycommentersexpressed concernthattheproposalwouldresultinsignificantjoblossesinupstateNewYork. CommentersalsomadevariousassertionsrelatedtoKeyCorp’slending,investment,and serviceactivities.SeveralcommentersrequestedthatKeyCorpcommittoacomprehensive planoutliningspecificstrategiesandgoalsforenhancingthecommunitiesitserves, includingdemonstratingasignificantpublicbenefit.Somecommentersrequestedthatthe Board’sapprovalof thetransactionbeconditionedonKeyCorpdevelopingacomprehensivecommunitybenefitsplanthatbetterservesthecommunitiesaffectedbythemerger. Somecommentersproposedpotentiallending,investment,orserviceinitiativesthat KeyBankcouldpursueinthecommunitiesitserves,particularlyinupstateNewYork,or arguedthatKeyBank’sproposedinitialcommitmenttocharitabledonationsisinadequate relativetotheproposedexpansionof theorganization’soverallfootprint. CommentersalsoallegedthatKeyBankandFirstNiagaraBankarenotmeetingthecredit needsof certaincommunitiesthatthebanksserve,andcriticizedthebanks’lendingrecords tominorityborrowersincertainmarkets,basedon2013HMDAdata.Commenters expressedconcernsaboutapotentialincreaseindiscriminatorylendinginthemarketsthat willbeservedbythecombinedorganizationfollowingtheproposedtransaction. Businessesof theInvolvedInstitutionsandResponsetoComments KeyCorp,throughKeyBankanditsnonbankingsubsidiaries,providesawiderangeof retailandcommercialbanking,commercialleasing,investmentmanagement,consumer finance,andinvestmentbankingproductsandservicestoindividual,corporate,andinstitutionalclients.KeyCorpprovidesarangeof financialproductsandservices,including deposit,lending,cashmanagement,investmentproducts,equipmentfinance,retailsecuritiesbrokerage,insurance,andinstitutionalassetmanagementservices.FirstNiagara, throughFirstNiagaraBankanditsnonbankingsubsidiaries,providesretailandbusiness bankingservices,includingresidentialandcommercialrealestateloans,commercialbusinessloansandleases,consumerloans,wealthmanagementproducts,depositproducts,and capitalmarketsservices.FirstNiagaraBankprovidescustomersretailandcommercial depositproducts,residentialandcommercialrealestateloans,commercialbusinessloans andleases,consumerloans,andwealthmanagementproducts.InNewYork,theonlystate inwhichthebankshaveoverlappingoperations,KeyBankandFirstNiagaraBank operate239and195branches,respectively. KeyCorpassertsthatitisstronglycommittedtoservingitscommunities,particularlyLMI communities,demonstratedbythefactthatKeyBankhasreceivedeightconsecutiveoverall “Outstanding”CRAratings.KeyCorparguesthat,sinceKeyBank’smostrecentCRA evaluation,ithasprovidedasubstantialnumberof communitydevelopmentloans supportingactivitiesaimedatbenefittingLMIindividualsandcommunities,andhasmade significantcommunitydevelopmentinvestments.KeyCorpfurthercontendsthatits commitmenttoitscommunitiesisdemonstratedbyitsdevelopmentof asuiteof innova-

322 FederalReserveBulletin|November2016 tive,low-costproductsandservicesdesignedtobenefitLMIindividuals.KeyCorpasserts thatitexpectstoimproveuponFirstNiagara’sexistingprogramsundertheCRAinthe communitiesservedbyFirstNiagara,andwillcontinueprovidingahighlevelof servicesto theLMIcommunitiesitalreadyserves. KeyCorparguesthatitslegacyof communityinvestmentandcivicparticipationdemonstratesthatitwilltakeseriouslytheconcernsexpressedbycommentersregardingcommunitybankingandinvestments.Inresponsetothesecommenters,KeyCorpheldcommunity outreachmeetingsandworkedcloselywithvariouscommunityorganizationstodevelopa NationalCommunityBenefitsPlan(“Plan”).ThePlancallsforKeyBanktoinvest $16.5billioninitscommunitiesoverafive-yearperiod,startingin2017.KeyCorpasserts thatupto35percentof thetotalcommitmentwouldbetargetedfortheareaswhere KeyBankandFirstNiagaraBankcurrentlyoverlapinNewYork.ThePlanestablishes goalsforloans,investments,andproductsspecificallyaimedatbenefittingLMIindividuals andcommunities,includinghomemortgages,smallbusinessloans,communitydevelopmentloans,investments,andphilanthropiccontributions.Inaddition,thePlanestablishes targetsforbranchinginLMIcommunitiesacrossthebank’sgeographicfootprintand, separately,thestateof NewYork.ThebankwillopenanadditionalbranchinanLMI communityinEastBuffaloandkeepopenfourotherbranchesinLMIneighborhoodsthat thebankinitiallyplannedtoclose.KeyCorpfurtherassertsthatthebankwillenhanceits diversityandinclusionpolicies,expanditscommunityengagementandmarketingefforts, andestablishanadvisorycouncilmadeupof variouscommunityorganizationsthatwill meetperiodicallytoassessKeyBank’sprogressunderthePlanandtobeinformedof the bank’sfutureinitiatives.KeyCorpassertsthatthePlanaddresses,andshouldsubstantially resolve,theconcernsexpressedbycommenters. KeyCorpassertsthattheproposedbranchclosureswouldoptimizethecombinedorganization’sbranchnetworkduetothesignificantoverlapbetweenKeyBank’sandFirstNiagara Bank’sbranchnetworksinupstateNewYork.KeyCorpfurtherassertsthatinmanycases, theclosuresareeffectivelybranchconsolidationsandthattheavailabilityof banking servicesinthosecommunitieswillnotbereduced,becauseanotherKeyBankbranchwill beincloseproximity.Moreover,KeyCorprepresentsthatthebranchclosureswouldbe completedinaccordancewiththeOCC’sbranchclosingnoticeregulations,whichprovide thepublicanopportunitytocomment,andKeyBank’sbranchclosingpolicy.33KeyCorp assertsthatitiscommittedtomaintainingbranchaccessinLMIcommunities,andfor branchclosingsinLMIareas,KeyCorpwouldseektoensurethatanotherbranchwould remainincloseproximityof theclosedbranch. Lastly,KeyCorpcontendsthatithastakensubstantialstepstoensurethatconsummation of theproposalwouldnotresultinanydisruptionof bankingservices,includingthe closingof accounts,forcustomersof FirstNiagaraBank.KeyCorphasassembledanintegrationteamwithsignificantexperienceincustomerandsystemsintegration,whichis workingwithitscounterpartsatFirstNiagaratoensurethatthetransitionfromFirst NiagaratoKeyCorpisasseamlessaspossibleforcustomers 33 Section42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedbytheJointPolicy StatementRegardingBranchClosings(64Fed.Reg.34844(1999)),requiresthatabankprovidethepublicwith atleast30days’notice,andtheappropriatefederalsupervisoryagencywithatleast90days’notice,beforethe dateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdatafor theclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

LegalDevelopments:ThirdQuarter,2016 323 Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.34Inthiscase,theBoardconsideredthe supervisoryviewsof andinformationprovidedbytheOCC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.35Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sHMDAdata,inadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulationstoassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors, including(1)thenumberandamountof homemortgage,smallbusiness,smallfarm,and consumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographic distributionof theinstitution’slending,includingtheproportionanddispersionof the institution’slendinginitsassessmentareasandthenumberandamountof loansinlow-, moderate-,middle-,andupper-incomegeographies;(3)thedistributionof loansbasedon borrowercharacteristics,including,forhomemortgageloans,thenumberandamountof loanstolow-,moderate-,middle-,andupper-incomeindividuals;36(4)theinstitution’s communitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. Asnotedabove,somecommentersallegedthat,basedon2013HMDAdata,KeyBankand FirstNiagaraBankhavefailedtoadequatelyserveallof theircommunities,includingthe Buffalomarket,andthatKeyBankhasnotshownadesiretoexpandservicesinthat market. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand 34 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75Fed.Reg.11,642,11,665 (March11,2010). 35 12U.S.C.§2906. 36 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3).

324 FederalReserveBulletin|November2016 programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.37 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof KeyBank KeyBankwasassignedanoverallratingof “Outstanding”atitsmostrecentCRAperformanceevaluationbytheOCC,asof October1,2011(“KeyBankEvaluation”).38KeyBank received“Outstanding”ratingsfortheLendingTestandtheServiceTestanda“High Satisfactory”ratingfortheInvestmentTest.AlthoughKeyBank’soverallratingwasbased onablendof itsstateandmultistatemetropolitanarearatings,examinersgavethe greatestweighttotheCleveland-Elyria-Mentor,OhioMSA;theAlbany-Schenectady-Troy, NewYorkMSA;andtheSeattle-Bellevue,WashingtonMSA(“primaryratingareas”), becausethosethreeprimaryratingareasrepresentedthebank’smostsignificantmarketsin termsof depositconcentrations.TheBoardhasconsultedwiththeOCCregardingthe KeyBankEvaluationandKeyBank’spoliciesandproceduresrelatingtotheCRA. ExaminersconcludedthatKeyBank’slendingperformancewasexcellentoverall. KeyBank’sborrowerdistributionwasgoodinallthreeprimaryratingareas,and geographicdistributionwasgoodintwoprimaryratingareasandadequateinone.Examinersnotedthatthebank’sHMDAloandistributionbyborrowerwasexcellentinone primaryratingareaandgoodintheothertwo,anditsHMDAgeographicdistributionwas goodintwoprimaryratingareas.Geographicdistributionof smallloanstobusinesseswas excellentintwoprimaryratingareas,andgoodinthethird.ExaminersfoundKeyBank’s communitydevelopmentlendingtobesignificantlypositive,whichelevatedthebank’s lendingperformancetoexcellentintwoprimaryratingareas.Theelevatedratingswere basedonthesignificanceof communitydevelopmentlendingvolume,innovativeness, complexity,andlevelof responsivenessbythebanktocommunityneeds. ExaminersfoundthatKeyBankhadagoodvolumeof qualifiedcommunitydevelopment investmentsandgrantsoverall.Thebank’sexcellentperformanceinlimited-scopeassessmentareashadapositiveimpactonoverallperformanceinoneprimaryratingarea.The bankshowedgoodresponsivenesstocommunityneedsforaffordablehousingprimarily throughthepurchaseof LowIncomeHousingTaxCredits(“LIHTC”),whichwerethe foundationof thebank’sinvestmentstrategy.Examinersfoundthebankrespondedfavorablytocommunityneedsforrevitalizationandstabilizationof LMIneighborhoods, althoughtoalesserdegree.Examinersnotedthatthebankmadesignificantuseof complexinvestmentsthroughLIHTCsthatroutinelyinvolvedcollaborativeeffortsamong numerousfundingsources,includinggovernmententities,privateequityfunds,financial institutions,andotherprivateinvestors.Theinvestmentswereresponsivetoaffordable housingandrevitalizationandstabilizationneedsthroughoutthebank’sassessmentareas. 37 Otherdatarelevanttocreditdecisionscouldincludecredithistoryproblems,debt-to-incomeratios,andloanto-valueratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditional informationbeforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 38 TheKeyBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners used2010MortgageandSmallBusinessPeerDatatoevaluatethebank’slendingmarketshare.Fordeposit information,examinersusedthemostrecentFederalDepositInsuranceCorporationDepositMarketShare Reports,asofJune30,2011.TheKeyBankEvaluationreviewedHMDAandsmallbusiness/farmloanoriginationsfromJanuary1,2008,throughJune30,2011.Theevaluationperiodforinvestment,retail,andcommunity developmentactivities(loansandservices)wasJuly1,2008,throughSeptember30,2011.TheKeyBankEvaluationincludedfull-scopereviewsofoneassessmentareaineachstatewhereKeyBankhadabranch(typically, theMSAormetropolitandivisionthatcontainedthelargestpercentageofthebank’sdepositswithinthestate), aswellaseachmultistateMSAwherethebankhadbranchesinmorethanonestate.

LegalDevelopments:ThirdQuarter,2016 325 ExaminersconcludedthatKeyBank’sserviceperformancewasexcellentoverall.Examiners notedthatthebank’sdeliverysystemswerereadilyaccessibletoallportionsof thebank’s assessmentareas,andthatbranchdistributionwasexcellentinthethreeprimaryrating areas.Accesstobankingfacilitiesandserviceswasenhancedintheprimaryratingareasby officeslocatedinmiddle-incomegeographieslocatedincloseproximitytomoderateincomegeographies.ExaminersfoundthatKeyBank’srecordof openingandclosing branchofficeshadimprovedtheaccessibilityof deliverysystemsinLMIgeographiesand that,withintheprimaryratingareas,branchhoursdidnotvaryinawaythatinconveniencedLMIgeographies.Thebankwasfoundtooffersimilarproductsandservices throughoutitsbranchnetwork,andsomeof theproductsweretailoredforLMIgeographiesandindividuals.Examinersstatedthatinoneprimaryratingarea,consumeradvocatesconsideredthebank’salternatepaydaylendingproducttobeamodelforotherbanks. Examinersfoundthatthebankofferedarelativelyhighlevelof communitydevelopment servicesinitsprimaryratingareas. KeyBank’sCRAEffortsSincethe2011Evaluation KeyCorprepresentsthat,sincetheKeyBankEvaluation,thebankhasmadecommunity developmentloansacrossitsentiregeographicfootprinttosupportactivitiesincluding affordablehousing,economicdevelopment,communityservicesforLMIpersonsor communities,andrevitalizationandstabilizationof LMIareas.KeyBankhasdeveloped communitylendingproductsandservicesaimedatextendingbankingservicestoindividualswhomaybeneworunfamiliarwithbanking,orwhohavehadchallengesmanaging abankingrelationshipinthepast.Theproductsincludelow-feecheckcashingservices, depositaccounts,low-feerevolvinglinesof credit,creditrehabilitationloans,andaffordablehomefinancing.KeyBankisoneof onlythreeinsureddepositoryinstitutions approvedbytheU.S.Departmentof HousingandUrbanDevelopmentasaMultifamily AcceleratedProcessingLender,enablingthebanktomakeexpeditedlendingdecisionson multifamilymortgageapplications.Thebankprovidesfreein-personfinancialliteracy educationforallmembersof itscommunitiesontopicssuchasbudgeting,managing money,andbuildingandmaintaininggoodcredit,whicharetaughtbyKeyCorpemployee volunteers.ThebankalsooffersonlinefinancialliteracycoursesinEnglishandSpanish, andprovidesfreetaxpreparationforlocalresidentsduringitsannual“SuperRefund Saturday”event. SincetheKeyBankEvaluation,thebankalsohasprovidedHMDA-reportableloans,small businessorsmallfarmloans,andcommunitydevelopmentloansintheBuffalomarket. Thebankprovidedcommunitydevelopmentloanssupportingtheconstructionof affordablehousingunitsandredevelopmentof commercial,industrial,andmixed-usebuildings. Inaddition,KeyBankprovidedconstructionloansinconnectionwithanaffordablemultifamilyresidentialdevelopmentaimedatprovidinghousingoptionsandamenitiesfor familieswithincomesranging40to80percentbelowthearea’smedianincome,andforthe developmentof additionalinfrastructureneededtoprovideaccesstoacommunityredevelopmentsite.KeyBankalsomadecommunitydevelopmentinvestmentsintheBuffalo market,includingthroughLIHTCinvestmentsandNewMarketTaxCreditinvestments. Inaddition,KeyBankFoundation,KeyCorp’snonprofitcharitablefoundation,made donationstovariousphilanthropiccausesacrosstheupstateNewYorkregion. CRAPerformanceof FirstNiagaraBank FirstNiagaraBankwasassignedanoverall“Satisfactory”ratingatitsCRAperformance evaluationbytheOfficeof ThriftSupervision(“OTS”),asof March12,2007(the“First

326 FederalReserveBulletin|November2016 NiagaraBankEvaluation”).39Thebankreceived“HighSatisfactory”ratingsforthe LendingTestandtheServiceTest,andreceivedan“Outstanding”ratingfortheInvestment Test.40TheOCCisnowtheprimarysupervisorof FirstNiagaraBankandhasbeen conductingitsownevaluationof thebank’sCRAperformance. Overall,examinersfoundthatthevastmajorityof thebank’slendingwasoriginatedwithin itsassessmentareas;however,levelsof lendingvariedbyspecificassessmentarea.Examinersnotedthatthebank’sgeographicdistributionof itsresidentiallendingwasadequate overall,butvariedbyassessmentarea.Examinersnotedthatthebank’sdistributionof homeloansbasedonborrowerincomewasreasonableoverall,butvariedfromexcellentto poordependingonthespecificassessmentarea.Examinersalsonotedthatloanvolumein LMIgeographieswasadequateoverall,butwaspoorinseveralassessmentareas.Examinershighlightedthatinseveralassessmentareas,thebankhadanexcellentvolumeof multifamilylending,particularlyinLMIcensustracts.Examinersalsofoundthatthebank displayedaconsistentlyexcellentlevelof smallbusinesslendingthroughoutitsassessment areas.Examinersemphasizedthatthebankhadagoodrecordof communitydevelopment lendingandusedflexible,innovative,andalternativelendingprogramstohelpmakecredit availabletoLMIborrowerswithinitsassessmentareasandthatthebankhadusedFederal HomeLoanBankprogramsextensively.Examinersfurthernotedthatthebank’sdelivery systemswereaccessibletoallportionsof itsassessmentareas,andthebankprovideda satisfactorylevelof communitydevelopmentservicestoitsmanycommunities. FirstNiagaraBankwasscheduledbytheOCCforaCRAevaluationin2012.Although thatevaluationislargelycomplete,theresultshavenotbeenreleased.TheBoardhas consultedwiththeOCCregardingtheFirstNiagaraBankEvaluationandthissubsequent CRAevaluation.TheBoardnotesthatKeyCorpwouldbeapplyingitsCRAprogram, policies,procedures,andinitiativesatthecombinedorganizationandthatKeyBankhas receivedeightconsecutive“Outstanding”ratingsforCRA. Viewsof theOCCandCFPB TheBoardhasconsultedwiththeOCC,theprimarysupervisorof bothKeyBankand FirstNiagaraBank,inconnectionwiththisproposalandtheOCC’sreviewof thebank mergerunderlyingthisproposal.TheOCCseparatelyreceivedcommentsonthebank mergerapplication,andwasprovidedwiththecommentsreceivedbytheBoardbothin supportof andagainsttheproposal.TheOCCisconsideringallof thecommentsin connectionwithitsreviewof thebankmergerapplication. Initsreviewof theproposal,theBoardconsultedtheOCCregardingbothinstitutions’ CRA,consumercompliance,andfairlendingrecords.TheBoardalsoconsultedwiththe OCCregardingKeyBank’spoliciesandproceduresrelatingtofairlendingandother consumerprotectionlawsandregulations,andKeyBank’sabilitytointegrateFirstNiagara Bankandresolveanyconcernsinatimelymanner.InadditiontoconsultingwiththeOCC, theBoardalsoconsultedwiththeCFPBregardingFirstNiagaraBank’srecordof compli- 39 TheFirstNiagaraBankEvaluationwasconductedusingOTSLargeInstitutionExaminationProcedures,and theexaminersevaluatedthefollowingfactors:performanceingrantingresidential,smallbusiness,andcommunitydevelopmentloans;thelevelofretailbankingandcommunitydevelopmentservicesprovided;andthelevel ofqualifiedinvestmentsmadewithintheassessmentarea.Thereviewperiodwas2004-2006.Thelendingtest focusedonloansreportableinaccordancewithHMDA,smallbusinessloans,andcommunitydevelopment loans.Examinersalsoconsideredinformationprovidedbycommunityleadersinthebank’sassessmentareas. 40 FortheFirstNiagaraBankEvaluation,examinersconductedreviewsofthefollowingentireMSAs:Buffalo- NiagaraFalls;Albany-Schenectady-Troy;GlenFalls;andIthaca,allinNewYork.Theexaminersconducted reviewsofcertaincountiesinthefollowingMSAs:Rochester,Syracuse,Utica-Rome,andPoughkeepsie- Newburgh-Middletown.Examinersalsoconductedreviewsofthefollowingcountiesinnon-MSAs:Greene, Columbia,Seneca,Courtland,Cayuga,Fulton,Montgomery,andGenesee,allinNewYork.

LegalDevelopments:ThirdQuarter,2016 327 ancewithconsumerprotectionlawsandregulationsandpoliciesandproceduresrelatingto fairlendingandotherconsumerprotectionlawsandregulations,aswellasaboutthe lendingrecordsof bothKeyBankandFirstNiagaraBank. TheOCChasindicatedthatithasnooutstandingsupervisoryconcernsregarding KeyBank’spoliciesandprocedures,andthatitiscontinuingtoevaluatetheapplication pendingbeforeit.KeyBankhascommittedtoimplementitspoliciesandproceduresatthe combinedorganization,andtheBoardexpectsthattheywillbecommensuratewiththe increasedsizeandcomplexityof thecombinedorganization.BasedontheBoard’sconsultationswiththeOCCandtheinformationdiscussedabove,KeyCorpappearscapableof effectivelyimplementingitspolicies,procedures,andprogramsacrossthecombinedorganizationtoeffectivelyserveallcommunitieswithinthefirm’sgeographicfootprint,andof addressinganyconsumercomplianceconcernsorissuesthatmayariseatthecombined organization.TheBoardalsoexpectsKeyCorptoengageinactivitiestohelpmeetcommunitycreditneedsatalevelcommensuratewiththeexpandedsizeandscopeof the combinedorganization,consistentwithsafeandsoundlendingpractices.Inaddition, KeyCorpshouldensurethatKeyBankcomplieswithanycommitmentsorconditionsthat theOCCmayrequestorimposeinconnectionwithitsactiononthebankmergerproposal. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.KeyCorprepresentsthattheproposalwould providecustomersof thecombinedorganizationaccesstoadditionalorexpandedproducts andservicesthatarenotcurrentlyofferedtoFirstNiagaraBankcustomers,including deposit,onlinebanking,mobilebankingandalternativeloanproducts,severalof whichare designedspecificallyforLMIcustomers.KeyCorpstatesthatcustomersof thecombined organizationwouldalsohaveaccesstoFirstNiagaraBank’sinsuranceandindirectauto lendingproductsthatarenotcurrentlyofferedtoKeyBankcustomers.KeyCorprepresents thattheproposalwouldnotresultinsignificantreductionsinproductsorservices currentlyofferedbytheinstitutions,andnotesthatKeyBankwouldwaivevariousaccount feesforaperiodof timetogiveFirstNiagaraBankcustomersanopportunitytolearn moreaboutKeyBank’sproducts. KeyCorprepresentsthatcustomerswouldbenefitfromthecombinedorganization’s enhancedlendingcapabilities.KeyCorphighlightsKeyBank’scommitmentunderthePlan tosubstantiallyincreaseitsresidentialmortgagelending,smallbusinessandfarmlending, andcommunitydevelopmentlendingandinvestments.KeyCorpalsorepresentsthat KeyBankwouldfurtherenhanceitscommunityengagementeffortsby(1)creatinga productinnovationfundtodevelopnewproductsforurbanandruralLMIcommunities, (2)conductingforumswithcommunitypartnerstoeducateconsumersandsmallbusinesses regardingthebank’sproductofferings,and(3)addingacorporateresponsibilityofficerin eachof theorganization’smajormarkets. KeyCorpfurtherrepresentsthatasaresultof theproposal,customersof thecombined organizationwouldhaveaccesstoasubstantiallylargerbranchandATMnetwork. KeyCorpalsostatesthatthecombinedorganizationwillexploreoffering,atFirstNiagara Bank’sbrancheslocatedinLMIcommunities,itsarrayof “KeyBankPlus”services,which includehassle-freecheckingaccounts,small-dollarloanproducts,reasonablypricedcheck

328 FederalReserveBulletin|November2016 cashingservices,afirst-timehomebuyerproduct,anunsecuredrevolvingcreditline,firsttimesavingsaccounts,andfinancialeducationprograms.41 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,consultationswiththeOCCandtheCFPB,confidentialsupervisoryinformation,informationprovidedbyKeyCorp,thepubliccommentson theproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”42 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.43These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.44 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem,includingthepubliccomments.45Boththeacquirerand targetarepredominantlyengagedinretailcommercialbankingactivities.46Theproforma 41 SomecommentersalsoexpressedconcernsaboutpotentialjoblossesinupstateNewYorkthatwouldresult fromtheproposal.KeyCorprepresentsthatithastakenstepstominimizejoblossesinaffectedmarkets, includingdesignatingFirstNiagara’sexistingloanservicingunit,locatedinBuffalo,toserveasKeyCorp’s underwriting,fulfillment,andportfoliomanagementplatforms,andinstitutinganenterprise-widehiringfreeze forcertainnon-clientfacingpositionsinordertomaximizethenumberofretentionopportunitiesavailableto FirstNiagaraemployees.Thisconcern,however,isoutsideofthelimitedstatutoryfactorsthattheBoardis authorizedtoconsiderwhenreviewinganapplicationornoticeundertheBHCAct.SeeWesternBancshares, Inc.v.BoardofGovernors,480F.2d749(10thCir.1973);seealso,e.g.,WellsFargo&Company,82Federal ReserveBulletin445(1996);andCommunityBankSystem,Inc.,FRBOrderNo.2015-34(November18,2015). 42 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 43 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 44 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 45 Twocommentersgenerallyraisedfinancialstabilityconcerns,assertingthattheproposalisfurtherevidencethat thefederalbankingagenciesarenotgivingfinancialstabilityconsiderationsenoughweight. 46 Asnotedabove,KeyCorpprimarilyacceptsretaildepositsandengagesinretailandcommercialbanking, commercialleasing,investmentmanagement,consumerfinance,andinvestmentbankingproductsandservices.

LegalDevelopments:ThirdQuarter,2016 329 organizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,theorganization wouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthe marketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financial distress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. RequestsforPublicHearingsorMeetingsandExtensionof CommentPeriod SomecommentersrequestedthattheBoardholdpublichearingsorpublicmeetingsonthe application.TheBHCActdoesnotrequiretheBoardtoholdapublichearingonan applicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmake atimelywrittenrecommendationof denialof theapplication.47TheBoardhasnot receivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underits rules,theBoardalsomay,initsdiscretion,holdaformalorinformalhearingorother proceedingonanapplication,48if appropriate,toallowinterestedpersonsanopportunity toproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresenttheir views. TheBoardhasconsideredtherequestsinlightof allthefactsof record.IntheBoard’s view,thecommentershavehadampleopportunitytosubmitcommentsontheproposal. Asnotedabove,theBoardextendedtheinitialperiodforpubliccommenttoaccommodate thepublicinterestinthisproposal,providinginterestedpersonsuntilJanuary31,2016,a totalperiodof 62days,tosubmitwrittencomments.Commenterssubmittednumerous writtencommentsthattheBoardhasconsideredinactingontheproposal.Therequestsdo notidentifydisputedissuesof factmaterialtotheBoard’sdecisionthatwouldbeclarified byapublichearingormeeting.Inaddition,therequestsdonotdemonstratewhywritten commentsdonotpresentthecommenters’viewsadequatelyorwhyahearingormeeting wouldotherwisebenecessaryorappropriate.Forthesereasons,andbasedonallthefacts of record,theBoardhasdeterminedthatapublichearingormeetingisnotrequiredor warrantedinthiscase.Accordingly,therequestsforapublicmeetingorhearingonthe proposalaredenied. Inaddition,onecommenterrequestedafurtherextensionof thecommentperiodof the proposal.TheBoardhasalreadyprovidedforanextendedcommentperiodof 62days. Duringthistime,anumberof commenters,includingtherequester,submitteddetailed commentsinwritingregardingtheproposal.TheBoard’sRulesof Procedurecontemplate thatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationof hardshiporothermeritoriousreasonforseekingadditionaltime.49Thecommenter’srequestfor additionaltimedoesnotidentifycircumstancesthatwouldwarrantafurtherextensionof thepubliccommentperiodforthisproposal.Accordingly,theBoardhasdeterminednotto extendfurtherthepubliccommentperiod. FirstNiagaraacceptsretaildepositsandengagesinmortgagelending,consumerlending,andbusinessloans.In eachofitsactivities,KeyCorphas,andasaresultoftheproposalwouldcontinuetohave,asmallshareona nationwidebasis,andnumerouscompetitorswouldremain. 47 12U.S.C.§1842(b)(1);12CFR225.16(e). 48 12CFR225.16(e). 49 12CFR262.25(b)(2);12CFR225.16(c)(2).

330 FederalReserveBulletin|November2016 Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe proposalshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCActandotherapplicablestatutes.Approvalof thisproposalisspecificallyconditionedoncompliancebyKeyCorpwithalltheconditionssetforthinthisOrder, includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetothe Boardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsand commitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnection withitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunder applicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Cleveland,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveJuly12,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix KeyCorp/FirstNiagaraBankingMarketsinNewYork ConsistentwithBoardPrecedentandDOJBankMergerGuidelines Remaining Amountsof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors Albany,NewYork–includesAlbany,Fulton,Hamilton,Montgomery,Rensselaer,Saratoga,Schenectady,Schoharie,Warren,andWashington counties;Austerlitz,Canaan,Chatham,Claverack,Ghent,Hillsdale,Kinderhook,NewLebanon,Stockport,andStuyvesanttownsinColumbia County;andAshland,Athens,Cairo,Coxsackie,Durham,Greenville,Jewett,NewBaltimore,Prattsville,andWindhamtownsinGreeneCounty. KeyCorpPre-Consummation 1 $5.5B 23.43 FirstNiagara 3 $2.7B 11.45 KeyCorpPost-Consummation 1 $8.3B 34.87 1620 536 24 Binghamton,NewYork-Pennsylvania–includesBroome,Chenango,Otsego,andTiogacounties,allinNewYork;andFriendsville,GreatBend, Hallstead,Lanesboro,LittleMeadows,NewMillford,Oakland,SusquehannaDepot,andThompsonboroughs,andApolacon,Choconut,Forest Lake,Franklin,GreatBend,Harmony,Jackson,Liberty,Middletown,NewMilford,Oakland,SilverLake,andThompsontownshipsinSusquehanna County,Pennsylvania. KeyCorpPre-Consummation 11 $137.3M 2.22 FirstNiagara 5 $339.9M 5.51 KeyCorpPost-Consummation 4 $447.2M 7.73 1861 24 11 Franklin,NewYork–includesFranklinCounty;andCrownPoint,Keene,Minerva,Newcomb,NorthElba,NorthHudson,St.Armand,Schroon,and TiconderogatownsinEssexCounty. KeyCorpPre-Consummation 7 $45.5M 5.05 FirstNiagara 4 $71.1M 7.89 KeyCorpPost-Consummation 3 $116.6M 12.94 2573 80 6 Ithaca,NewYork–includesTompkinsCounty;Cortlandcity,Cortlandville,Harford,Lapeer,andVirgiltownsinCortlandCounty;andCatherine, Cayuta,andHectortownsinSchuylerCounty. KeyCorpPre-Consummation 11 $21.2M 0.90 FirstNiagara 2 $224.8M 9.57 KeyCorpPost-Consummation 2 $246.0M 10.47 3057 18 11 (continuedonnextpage)

LegalDevelopments:ThirdQuarter,2016 331 Appendix—continued KeyCorp/FirstNiagaraBankingMarketsinNewYork ConsistentwithBoardPrecedentandDOJBankMergerGuidelines—continued Remaining Amountsof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors Jamestown,NewYork-Pennsylvania–includesChautauquaCounty,NewYork;andClarendonborough,Warrencity,andConewango,Elk, Farmington,Glade,Mead,andPineGrovetownshipsinWarrenCounty,Pennsylvania. KeyCorpPre-Consummation 5 $147.9M 8.54 FirstNiagara 4 $258.6M 14.93 KeyCorpPost-Consummation 1 $406.5M 23.46 1694 254 12 MetroNewYorkCity,NewYork-NewJersey-Connecticut-Pennsylvania–includesFairfieldCounty;Bethlehem,Bridgewater,Canaan, Cornwall,Goshen,Kent,Litchfield,Morris,NewMilford,NorthCanaan,Plymouth,Roxbury,Salisbury,Sharon,Thomaston,Warren,Washington, Watertown,andWoodburytownsinLitchfieldCounty;Ansonia,BeaconFalls,Bethany,Cheshire,Derby,Hamden,Meriden,Middlebury,Milford, Naugatuck,NorthHaven,Orange,Oxford,Prospect,Seymour,Southbury,Wallingford,Waterbury,Wolcott,andWoodbridgeinNewHavenCounty,all inConnecticut;Bronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam,Queens,Richmond,Rockland,Suffolk,Sullivan,Ulsterand Westchestercounties;Hudsoncity,Ancram,Clermont,Copake,Gallatin,Germantown,Greenport,Livingston,andTaghkanictownsinColumbia County;Catskill,Halcott,Hunter,andLexingtontownsinGreeneCounty,allinNewYork;Bergen,Essex,Hudson,Hunterdon,Middlesex, Monmouth,Morris,Ocean,Passaic,Somerset,Sussex,andUnioncounties;PembertonandWrightstownboroughs,BassRiver,NewHanover,North Hanover,Pemberton,Shamong,Southampton,Tabernacle,Washington,andWoodlandtownshipsinBurlingtonCounty;Hightstown,Hopewell, Pennington,Princetonboroughs,EastWindsor,Ewing,Hopewell,Lawrence,Princeton,Robbinsville,andWestWindsortownshipsinMercerCounty; Washingtonborough,BelvidereandHackettstowntowns,Allamuchy,Blairstown,Franklin,Frelinghuysen,Greenwich,Hardwick,Harmony,Hope, Independence,Knowlton,Liberty,Lopatcong,Mansfield,Oxford,Washington,andWhitetownshipsinWarrenCounty,allinNewJersey;Pike County;DelawareWaterGap,EastStroudsburg,MountPocono,andStroudsburgboroughs,Barrett,Coolbaugh,MiddleSmithfield,Paradise, Pocono,Price,Smithfield,andStroudtownshipsinMonroeCounty;andHawleyborough,Berlin,Damascus,Dreher,Lebanon,Manchester,Oregon, Palmyra,Paupack,Salem,andSterlingtownshipsinWayneCounty,allinPennsylvania. KeyCorpPre-Consummation 42 $2.4B 0.19 FirstNiagara 36 $3.0B 0.15 KeyCorpPost-Consummation 27 $5.4B 0.34 1300 0 241 Rochester,NewYork–includesChemung,Livingston,Monroe,Ontario,Seneca,Steuben,WayneandYatescounties;Alfred,Almond,Andover, Birdsall,Burns,Grove,Independence,Ward,Wellsville,WestAlmond,andWillingtownsinAlleganyCounty;Bergen,Bethany,Byron,Elba,LeRoy, Pavilion,andStaffordtownsinGeneseeCounty;Albion,Barre,Carlton,Clarendon,Gaines,Kendall,Murray,andYatestownsinOrleansCounty;Dix, Montour,Orange,Reading,andTyronetownsinSchuylerCounty;andCastile,Covington,Gainesville,GeneseeFalls,Middlebury,Perry,and WarsawtownsinWyomingCounty. KeyCorpPre-Consummation 8 $1.0B 5.25 FirstNiagara 6 $1.4B 7.06 KeyCorpPost-Consummation 2 $2.4B 12.31 1079 74 26 SaintLawrence,NewYork–includesSaintLawrenceCounty. KeyCorpPre-Consummation 3 $103.4M 11.04 FirstNiagara 5 $63.0M 6.73 KeyCorpPost-Consummation 2 $166.4M 17.77 2734 149 8 Syracuse,NewYork–includesCayuga,OnondagaandOswegocounties;Cincinnatus,Cuyler,Freetown,Homer,Marathon,Preble,Scott,Solon, Taylor,Truxton,andWillettownsinCortlandCounty;andCazenovia,DeRuyter,Fenner,Georgetown,Lenox,Lincoln,Nelson,Smithfield,andSullivan townsinMadisonCounty. KeyCorpPre-Consummation 3 $1.4B 11.9 FirstNiagara 4 $1.1B 9.13 KeyCorpPost-Consummation 2 $2.6B 21.03 1395 218 23 Utica-Rome,NewYork–includesHerkimerandOneidacounties;andOneidacity,Brookfield,Eaton,Hamilton,Lebanon,Madison,and StockbridgetownsinMadisonCounty. KeyCorpPre-Consummation 9 $63.8M 1.41 FirstNiagara 7 $425.9M 9.45 KeyCorpPost-Consummation 7 $489.7M 10.86 1349 27 10 Watertown,NewYork–includesJeffersonandLewiscounties. KeyCorpPre-Consummation 3 $236.4M 17.31 FirstNiagara 7 $31.6M 2.31 KeyCorpPost-Consummation 2 $268.0M 19.62 2636 80 10 DataandrankingsareasofJune30,2015.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent. Theremainingnumberofcompetitorsnotedforeachmarketincludesthrifts.

332 FederalReserveBulletin|November2016 Huntington Bancshares Incorporated Columbus, Ohio OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2016–13(July29,2016) HuntingtonBancsharesIncorporated(“Huntington”),Columbus,Ohio,afinancial holdingcompanywithinthemeaningof theBankHoldingCompanyActof 1956(“BHC Act”),1hasrequestedtheBoard’sapprovalundersection3of theBHCAct2tomergewith FirstMeritCorporation(“FirstMerit”)andtherebyindirectlyacquireFirstMeritBank, N.A.(“FirstMeritBank”),bothof Akron,Ohio.3Followingtheproposedacquisition, FirstMeritBankwouldbemergedintoHuntington’ssubsidiarybank,TheHuntington NationalBank(“HuntingtonBank”),alsoof Columbus.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister14445(March17,2016)).5TheBoardextendedthe initialperiodforpubliccommenttoaccommodatepublicinterestinthisproposal, providinginterestedpersonsuntilMay16,2016,atotalof morethan65days,tosubmit writtencomments(81FederalRegister25405(April28,2016)).Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. Huntington,withconsolidatedassetsof approximately$71.1billion,isthe40thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $53.9billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.6Huntington controlsHuntingtonBank,whichoperatesinFlorida,Indiana,Kentucky,Michigan,Ohio, Pennsylvania,andWestVirginia.HuntingtonBankisthethirdlargestinsureddepository institutioninOhio,controllingdepositsof approximately$35.6billion,whichrepresent 11.9percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.7 HuntingtonBankisthesixthlargestinsureddepositoryinstitutioninMichigan,controllingdepositsof approximately$9.5billion,whichrepresentapproximately5percentof the totaldepositsof insureddepositoryinstitutionsinthatstate.HuntingtonBankisthe19th largestinsureddepositoryinstitutioninPennsylvania,controllingdepositsof approximately$3.2billion,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. FirstMerit,withconsolidatedassetsof approximately$25.5billion,isthe66thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $19.7billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.FirstMerit controlsFirstMeritBank,whichoperatesinIllinois,Michigan,Ohio,Pennsylvania,and Wisconsin.FirstMeritBankistheseventhlargestinsureddepositoryinstitutioninOhio, 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 TheapplicantwouldeffecttheacquisitionbymergingWestSubsidiaryCorporation,awhollyownedsubsidiary ofHuntington,withandintoFirstMerit,withFirstMeritasthesurvivor.FirstMeritwouldthenmergewith andintoHuntington,withHuntingtonasthesurvivor. 4 ThemergerofFirstMeritBankintoHuntingtonBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct. 5 12CFR262.3(b). 6 AssetanddepositdataareasofJune30,2015,unlessotherwisenoted. 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsandloanassociations,and savingsbanks.

LegalDevelopments:ThirdQuarter,2016 333 controllingdepositsof approximately$10.9billion,whichrepresent3.6percentof thetotal depositsof insureddepositoryinstitutionsinthatstate.FirstMeritBankistheninth largestinsureddepositoryinstitutioninMichigan,controllingdepositsof approximately $5.1billion,whichrepresent2.7percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.Inaddition,FirstMeritBankisthe127thlargestinsureddepository institutioninPennsylvania,controllingdepositsof approximately$227million,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. Onconsummationof thisproposal,Huntingtonwouldbecomethe34thlargestinsured depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $96.6billion,whichrepresentlessthan1percentof thetotalamountof assetsof insured depositoryinstitutionsintheUnitedStates.Huntingtonwouldcontrolconsolidated depositsof approximately$73.6billion,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates.Huntingtonwouldbecome thelargestinsureddepositoryorganizationinOhio,controllingdepositsof approximately $46.5billion,whichrepresent15.5percentof thetotalamountof depositsof insured depositoryinstitutionsinthatstate.Huntingtonwouldremainthesixthlargestinsured depositoryorganizationinMichigan,controllingdepositsof approximately$14.6billion, whichrepresent7.7percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.Inaddition,Huntingtonwouldremainthe19thlargestinsureddepositoryorganizationinPennsylvania,controllingdepositsof approximately$3.4billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.8Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.9Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,thebankholdingcompanywoulduponconsummationcontrol30percentormore of thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateor inanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.10 Forpurposesof theBHCAct,thehomestateof bothHuntingtonandFirstMeritBankis Ohio.11FirstMeritBankalsooperatesinIllinois,Michigan,Pennsylvania,andWisconsin. 8 12U.S.C.§1842(d)(1)(A). 9 12U.S.C.§1842(d)(1)(B). 10 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). 11 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Anationalbank’shomestateisthestateinwhichthemain officeofthebankislocated.

334 FederalReserveBulletin|November2016 HuntingtoniswellcapitalizedandwellmanagedunderapplicablelawandhasasatisfactoryratingundertheCommunityReinvestmentActof 1977(“CRA”).12Illinoisand Wisconsinhavefive-yearagerequirementsthatdonotapplytoHuntington’sacquisitionof FirstMerit.13Michigan,Ohio,andPennsylvaniadonothaveminimumagerequirements.14 Onconsummationof theproposedtransaction,Huntingtonwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Ohioimposesa30percentlimitonthetotalamountof in-statedeposits thatasinglebankingorganizationmaycontrol.15Thecombinedorganizationwould controlapproximately15.5percentthetotalamountof depositsof insureddepository institutionsinOhio.Accordingly,inlightof allthefactsof record,theBoardmayapprove theproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitiestobeserved.16 HuntingtonandFirstMerithavesubsidiarybanksthatcompetedirectlyin27banking marketsinMichigan,Ohio,andPennsylvania.TheBoardhasconsideredthecompetitive effectsof theproposalinthebankingmarketsinwhichHuntingtonBankandFirstMerit Bankcompete.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthebankingmarkets;therelativesharesof totaldepositsininsured depositoryinstitutionsinthemarkets(“marketdeposits”)thatHuntingtonwould control;17theconcentrationlevelsof marketdepositsandtheincreaseintheselevelsas measuredbytheHerfindahlHirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);18other characteristicsof themarkets;and,asdiscussedbelow,commitmentsmadebyHuntington 12 12U.S.C.§2901etseq. 13 IllinoisandWisconsinlawbothimposeminimumagerequirementsonlyontheacquisitionofabankorganizedunderthelawsofIllinoisorWisconsinorthatmaintainsitsmainofficeinIllinoisorWisconsin.205Ill. Comp.Stat.5/21.2(a);Wis.Stat.§221.0901(8).TheseagerequirementsarenotapplicabletotheproposedtransactionbecauseFirstMeritBank’smainofficeislocatedinOhio. 14 SeeMich.Comp.Laws§487.13702;OhioRev.CodeAnn.§1115.05;7Pa.Stat.Ann.§1604. 15 OhioRev.CodeAnn.§1115.05(B)(1)(a).NeitherMichigannorPennsylvaniaimposesalimitonthetotal amountofin-statedepositsthatasinglebankingorganizationmaycontrol. 16 12U.S.C.§1842(c)(1). 17 DepositandmarketsharedataareasofJune30,2015,andunlessotherwisenotedarebasedoncalculationsin whichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthat thriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks. See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70 FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinmarketsharecalculationsona50-percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 18 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html.

LegalDevelopments:ThirdQuarter,2016 335 todivestbranchesintheAkron,AshtabulaCounty,andCantonbankingmarkets,allin Ohio. BankingMarketsWithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesin22bankingmarkets.Onconsummation, onebankingmarketwouldbecomehighlyconcentrated;eightbankingmarketswould remainhighlyconcentrated;11bankingmarketswouldremainmoderatelyconcentrated; andtwobankingmarketswouldremainunconcentrated,asmeasuredbytheHHI.The changeintheHHIinthesemarketsgenerallywouldbesmall,consistentwithBoardprecedent,andwithinthethresholdsintheDOJBankMergerGuidelines.Inaddition, numerouscompetitorswouldremaininmostof thesebankingmarkets.19 BankingMarketsWarrantingSpecialScrutiny Thestructuraleffectsthatconsummationof theproposalwouldhaveintheAkron, AshlandCounty,AshtabulaCounty,andCantonbankingmarkets,allinOhio,andthe Cadillac,Michigan,bankingmarketwarrantadetailedreviewbecausetheconcentration levelsonconsummationwouldexceedthethresholdsintheDOJBankMergerGuidelines orwouldresultinthemarketdepositshareof Huntingtonequalingorexceeding35percent whenusinginitialcompetitivescreeningdata. MarketsWithoutDivestitures Cadillac,Michigan,BankingMarket.HuntingtonBankistheseventhlargestdepository institutionintheCadillacbankingmarket,controllingapproximately$8.8millionin deposits,whichrepresent1.4percentof marketdeposits.20FirstMeritBankisthelargest depositoryinstitutioninthemarket,controllingapproximately$223.2millionindeposits, whichrepresent36.0percentof marketdeposits.Onconsummation,HuntingtonBank wouldbethelargestdepositoryinstitutionintheCadillacbankingmarket,controlling approximately$231.9millionindeposits,whichwouldrepresentapproximately 37.4percentof marketdeposits.TheHHIinthismarketwouldincrease102points,from 2604to2706. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheCadillacbankingmarket.21Inparticular,threecreditunionsexerta competitiveinfluenceintheCadillacbankingmarket.Eachinstitutionoffersawiderange of consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsintherelevantbankingmarket.22The Boardfindsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunions ata50-percentweightinestimatingmarketinfluence.Thisweightingtakesintoaccountthe 19 Thesebankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedinthe appendix. 20 TheCadillacbankingmarketisdefinedasMissaukeeandWexfordcounties,andOsceolaCountyexcept Richmond,Hersey,Evart,andOrienttownships,allinMichigan. 21 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorporation, 84FederalReserveBulletin129(1998). 22 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.See,e.g.,BB&TCorporation,FRBOrderNo.2015-18(July7,2015);MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14,2012);OldNationalBancorp,FRBOrderNo.2012-9 (August30,2012);UnitedBankshares,Inc.,(June20,2011),97FederalReserveBulletin19(2dQuar.2011);The PNCFinancialServicesGroup,Inc.,94FederalReserveBulletinC38(2008);ThePNCFinancialServices

336 FederalReserveBulletin|November2016 limitedlendingdonebycreditunionstosmallbusinessesrelativetocommercialbanks’ lendinglevels. ThisadjustmentsuggeststhattheresultingmarketconcentrationintheCadillacbanking marketislesssignificantthanwouldappearfromtheinitialcompetitivescreeningdata, whichfocusedoncommercial-bankandthriftcompetitors.Afterconsummation,and adjustingtoreflectcompetitionfromcreditunionsinthemarket,themarketconcentration levelintheCadillacbankingmarketasmeasuredbytheHHIwouldincreaseby87points, from2259to2346,andthemarketshareof Huntingtonwouldincreaseto34.7percent. Inadditiontothethreecreditunions,fiveotherinsureddepositoryinstitutionswould remaininthemarket,includingoneinsureddepositoryinstitutionwithamarketshareof morethan25percent. AshlandCounty,Ohio,BankingMarket.HuntingtonBankisthesecondlargestdepository institutionintheAshlandCountybankingmarket,controllingapproximately $103.3millionindeposits,whichrepresent17.1percentof marketdeposits.23FirstMerit Bankisthefourthlargestdepositoryinstitutioninthemarket,controllingapproximately $80.5millionindeposits,whichrepresent13.4percentof marketdeposits.Onconsummation,HuntingtonBankwouldbethelargestdepositoryinstitutionintheAshlandCounty bankingmarket,controllingapproximately$183.8millionindeposits,whichwouldrepresentapproximately30.5percentof marketdeposits.TheHHIinthismarketwouldincrease 458points,from1422to1880. Thecompetitiveeffectsinthismarketaremitigatedbyseveralfactorsthatindicatethatthe increaseinconcentrationintheAshlandCountybankingmarket,asmeasuredbythe aboveHHIandmarketshare,overstatesthepotentialcompetitiveeffectsof theproposalin themarket.Twothriftinstitutionsinthemarkethaveacommercialandindustrialloan portfoliosimilartothoseof commercialbanksintheAshlandCountybankingmarket,as measuredintermsof theratiosof thosetypesof loanstototalloansandassets.24The Boardhasconcludedthatdepositscontrolledbytheseinstitutionsshouldbeweightedat 100percentinthemarket-sharecalculations. Inaddition,threecreditunionsexertacompetitiveinfluenceintheAshlandCounty bankingmarket.Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmostallof the residentsintherelevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrant includingthedepositsof thesecreditunionsata50-percentweightinestimatingmarket influence. Withthedepositsof boththriftsweightedat100percentandthethreecreditunionsat 50percent,theAshlandCountybankingmarketappearstobeonlymoderatelyconcen- Group,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancialCorporation,93FederalReserveBulletin C16(2007);PassumpsicBancorp,92FederalReserveBulletinC175(2006);andWachoviaCorporation,92Federal ReserveBulletinC183(2006). 23 TheAshlandCountybankingmarketisdefinedasAshlandCounty,Ohio. 24 Thestandardtreatmentofthriftsinthecompetitiveanalysisistogivetheirdeposits50-percentweightingto reflecttheirlimitedlendingtosmallbusinessesrelativetobanks’lendinglevels.TheBoardpreviouslyhasindicated,however,thatitmayconsiderthecompetitivenessofathriftinstitutionatalevelgreaterthan 50percentofitsdepositswhenappropriateifcompetitionfromtheinstitutioncloselyapproximatescompetitionfromacommercialbank.See,e.g.,BanknorthGroup,Inc.,75FederalReserveBulletin703(1989).Where,as here,thefactsandcircumstancesofabankingmarketindicatethataparticularthriftservesasasignificant sourceofcommercialloansandprovidesabroadrangeofconsumer,mortgage,andotherbankingproducts, theBoardhasconcludedthatcompetitionfromsuchathriftcloselyapproximatescompetitionfromacommercialbankandthatdepositscontrolledbytheinstitutionshouldbeweightedat100percentinmarket-share calculations.See,e.g.,RiverValleyBancorp,FRBOrderNo.2012-10(October17,2012);RegionsFinancial Corporation,93FederalReserveBulletinC16(2007);andBanknorthGroup,Inc.,supra.

LegalDevelopments:ThirdQuarter,2016 337 trated,bothbeforeandafterthetransaction.Uponconsummationof themerger, Huntingtonwouldcontrol27.3percentof marketdeposits,theHHIwouldincreaseby 367points,from1190to1557,andsixotherinsureddepositoryinstitutionswouldremain inthemarket,includingfourinsureddepositoryinstitutionswithmarketsharesof approximately10percentormore. MarketswithDivestitures Akron,Ohio,BankingMarket.HuntingtonBankisthefifthlargestdepositoryinstitution intheAkronbankingmarket,controllingapproximately$775.8millionindeposits,which represent6.7percentof marketdeposits.25FirstMeritBankisthelargestdepository institutioninthemarket,controllingapproximately$3.9billionindeposits,whichrepresent 33.7percentof marketdeposits.Onconsummation,HuntingtonBankwouldbethelargest depositoryinstitutionintheAkronbankingmarket,controllingapproximately$4.7billion indeposits,whichwouldrepresentapproximately40.4percentof marketdeposits.The HHIinthismarketwouldincrease450points,from1691to2141. Tomitigatethepotentiallyadversecompetitiveeffectsof theproposalintheAkron bankingmarket,Huntingtonhascommittedtodivestonebranch,accountingforatotalof approximately$63.8millionindeposits,toacompetitivelysuitableinstitution.26Other factorsalsomitigatethecompetitiveeffectsof theproposalorindicatethattheproposal wouldnothaveasignificantlyadverseeffectoncompetitionintheAkronbankingmarket. Sixthriftinstitutionsinthemarkethaveacommercialandindustrialloanportfoliosimilar tothoseof commercialbanksintheAkronbankingmarket,asmeasuredintermsof the ratiosof thosetypesof loanstototalloansandassets.TheBoardhasconcludedthat depositscontrolledbytheseinstitutionsshouldbeweightedat100percentinthemarketsharecalculations. Inaddition,sevencreditunionsexertacompetitiveinfluenceintheAkronbankingmarket. Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe relevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrantincludingthe depositsof thesecreditunionsata50-percentweightinestimatingmarketinfluence. Huntingtonalsoarguesthattheinclusionof certaindepositsthatareheldatFirstMerit’s mainoffice,whichislocatedintheAkronmarket,distortsthemeasuresof thecompetitive effectof theproposalontheAkronmarketbecausethosedepositshavenorelationtothe 25 TheAkronbankingmarketisdefinedasSummitCounty(minusSagamoreHills,NorthfieldCenter, Twinsburg,Richfield,andBostontownships,thevillagesadjoiningthesetownships,andthecitiesof Twinsburg,Macedonia,andHudson);Franklin,Ravenna,Charlestown,Paris,Brimfield,Rootstown, Edinburg,Palmyra,Suffield,Randolph,Atwater,andDeerfieldtownships,andthecityofKentinPortage County;Guilford,Wadsworth,andSharontownships,andthecityofWadsworthinMedinaCounty;Lawrence andLaketownshipsinStarkCounty;andMiltonandChippewatownships,andthevillagesadjoiningthese townships,inWayneCounty,allinOhio. 26 Asaconditionofconsummationoftheproposedmerger,Huntingtonhascommittedthatitwillexecute, beforeconsummationoftheproposedmerger,asalesagreementwithacompetitivelysuitablebankingorganization.HuntingtonhasprovidedasimilarcommitmenttotheDOJ.Huntingtonalsohascommittedto completethedivestiturewithin180daysafterconsummationoftheproposedtransaction.Inaddition, Huntingtonhascommittedthatiftheproposeddivestitureisnotcompletedwithinthe180-dayperiod, Huntingtonwouldtransfertheunsoldbranchestoanindependenttrustee,whowouldbeinstructedtosell themtoanalternatepurchaserorpurchasersinaccordancewiththetermsofthisorderandwithoutregardto price.BoththetrusteeandanyalternatepurchasermustbedeemedacceptabletotheBoard.See,e.g., BankAmericaCorporation,78FederalReserveBulletin338(1992);UnitedNewMexicoFinancialCorporation, 77FederalReserveBulletin484(1991).

338 FederalReserveBulletin|November2016 Akronmarketorcannotbeusedforlendingorforanyotherpurpose.27Inconductingits competitiveanalysisinpreviouscases,theBoardgenerallyhasnotadjusteditsmarket sharecalculationstoexcludeout-of-marketdepositsbecausealldepositsaretypicallyavailabletosupportlendingandotherbankingactivitiesatanylocationandthedeposits maintainedinaspecificmarketrepresentafirm’sabilitytocompeteinthatmarket.The Board,however,hasadjustedmarketdepositsheldbyapartytotheproposaltoexclude specifictypesof out-of-marketdepositsinraresituationswhenevidencesupportsafinding thattheout-of-marketdepositsaresubjecttolegalorotherrestrictionsthatconstrainan organization’sabilitytousethosedepositstosupportitsgeneralbankingactivitiesandthat therearedataavailabletomakecomparableadjustmentstothemarketsharesforother participants.28 FirstMerithassomeout-of-marketdepositsthatarecentrallybookedatitsmainofficethat aresubjecttolegalorotherrestrictionsthatconstraintheorganization’sabilitytolendon suchdeposits.Thesedepositshavebeengeneratedfromvariousgovernmentandmunicipal entitieslocatedoutsideof theAkronmarket,involveescrowaccountsformortgagesmade outsideof theAkronmarket,andincludetrustaccountdepositsthataresweptinto FirstMerit’sdepositaccountsovernightbeforebeingsweptbackintocustomeraccounts locatedoutsideof theAkronmarket.Forthedepositsineachof thesecategories, FirstMeritislimitedbylaw,contract,orotherwiseinitsabilitytousethesespecifictypesof out-of-marketdepositstosupportitsgeneralbankingactivities.29 Toaccountforthepossibilitythatothermarketcompetitorsmightmaintainsimilar depositsintheAkronmarket,theBoardexcludedfromthetwolargestbranchesof competitorsintheAkronmarketthesamepercentageof depositsthatwereexcludedfrom FirstMerit’smainofficedepositsinAkron.Aftermakingtheseadjustments,accountingfor thebranchdivestiture,andweightingthedepositsof thethriftsat100percentandthe creditunionsat50percent,Huntingtonwouldcontrolapproximately38.0percentof marketdeposits,andtheHHIwouldincreaseby382pointstoalevelof 1930. TheBoardalsohasexaminedotheraspectsof thestructureof theAkronmarketthatmitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothavea significantlyadverseeffectoncompetitionintheAkronbankingmarket.Afterconsummationof theproposal,Huntingtonwouldfacecompetitionfrom27otherdepositoryinstitutionsintheAkronmarket,includingtwolarge,nationaldepositoryinstitutionsthateach wouldcontrolmorethan12percentof marketdepositsandtwootherlarge,regional competitorsthateachwouldcontrolmorethan6percentof deposits.Thepresenceof these viablecompetitorssuggeststhatHuntingtonwouldhavelimitedabilitytounilaterallyoffer lessattractivetermstoconsumersandthatthesecompetitorsareabletoexertcompetitive pressureonHuntingtonintheAkronmarket. Moreover,recententryandexpansionaryactivitysuggeststhatthemarketisattractiveto potentialcompetitors.OnedepositoryinstitutionhasenteredtheAkronmarketdenovo since2015,twocompetitorshaveenteredthemarketthroughacquisitionsince2012,and anotherexistingcompetitoropenedanewbranchin2015. 27 Huntingtonseekstoexclude$982millionofFirstMerit’smainofficedeposits,consistingofwholesale/brokered certificatesofdeposit,amasterMoneyMarketAccount,collateralizedpublicdeposits,trustaccountdeposits thataresweptintoFirstMerit’saccountsovernightandaresweptbackintocustomers’investmentaccountsby day,andout-of-marketmortgageescrowdeposits. 28 SeeFirstSecurityCorp.,86FederalReserveBulletin122,125–27(2000). 29 OhiolawrequiresdepositoryinstitutionsthatacceptOhiogovernmentdepositstocollateralizesuchdeposits witheligiblesecuritiesatanaggregatemarketvalueequaltoatleast105percentofthetotalamountofthe publicdepositor’suninsuredpublicdeposits.OhioRev.CodeAnn.§135.18.

LegalDevelopments:ThirdQuarter,2016 339 Canton,Ohio,BankingMarket.HuntingtonBankisthelargestdepositoryinstitutionin theCantonbankingmarket,controllingapproximately$1.6billionindeposits,which represent27.1percentof marketdeposits.30FirstMeritBankisthesecondlargestdepositoryinstitutioninthemarket,controllingapproximately$1.4billionindeposits,which represent23.2percentof marketdeposits.Onconsummation,HuntingtonBankwould remainthelargestdepositoryinstitutionintheCantonbankingmarket,controlling approximately$3.0billionindeposits,whichwouldrepresentapproximately50.3percentof marketdeposits.TheHHIinthismarketwouldincrease1258points,from1660to2918. Tomitigatethepotentiallyadversecompetitiveeffectsof theproposalintheCanton bankingmarket,Huntingtonhascommittedtodivesttoacompetitivelysuitableinstitution 10branches,accountingforatotalof atleast$613millionindeposits.Otherfactorsalso mitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnot haveasignificantlyadverseeffectoncompetitionintheCantonbankingmarket.Twothrift institutionsinthemarkethaveacommercialandindustrialloanportfoliosimilartothose of commercialbanksintheCantonbankingmarket,asmeasuredintermsof theratiosof thosetypesof loanstototalloansandassets.TheBoardhasconcludedthatdeposits controlledbytheseinstitutionsshouldbeweightedat100percentinthemarket-share calculations. Inaddition,11creditunionsexertacompetitiveinfluenceintheCantonbankingmarket. Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe relevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrantincludingthe depositsof thesecreditunionsata50-percentweightinestimatingmarketinfluence. TheBoardalsohasconsideredHuntington’sargumentthatinclusionof certainpublic depositsthatareheldatalargeHuntingtonBankbranchinCantonwoulddistortthe measuresof thecompetitiveeffectof theproposalontheCantonmarket.Forthesame reasonsprovidedintheAkronmarket,thegovernmentdepositsfromentitiesandmunicipalitieslocatedoutsideof theCantonmarketheldbyHuntingtonhavebeenexcludedfrom theanalysisbecausethesedepositsaresubjecttoalegalrestrictionthatconstrainsHuntington’sabilitytosupportitsgeneralbankingactivities.Becausethelargestbranchof Huntington’sandFirstMerit’scompetitorsinthemarketissignificantlysmallerthan Huntington’sbranchwherethesegovernmentdepositsareheld,nodepositswereexcluded fromthesecompetitors’branchesinassessingtheirmarketshare.31Afterexcludingthese out-of-marketgovernmentdeposits,accountingforthebranchdivestitures,andweighting thedepositsof thethriftsat100percentandthecreditunionsat50percent,Huntington wouldcontrolapproximately36.4percentof marketdepositsandtheHHIwouldincrease by351pointstoalevelof 1790. TheBoardalsohasexaminedotheraspectsof thestructureof theCantonmarketthat mitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnot haveasignificantlyadverseeffectoncompetitionintheCantonbankingmarket.After consummationof theproposal,Huntingtonwouldfacecompetitionfrom17otherdepositoryinstitutions,includingtwolarge,nationaldepositoryinstitutionsthateachwould controlapproximately10percentof marketdeposits.Thepresenceof theseviablecompetitorssuggeststhatHuntingtonwouldhavelimitedabilitytounilaterallyofferlessattractive 30 TheCantonbankingmarketisdefinedasCarrollCounty;Marlboro,Lexington,Jackson,Plain,Nimishillen, Washington,Tuscarawas,Perry,Canton,Osnaburg,Paris,SugarCreek,Bethlehem,Pike,andSandytownships inStarkCounty;andSmithtownshipinMahoningCounty,allinOhio. 31 SeeFirstSecurityCorp.,86FederalReserveBulletin122,125–27(2000).

340 FederalReserveBulletin|November2016 termstoconsumersandthatthecompetitorsareabletoexertcompetitivepressureon HuntingtonintheCantonmarket. Moreover,recententryandexpansionaryactivitysuggeststhatthemarketisattractiveto potentialcompetitors.TwodepositoryinstitutionshaveenteredtheCantonmarketdenovo since2011,andtwootherexistingcompetitorshaveopenednewbranchessince2011. AshtabulaCounty,Ohio,BankingMarket.HuntingtonBankisthethirdlargestdepository institutionintheAshtabulaCountybankingmarket,controllingapproximately $168.4millionindeposits,whichrepresent17.6percentof marketdeposits.32FirstMerit Bankisthefourthlargestdepositoryinstitutioninthemarket,controllingapproximately $165.1millionindeposits,whichrepresent17.3percentof marketdeposits.Onconsummation,HuntingtonBankwouldbethelargestdepositoryinstitutionintheAshtabulaCounty bankingmarket,controllingapproximately$333.5millionindeposits,whichwouldrepresentapproximately34.9percentof marketdeposits.TheHHIinthismarketwouldincrease 608points,from1878to2486. Tomitigatethepotentiallyadversecompetitiveeffectsof theproposalintheAshtabula Countybankingmarket,Huntingtonhascommittedtodivesttwobranches,accountingfor atotalof approximately$60.7millionindeposits,toacompetitivelysuitableinstitution. Onethriftinstitutioninthemarkethasacommercialandindustrialloanportfoliosimilar tothoseof commercialbanksintheAshtabulaCountybankingmarket,asmeasuredin termsof theratiosof thosetypesof loanstototalloansandassets.TheBoardhas concludedthatdepositscontrolledbythisinstitutionshouldbeweightedat100percentin themarket-sharecalculations. Inaddition,fourcreditunionsexertacompetitiveinfluenceintheAshtabulaCounty bankingmarket.Eachinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembershipcriteriathatincludealmostallof the residentsintherelevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrant includingthedepositsof thesecreditunionsata50-percentweightinestimatingmarket influence. Afteraccountingforthetwobranchdivestituresandweightingthedepositsof thethriftat 100percentandthefourcreditunionsat50percent,Huntingtonwouldcontrolapproximately25.6percentof marketdeposits,theHHIwouldincreaseby198pointstoalevelof 1741,andsixotherinsureddepositoryinstitutionswouldremain,includingoneinsured depositoryinstitutionwithamarketshareof morethan25percent. ConclusionRegardingCompetitiveEffects TheDOJconductedareviewof thepotentialcompetitiveeffectsof theproposalandhas advisedtheBoardthatconsummationof theproposalwiththeproposeddivestituresof branchesintheAkron,AshtabulaCounty,andCantonbankingmarkets,asdiscussed above,wouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninthosemarkets orinanyotherrelevantbankingmarket.Inaddition,theappropriatebankingagencies havebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,includingtheproposeddivestitures,andforthereasons explainedabove,theBoardconcludesthatconsummationof theproposalwouldnothavea significantlyadverseeffectoncompetitionorontheconcentrationof resourcesinthe bankingmarketsinwhichHuntingtonandFirstMeritcompetedirectlyorinanyother 32 TheAshtabulaCountybankingmarketisdefinedasAshtabulaCounty,Ohio.

LegalDevelopments:ThirdQuarter,2016 341 relevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof publicandsupervisoryinformationregardingcapital adequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancial conditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions. Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. HuntingtonandHuntingtonBankarebothwellcapitalizedandwouldremainsoon consummationof theproposedacquisition.Theproposedtransactionisabankholding companymergerthatisstructuredasacashandshareexchange.33Theassetquality,earnings,andliquidityof bothHuntingtonBankandFirstMeritBankareconsistentwith approval,andHuntingtonappearstohaveadequateresourcestoabsorbthecostsof the proposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,future prospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Huntington,FirstMerit,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyHuntington,theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,and theorganizations’recordsof compliancewithapplicablebanking,consumerprotection, andanti-money-launderinglaws. Huntington,FirstMerit,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.Huntington’sdirectorsandseniorexecutiveofficershavesubstantial knowledgeof andexperienceinthebankingandfinancialservicessectors,anditsriskmanagementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredHuntington’splansforimplementingtheproposal. Huntingtonhasconductedcomprehensiveduediligenceandisdevotingsufficientfinancial andotherresourcestoaddressallaspectsof thepost-integrationprocessforthisproposal. Huntingtonwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe 33 Atthetimeofthemerger,eachshareofFirstMeritcommonstockwouldbeconvertedintoarighttoreceive cashandHuntingtoncommonstockbasedonanexchangeratio.Inaddition,eachshareofcertainnoncumulativeperpetualpreferredFirstMeritstockwouldbeconvertedintoarighttoreceivesubstantiallysimilarnewly issuednoncumulativeperpetualpreferredHuntingtonstock.Huntingtonhasthefinancialresourcestofundthe transaction.

342 FederalReserveBulletin|November2016 combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,Huntington’sandFirstMerit’smanagementhavetheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner, andHuntingtonplanstointegrateFirstMerit’sexistingmanagementandpersonnelina mannerthataugmentsHuntington’smanagement.34 Basedonallthefactsof record,includingHuntington’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof HuntingtonandFirstMeritincombattingmoney-laundering activities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.35Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,36andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods.37 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof HuntingtonBankandFirstMeritBank,thefairlendingandcompliancerecordsof both banks,thesupervisoryviewsof theOCCandtheConsumerFinancialProtectionBureau (“CFPB”),confidentialsupervisoryinformation,informationprovidedbyHuntington,and thepubliccommentsreceivedontheproposal. 34 Huntingtonwillincreasethesizeofitsboardbyfourdirectors,whowillbeappointedfromFirstMerit’sboard. Inaddition,HuntingtonwillinvitethemembersoftheboardofdirectorsofFirstMerittoserveforthreeyears asmembersofHuntington’sGreaterAkron-CantonRegionAdvisoryBoard. 35 12U.S.C.§1842(c)(2). 36 12U.S.C.§2901(b). 37 12U.S.C.§2903.

LegalDevelopments:ThirdQuarter,2016 343 Summaryof PublicCommentsonConvenienceandNeeds TheBoardreceivedcommentsfromonecommenterwhoobjectedtotheproposal,alleging thatHuntingtonmadeadisproportionatelylownumberof homepurchaseloans,home improvementloans,andrefinanceloanstoAfricanAmericanandHispanicborrowersin theAkronandCleveland,Ohio,areasandthatFirstMeritmadeadisproportionatelylow numberof homepurchaseloans,homeimprovementloans,andrefinanceloanstoAfrican AmericanandHispanicborrowersintheAkron,Ohio,area,asreflectedindatareported undertheHomeMortgageDisclosureActof 1975(“HMDA”)38for2014.Thecommenter alsocriticizedtherateatwhichHuntingtonandFirstMeritdeniedapplicationsbyAfrican AmericansandHispanics,comparedtothatfornon-Hispanicwhites,forhomepurchase loans,homeimprovementloans,andrefinanceloansintheAkronandClevelandareas,as reportedunderHMDAfor2014.Inaddition,thecommenteralsoexpressedconcerns abouttheclosureorconsolidationof branches,primarilyintheAkron,Canton,andClevelandareas,allegingthattheconsolidationsandclosureswouldnothaveacountervailing publicbenefitandwouldhaveadisproportionateeffectonLMIneighborhoods.Asecond commenterobjectedtotheproposal,allegingthatthecombinedorganizationwouldnot offerasmanyproductsandservicesasFirstMeritcurrentlyoffers,includingcreditmonitoringandarewardsprogram,andthattheproposalwouldresultinjoblossesinthe communitiesthatthecombinedorganizationwouldserve.Thecommenteralsoquestioned Huntington’scommitmenttoservetheneedsof Columbus,Ohio. Businessof theInvolvedInstitutionsandResponsetoComments HuntingtonandHuntingtonBankofferabroadrangeof financialproductsandservicesto individualcustomersandbusinesses.ThroughitsbranchnetworkinFlorida,Indiana, Kentucky,Michigan,Ohio,Pennsylvania,andWestVirginia,HuntingtonBankoffersa varietyof bankingproductsandservicestoitscustomers,includingretailconsumerand commercialbanking,consumerandcommercialmortgagelending,treasurymanagement, assetmanagement,andtrustandinvestmentservices. FirstMeritandFirstMeritBankalsoofferawiderangeof financialproductsandservices toindividualcustomersandbusinesses,includingconsumerandcommercialbanking services,consumerandcommercialmortgagesandmortgageloanservicing,commercial leasefinancing,wealthmanagementandfinancialconsultingservices,treasurymanagementservices,andinsurancebrokerageandagencyservices. Huntingtondeniesthecommenters’allegations,arguingthatitsrecordof homemortgage lendingdoesnotdisproportionatelyordiscriminatorilyaffectAfricanAmericansor Hispanics.HuntingtonrepresentsthatitsdenialratesforAfricanAmericansandHispanics inAkronandClevelandreflectdecisionsbasedoncollateral,credithistory,incomplete creditapplications,anddebt-to-incomeratios.Huntingtonalsorepresentsthatitisfirmly committedtoallfairlendinglawsandregulationsandactivelyengagesinmonitoring, testing,andmaintaininginternalcontrolstoensurecompliancewithfairlendinglawsand regulations.Inaddition,Huntingtonassertsthatitoffersmanyaffordablemortgageloan programsandcommunitydevelopmentactivitiestoincreaseaffordablehousingopportunitiesforLMIindividualsandcommunities. Withrespecttobranchclosures,Huntingtonrepresentsthatanyclosureswillcomplywith thecompany’scomprehensiveinternalbranchopening,closing,relocation,andconsolidationpolicy,whichsetsforthitsobligationstocomplywithapplicablelawsandregula- 38 12U.S.C.§2801etseq.

344 FederalReserveBulletin|November2016 tionsrelatedtobranchclosuresandconsolidations.Huntingtonfurtherrepresentsthat severalbranchesthatwouldbeclosedorconsolidatedarelocatednearotherbranchesin LMIcensustractstowhichcustomers’accountswouldbetransferred,andtheseclosures orconsolidationswillnotnegativelyaffectthecustomerexperience. Huntingtondeniesthecommenter’sallegationsregardingFirstMerit’slendingpractices, arguingthatFirstMeritdoesnotengageinanydiscriminatoryhomemortgagelending practices.HuntingtoncontendsthatFirstMerit’sdenialratesforAfricanAmericansand HispanicsinAkronreflectdecisionsbasedoncollateral,credithistory,anddebt-to-income ratios.HuntingtonalsorepresentsthatFirstMeritstrivestoserveallsegmentsof its communities,includingthroughhomemortgageloanproductsdesignedtoincreaseaffordablehousingopportunitiesforLMIindividualsandcommunities. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.39Inthiscase,theBoardconsideredthe supervisoryviewsof andinformationprovidedbytheOCC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.40Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sdatareportedunderHMDA,inadditiontosmallbusiness,smallfarm,and communitydevelopmentloandatacollectedandreportedundertheCRAregulations,to assessaninstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors,including(1)thenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)the geographicdistributionof thecompany’slending,includingtheproportionanddispersion of theinstitution’slendinginitsassessmentareasandthenumberandamountof loansin low-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof loans basedonborrowercharacteristics,including,forhomemortgageloans,thenumberand 39 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 40 12U.S.C.§2906.

LegalDevelopments:ThirdQuarter,2016 345 amountof loanstolow-,moderate-,middle-,andupper-incomeindividuals;41(4)theinstitution’scommunitydevelopmentlending,includingthenumberandamountof community developmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.42 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof HuntingtonBank HuntingtonBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheOCC,asof January1,2012(“HuntingtonBankEvaluation”).43HuntingtonBankreceivedan“Outstanding”ratingfortheLendingTestand “HighSatisfactory”ratingsfortheInvestmentTestandtheServiceTest.TheBoardhas consultedwiththeOCCregardingtheHuntingtonBankEvaluation. ExaminersfoundthatHuntingtonBank’soveralllendinglevelsreflectedexcellentresponsivenesstocommunitycreditneeds.Accordingtoexaminers,thebank’sgeographicdistributionof loanswasgood,includingloanstoLMIneighborhoods.Examinersalsofound thatthebank’sdistributionof borrowerswasgood,includingloanstoLMIborrowersand businessesof differentsizes.ExaminersnotedthatHuntingtonBank’sdistributionof homemortgageloansandsmallbusinessloanswasgoodorexcellentinasignificant numberof statesandmultistateMSAs.ExaminersalsofoundthatHuntingtonBankexhibitedaverystrongrecordof communitydevelopmentlendingthatotherwiseelevatedgood lendingperformancetoexcellentlendingperformance.HuntingtonBank’scommunity developmentloansweremadeforavarietyof purposes,withaparticularfocusonaffordablehousing,whichreflectedexcellentresponsivenesstolocalcommunityneeds. ExaminersfoundthatHuntingtonBankhadagoodlevelof qualifiedinvestmentactivity. Examinersnotedthattheinvestmentactivityof thebankanditssubsidiary,Huntington CommunityDevelopmentCorporation,inlow-incomehousingtaxcreditfundswasespeciallyresponsivetotheaffordablehousingneedsof localcommunities.Thebankextended 41 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 42 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 43 TheHuntingtonBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examiners reviewedhomemortgagelendingdata,otherCRAdata(smallloanstobusinessesandfarms),community developmentloans,qualifiedinvestments,branchingactivities,andcommunitydevelopmentservicesfrom January1,2007,throughDecember31,2011.TheHuntingtonBankEvaluationcoveredHuntingtonBank’s 38assessmentareaslocatedinsixstatesandfourmultistatemetropolitanstatisticalareas(“MSAs”):Florida; Indiana;Michigan;Ohio;Pennsylvania;WestVirginia;theCincinnati–Middleton,Ohio–Kentucky–Indiana, MSA;theSteubenville–Weirton,Ohio–WestVirginia,MSA;theWheeling,WestVirginia–Ohio,MSA;andthe Youngstown–Warren–Boardman,Ohio–Pennsylvania,MSA.TheHuntingtonBankEvaluationincludeda full-scopereviewof13oftheseassessmentareas,includingallfourmultistateMSAs.Alimited-scopereview wasconductedintheremaining25assessmentareas.TheHuntingtonBankEvaluationwasreleasedin March2016.

346 FederalReserveBulletin|November2016 qualifiedgrantstolocalcommunityorganizationstosupportlocalcommunitydevelopmentinitiatives,includingaffordablehousing,financialeducation,andeconomicdevelopmentthroughoutitsassessmentareas. ExaminersalsonotedthatHuntingtonBank’sdeliverysystemsprovidedgoodaccessibility of productsandservicestoareasandindividualsof differentincomelevels,includingLMI communitiesandindividuals.ExaminersfurthernotedthatHuntingtonBank’sbranches oftenofferedextendedhours,includingonweekends.Examinersalsofoundthatthebank’s communitydevelopmentserviceactivitywasgood.ExaminersindicatedthatHuntington Bank’sofficersandemployeesusedtheirfinancialexpertisetoaddressawiderangeof communityneeds,includingbyofferingcreditcounseling,first-timehome-buyerseminars, homeforeclosurepreventionworkshops,andotherfinancialeducationprogramstoLMI individuals. HuntingtonBank’sEffortsSincethe2012CRAEvaluation HuntingtonBankrepresentsthatithascontinueditsoverallCRAperformanceinallof its assessmentareassincetheHuntingtonBankEvaluation.HuntingtonBank,throughthe DetroitHomeMortgageFundinitiative,hascommittedfundstohelpincreasehome ownership,propertyvalues,andreinvestmentinDetroitbyprovidingfirstandsecond mortgageloanstoborrowerstopurchaseandrenovatepropertiesinDetroit.Huntington Bankalsorepresentsthatithasmadecommunitydevelopmentloanstosupportaffordable housinginitscommunities,includingcommitmentstoprovideinvestmentsandloansin MichiganandOhio. Inaddition,HuntingtonBankrepresentsthatitprovidedahighvolumeof smallbusiness loansthroughoutitsassessmentareasandparticipatedinstate-sponsoredprograms designedtohelpsmallbusinessesandsmallfarmsthatotherwisehaddifficultyobtaining loanstosecurefunding.HuntingtonBank’smanagementandemployeeshavecontinuedto dedicatevolunteerhourstocommunityserviceprojects,includingwithcommunityorganizationsthatprovideaffordablehousing,employmentservices,smallbusinessopportunities,financialeducationforchildrenandLMIfamilies,andhome-buyercounseling. CRAPerformanceof FirstMeritBank FirstMeritBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheOCC,asof June17,2013(“FirstMeritBankEvaluation”).44 FirstMeritBankreceived“HighSatisfactory”ratingsfortheLendingTestandServiceTest anda“LowSatisfactory”ratingfortheInvestmentTest.45 ExaminersnotedthatFirstMeritBank’soveralllendingactivityanddistributionof loans byborrowerincomewasgood.Examinersalsofoundthatthebank’sgeographicdistribu- 44 TheFirstMeritBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.TheevaluationperiodfortheLendingTestwasfromJanuary1,2008,toDecember31,2012,exceptforIllinois,which thebankenteredin2010andforwhichtheevaluationperiodwasfromJanuary1,2010,throughDecember31, 2012.TheevaluationperiodfortheInvestmentTestandtheServiceTestwasfromNovember17,2008,through June17,2013,forOhioandPennsylvaniaandJanuary1,2010,throughJune17,2013,forIllinois. 45 TheFirstMeritBankEvaluationincludedafull-scopeassessmentreviewofthebank’sassessmentareasinthe followinggeographies:theAkron,Ohio,MSA(“AkronMSA”);theCleveland–Elyria,Ohio,MSA (“ClevelandMSA”);theChicago–Naperville–Elgin,Illinois–Indiana–Wisconsin,MSA;andLawrenceCounty, Pennsylvania.Alimited-scopereviewwasperformedintheAshtabulaCounty,Ohio,assessmentarea;the Canton–Massillon,Ohio,MSA;theColumbus,Ohio,MSA;theMansfield,Ohio,MSA;theSandusky,Ohio, assessmentarea;theToledo,Ohio,assessmentarea;theAshlandCounty,CrawfordCounty,HuronCounty, SenecaCounty,HolmesCounty,KnoxCounty,andWayneCounty,Ohio,assessmentareas;andtheLake County,Illinois,assessmentarea.

LegalDevelopments:ThirdQuarter,2016 347 tionof loansbothoverallandinOhiowasadequatethroughoutthebank’sassessment areas.ExaminersnotedthatFirstMeritBankmadeanexcellentlevelof communitydevelopmentloansintheClevelandMSAandagoodlevelof communitydevelopmentloans intheAkronMSA,bothof whichpositivelyimpactedthebank’sLendingTestrating. Examinersobservedthatthebank’soveralllevelof communitydevelopmentinvestments wasadequate.Thebank’sinvestmentssupportedaffordablehousingprojectsandcommunitydevelopmentfinancialinstitutions.Thebank’squalifiedgrantsanddonationswere usedtosupportcommunitydevelopmentorganizationsthatfocusedonaffordablehousing forLMIindividuals,vocationaltrainingforlow-incomestudents,andfirst-timehomebuyerandotherfinancialliteracytraining. Examinersfoundthatthebank’sdeliverysystemswerereadilyaccessibletoallgeographies andindividualsof differentincomelevels.Examinersalsonotedthatthebank’sbranch distributionintheAkronMSAwasexcellentandthatthepercentageof branchesinLMI censustractsexceededthepercentageof thepopulationlivinginthosegeographies. BranchClosures Asnotedabove,onecommenterexpressedconcernthatHuntington’splannedbranch consolidationsandclosureswouldhaveanegativeeffectonLMIcommunities.Thefederal bankingsupervisoryagenciesevaluateabank’srecordof openingandclosingbranches, particularlybrancheslocatedinLMIgeographiesorprimarilyservingLMIindividuals,as partof theCRAexaminationprocess.46Specifically,examinersnotedintheHuntington BankEvaluationthatHuntington’sbranchopeningsandclosuresdidnotadverselyaffect theaccessibilityof productsandservicestoLMIindividualsorinLMIgeographies,and theclosuresweretheresultof reductionsinbranchactivity.TheBoardalsohasconsidered thefactthatfederalbankinglawprovidesaspecificmechanismforaddressingbranch closings,includingtheprovisionof noticetothepublicandtheappropriatefederalsupervisoryagencybeforethebranchisclosed.47Inaddition,forthethreeproposedbranch closuresinLMIcensustracts,thereceivingbranchestowhichcustomers’accountswould betransferredareallwithinhalf amilefromtheproposedclosingbranchandwillremain inLMIcensustracts.Specifically,forthetwoproposedbranchestobeclosedin low-incometracts,thecommunitieswillbeservedbyexistingFirstMeritBankbranches locatedlessthan600yardsfromtheclosingbranches.Further,themoderate-incometract branchisprimarilyacommerciallendingfacilitywithoutretailwalk-intraffic. Viewsof theOCC Initsreviewof theproposal,theBoardconsultedtheOCCregardingbothinstitutions’ CRA,consumercompliance,andfairlendingrecords.TheOCCistheprimarysupervisor of bothHuntingtonBankandFirstMeritBankandisrequiredtoreviewthebankmerger underlyingthisproposal,applyingthesameconvenienceandneedsfactorasmustbe appliedbytheBoard.TheBoardalsoconsultedwiththeOCCregardingHuntington Bank’sandFirstMeritBank’srecordsof compliancewithfairlendinglawsandregulations andthebanks’policiesandproceduresrelatingtofairlendingandotherconsumerprotec- 46 See,e.g.,12CFR228.24(d)(2).Inaddition,theBoardnotesthattheOCC,astheprimaryfederalsupervisorof thecombinedbank,willcontinuetoreviewthebank’sbranchclosingrecordinthecourseofconductingCRA performanceevaluations. 47 See12U.S.C.§1831r-1,asimplementedbytheJointPolicyStatementRegardingBranchClosings,64Fed. Reg.34844(June29,1999).TheJointPolicyStatementrequiresthatabankprovidethepublicwithatleast 30days’noticeandtheappropriatefederalsupervisoryagencywithatleast90days’noticebeforethedateof theproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdataforthe closure,consistentwiththeinstitution’swrittenpolicyforbranchclosings.

348 FederalReserveBulletin|November2016 tionlawsandregulations;aswellasthelendingrecordsof bothinstitutions.TheOCCwas providedwiththecommentsreceivedbytheBoard.TheOCCisconsideringallof the comments,thosereceivedbytheBoardandthosereceivedjointlybytheOCCandthe Board,inconnectionwithitsreviewof thebankmergerapplication. TheBoardhastakentheseconsultationswiththeOCCandtheinformationdiscussed aboveintoaccountinevaluatingthisproposal,includinginconsideringwhether Huntingtonhastheexperienceandresourcestoensurethatthecombinedorganization effectivelyimplementspoliciesandprogramsthatallowthecombinedorganizationtoeffectivelyservethecreditneedsof allthecommunitieswithinthefirm’sassessmentareas.The BoardexpectsHuntingtontoensurethatHuntingtonBankcomplieswithanycommitmentsorconditionsthattheOCCmayrequestorimposeinconnectionwithitsactionon thebankmergerproposal. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Huntingtonrepresentsthatasaresultof the proposal,existingcustomersof FirstMeritwouldhaveaccesstoacomplementof products andservicesthatiscomparabletoormoreexpansivethanthosecurrentlyavailableat FirstMerit,includingcorporatetrustandretirementplanservices,securitiesbrokerageand investmentadvisoryservices,insuranceproductsandinsurance-relatedconsultative services,andbillingandinvoiceservices.Moreover,Huntingtonassertsthatcustomersof bothinstitutionswouldbenefitfromamoreexpansivebranchandATMnetwork,particularlyHuntingtonBank’sbrancheslocatedingrocerychainsthatofferlongerhoursand areusuallyopensevendaysaweek.48 Inaddition,followingitssubmissionof theapplication,HuntingtonadoptedaCommunity Plan(“Plan”),underwhichHuntingtonhascommittedtoinvest$16.1billioninthe communitiesthatitserves,includingLMIcommunities,overafive-yearperiod,beginning in2017.HuntingtonassertedthatthePlanwillprovideanincreaseinlendingtosmallbusinesses,bringjobsbacktoneighborhoodsthroughoutHuntingtonandFirstMerit’s combinedfootprint,49andprovidemoreaffordablehousingopportunities.UnderthePlan, HuntingtonhassettargetsforLMIcommunitiesandsmallbusinesses,includingaplanto provide$5.7billioninmortgagelendinginLMIcommunitiesandtoLMIborrowersand $6.6billionforsmallbusinesses,includingthoseinLMIcommunities.Huntingtonalso intendstofund$3.7billionincommunitydevelopmentlendingandinvestmentsandan additional$25millioninphilanthropicinvestments.Huntingtondescribedplansto enhanceitsdiversityandinclusionpolicies,expanditscommunityengagementand 48 Asnotedabove,onecommenterexpressedconcernthatHuntingtonBankwouldnotofferthesamecredit monitoringservicethatFirstMeritoffered.AlthoughtheBoardhasrecognizedthatbankscanhelptoservethe bankingneedsofcommunitiesbymakingcertainproductsorservicesavailable,aninsureddepositoryinstitutionisnotrequiredtoprovideanyspecifictypesofproductsorservices.SeeM&TBankCorporation,FRB OrderNo.2015-27at15n.37(September30,2015). 49 Onecommenterallegedthattheproposalwouldresultinjoblossesinthecommunitiesthatthecombinedorganizationwouldserve.ThisconcernisoutsideofthelimitedstatutoryfactorsthattheBoardisauthorizedto considerwhenreviewinganapplicationornoticeundertheBHCAct.SeeWesternBancshares,Inc.v.Boardof Governors,480F.2d749(10thCir.1973);see,e.g.,CommunityBankSystem,Inc.,FRBOrderNo.2015-34 (November18,2015);WellsFargo&Company,82FederalReserveBulletin445(1996).Huntingtonhasrepresentedthatitwillestablishanoperations/callcenterwithinAkronandusereasonablebesteffortstomaintain employmentlevelsinAkronthatareconsistentwithFirstMerit’sexistingemploymentlevelswithintwoyears ofthemerger’sclosingdate.

LegalDevelopments:ThirdQuarter,2016 349 marketingefforts,andaddatotalof 10branchesinLMIandmajority-minoritycensus tractsinDetroit,Cleveland,Chicago,Toledo,andoneadditionalcitytobedetermined.50 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,consultationswiththeOCCandCFPB,confidentialsupervisoryinformation,informationprovidedbyHuntington,publiccommentson theproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval.TheBoardexpectsHuntingtonto implementpolicies,programs,andactivitiesthatarecommensuratewiththeincreasedsize andcomplexityof theinstitution. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”51 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.52These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.53 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Boththeacquirerandthetargetarepredominately engagedinretailcommercialbankingactivities.54Theproformaorganizationwouldhave 50 TwocommunityorganizationsassertedthattheproposalshouldnotbeapprovedunlessthePlanisincludedas aconditionoftheapproval.TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbanking agencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,CITGroup,Inc.,FRBOrderNo.2015-20at24n.54(July19,2015); CitigroupInc.,88FederalReserveBulletin485(2002);FifthThirdBancorp,80FederalReserveBulletin838,841 (1994).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordofanapplicantandthe programsthattheapplicanthasinplacetoservethecreditneedsofitsCRAassessmentareas. 51 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 52 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 53 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 54 Huntingtonprimarilyofferscommercialandconsumerbankingservices,mortgagebankingservices,commercialrealestatelending,automobilefinancing,equipmentleasing,communitydevelopmentinvestment,investmentadvisoryandmanagementservices,fiduciaryadministration,trustservicesandoperations,discount

350 FederalReserveBulletin|November2016 minimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complex interrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirm intheeventof financialdistress.Inaddition,theorganizationwouldnotbeacritical servicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldpose significantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.55Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyHuntingtonwithalltheconditionsimposedinthisorder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Cleveland,actingunderdelegated authority. securitiesbrokerageservices,treasurymanagement,capitalmarketservices(includingcorporateriskmanagementandinstitutionalsales,tradingandunderwriting—includingmunicipalbondunderwritingandprivate placementactivities),aswellasreinsuringcreditlifeanddisabilityinsuranceandsellingotherinsuranceand financialproductsandservicesasagent.FirstMeritoffersprimarilyretailandcommercialdepositandloan products,commercialleasefinancingandrelatedservices,insurancebrokerage,financialconsulting,trust operations,andfiduciaryservices.Ineachofitsactivities,Huntingtonhas,andasaresultoftheproposal wouldcontinuetohave,asmallmarketshareonanationwidebasis,andnumerouscompetitorswouldremain fortheseservices. 55 AcommenterrequestedthattheBoardholdpublichearingsormeetingsontheproposal.Section3(b)ofthe BHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfrom theappropriatesupervisoryauthorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublic hearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwritten commentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenter’srequestin lightofallthefactsofrecord.Asnotedabove,theBoardextendedtheinitialperiodforpubliccommentto accommodatethepublicinterestinthisproposal,providinginterestedpersonsuntilMay16,2016,atotal periodof66days,tosubmitwrittencomments.IntheBoard’sview,thecommenterhashadampleopportunity tosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsidered inactingontheproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtothe Board’sdecisionthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhy writtencommentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwise wouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestfora publichearingormeetingontheproposalisdenied. Inaddition,acommenterrequestedafurtherextensionofthecommentperiodfortheproposal.Asnoted above,theBoardalreadyprovidedforanextendedcommentperiodof66days.Duringthistime,the commenters,includingtherequestor,submitteddetailedcommentsinwritingregardingtheproposal.The Board’srulescontemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationof hardshiporothermeritoriousreasonforseekingadditionaltime.Thecommenter’srequestforadditionaltime tocommentdoesnotidentifycircumstancesthatwouldwarrantanextensionofthepubliccommentperiodfor thisproposal.Accordingly,theBoardhasdeterminednottoextendfurtherthecommentperiod.

LegalDevelopments:ThirdQuarter,2016 351 Byorderof theBoardof Governors,effectiveJuly29,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix Huntington/FirstMeritBankingMarkets ConsistentwithBoardPrecedentandDOJBankMergerGuidelines Remaining Amountsof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors Elkhart/Niles/SouthBend,Indiana–Elkhart,St.Joseph,Kosciusko,LaGrange,andMarshallCounties;Davis,Oregon,Washington,andNorth Bend(includingtheentirecityofBassLake)townshipsinStarkeCounty,allinIndiana;CassCounty;Buchanan,NilesandBertrandtownshipsin BerrienCounty;andthesouthernhalfofSt.JosephCounty,(Constantine,Florence,Sherman,BurrOak,Mottville,WhitePigeon,Sturgis,andFawn RiverTownships),allinMichigan. HuntingtonPre-Consummation 18 $60.2M 0.6 FirstMerit 17 $69.2M 0.7 HuntingtonPost-Consummation 13 $129.4M 1.3 1290 1 31 Alpena,Michigan–AlpenaandPresqueIsleCounties;Mitchell,Caledonia,Alcona,andHaynestownshipsofAlconaCounty;andMontmorency, Hillman,Avery,Loud,andRusttownshipsofMontmorencyCounty,allinMichigan. HuntingtonPre-Consummation 7 $1.1M 0.3 FirstMerit 2 $95.3M 22.7 HuntingtonPost-Consummation 2 $96.4M 23.0 1894 13 6 BayCity-Saginaw,Michigan–ArenacCounty(exceptMason,Turner,andWhitneytownships);BayandSaginawCounties;andTuscolaCounty (exceptElmwood,andElklandtownships),allinMichigan. HuntingtonPre-Consummation 7 $134.1M 3.8 FirstMerit 1 $766.6M 21.7 HuntingtonPost-Consummation 1 $900.7M 25.5 1409 165 18 CalhounCounty,Michigan–CalhounCounty,Michigan. HuntingtonPre-Consummation 13 $4.6M 0.5 FirstMerit 8 $24.6M 2.6 HuntingtonPost-Consummation 7 $29.2M 3.1 1889 2 12 Detroit,Michigan–Oakland,Macomb,Wayne,Lapeer,Genesee,Washtenaw,St.Clair,Livingston,Lenawee,andShiawasseeCounties;Monroe County(exceptWhiteford,Bedford,andErietownships);andSanilacCounty(exceptGreenleaf,Austin,Argyle,Moore,Minden,Wheatland, Delaware,andForestertownships);allinMichigan. HuntingtonPre-Consummation 6 $5.7B 4.5 FirstMerit 11 $2.5B 2.0 HuntingtonPost-Consummation 5 $8.2B 6.5 1468 18 55 Gaylord,Michigan–OscodaandOtsegoCounties;andVienna,Briley,andAlberttownshipsofMontmorencyCounty,allinMichigan. HuntingtonPre-Consummation 8 $8.6M 1.8 FirstMerit 3 $79.3M 16.0 HuntingtonPost-Consummation 3 $87.9M 17.8 2046 56 7 Gladwin-Midland,Michigan–GladwinandMidlandCounties,bothinMichigan. HuntingtonPre-Consummation 8 $21.2M 1.5 FirstMerit 7 $23.5M 1.7 HuntingtonPost-Consummation 5 $44.6M 3.2 4809 5 7 GrandRapids,Michigan–Allegan,Barry,Ionia,andKentMecosta,Montcalm,Muskegon,Newaygo,Oceana,andOttawaCounties;Newkirk, Dover,Ellsworth,CherryValley,Pinona,Yates,andChasetownshipsofLakeCounty;Richmond,Evart,Hersey,andOrienttownshipsofOsceola County;allinMichigan. HuntingtonPre-Consummation 2 $2.7B 11.6 FirstMerit 30 $46.1M 0.2 HuntingtonPost-Consummation 2 $2.7B 11.8 935 4 33 (continuedonnextpage)

352 FederalReserveBulletin|November2016 Appendix—continued Huntington/FirstMeritBankingMarkets ConsistentwithBoardPrecedentandDOJBankMergerGuidelines—continued Remaining Amountsof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors Jackson,Michigan–JacksonCounty,Michigan. HuntingtonPre-Consummation 11 $12.3M 0.9 FirstMerit 2 $297.9M 22.0 HuntingtonPost-Consummation 2 $310.2M 22.9 1861 40 12 Kalamazoo-BattleCreek,Michigan–KalamazooandVanBurenCounties;Flowerfield,Park,Mendo,Leonidas,Fabius,Lockport,Nottawaand ColontownshipsofSt.JosephCounty,allinMichigan. HuntingtonPre-Consummation 11 $98.6M 2.6 FirstMerit 17 $25.1M 0.6 HuntingtonPost-Consummation 10 $123.7M 3.2 1309 3 18 Lansing,Michigan–Clinton,Eaton,andInghamCounties,allinMichigan. HuntingtonPre-Consummation 18 $37.2M 0.7 FirstMerit 6 $475.1M 8.6 HuntingtonPost-Consummation 5 $512.3M 9.3 897 12 21 Petoskey,Michigan–Banks,CentralLake,Echo,JordanandWarnertownshipsofAntrimCounty;andCharlevoix,Cheboygan,andEmmet Counties,allinMichigan. HuntingtonPre-Consummation 8 $119.1M 7.9 FirstMerit 9 $71.4M 4.7 HuntingtonPost-Consummation 4 $190.5M 12.6 1255 75 10 Roscommon,Michigan–CrawfordandRoscommonCounties,bothinMichigan. HuntingtonPre-Consummation 6 $19.5M 4.6 FirstMerit 3 $43.0M 10.1 HuntingtonPost-Consummation 3 $62.5M 14.7 3014 94 5 SaultSainteMarie,Michigan–Luce,Chippewa,andMackinacCounties,allinMichigan. HuntingtonPre-Consummation 5 $43.5M 6.7 FirstMerit 6 $16.4M 2.5 HuntingtonPost-Consummation 4 $59.9M 9.2 2464 34 6 TraverseCity,Michigan–AntrimCounty(exceptBanks,CentralLake,Echo,Jordan,andWarnertownships);Benzie,GrandTraverse,Kalkaska, Leelanau,andArcadiaCounties;Pleasanton,Springdale,Cleon,MapleGrove,andMarillatownshipsofManisteeCounty;allinMichigan. HuntingtonPre-Consummation 3 $453.6M 15.1 FirstMerit 11 $59.1M 2.0 HuntingtonPost-Consummation 3 $512.7M 17.1 1395 59 13 Cleveland,Ohio–Cuyahoga,Lake,Lorain,andGeaugaCounties;SagamoreHills,NorthfieldCenter,Twinsburg,Richfield,andBostontownships, thevillagessurroundingthesetownships,andthecitiesofMacedonia,TwinsburgandHudsoninSummitCounty;Homer,Harrisville,Westfield, Spencer,Chatham,Lafayette,Montville,Litchfield,York,Medina,Granger,Liverpool,BrunswickHillsandHinckleytownships,andthecitiesof MedinaandBrunswickinMedinaCounty;Mantua,Hiram,Nelson,Shalersville,Freedom,andWindhamtownships,andthecitiesofAuroraand StreetsboroinPortageCounty;andthecityofVermilion(notwholetownship)inErieCounty,allinOhio. HuntingtonPre-Consummation 4 $5.1B 8.4 FirstMerit 6 $3.9B 6.5 HuntingtonPost-Consummation 2 $9.0B 14.9 1518 110 35 Columbus,Ohio–Franklin,Delaware,Fairfield,Hocking,Licking,Madison,Morrow,PickawayandUnionCounties;andPerryCounty,(minus Harrisontownship),allinOhio. HuntingtonPre-Consummation 1 $17.4B 31.4 FirstMerit 10 $657.2M 1.2 HuntingtonPost-Consummation 1 $18.1B 32.6 1830 75 54 Dover-NewPhiladelphia,Ohio–TuscarawasandHarrisonCounties;andSaltCreek,Paint,Berlin,WalnutCreekandClarktownshipsinHolmes County,allinOhio. (continuedonnextpage)

LegalDevelopments:ThirdQuarter,2016 353 Appendix—continued Huntington/FirstMeritBankingMarkets ConsistentwithBoardPrecedentandDOJBankMergerGuidelines—continued Remaining Amountsof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors HuntingtonPre-Consummation 1 $378.6M 20.0 FirstMerit 16 $3.9M .2 HuntingtonPost-Consummation 1 $382.5M 20.2 1190 9 17 Toledo,Ohio–Lucas,FultonandOttawaCounties;andWoodCounty(minusFostoriacity),allinOhio. HuntingtonPre-Consummation 1 $2.5B 24.3 FirstMerit 13 $91.8M 0.9 HuntingtonPost-Consummation 1 $2.6B 25.2 1469 43 24 RichlandCounty,Ohio–RichlandCounty,Ohio. HuntingtonPre-Consummation 9 $38.4M 2.2 FirstMerit 5 $134.2M 7.7 HuntingtonPost-Consummation 5 $172.6M 9.9 1759 34 13 Wayne-WestHolmes,Ohio–Congress,Canaan,Chester,Wayne,Green,Baughman,Plain,Wooster,EastUnion,SugarCreek,Clinton,Franklin, SaltCreekandPainttownships,andthecityofWoosterinWayneCounty;andWashington,Ripley,Prairie,Knox,Monroe,Hardy,Richland,Killbuck andMechanictownshipsinHolmesCounty,allinOhio. HuntingtonPre-Consummation 12 $27.7M 1.4 FirstMerit 3 $312.6M 15.6 HuntingtonPost-Consummation 2 $340.3M 17.0 1405 43 13 Pittsburgh,Pennsylvania–Allegheny,Armstrong,Beaver,Butler,Greene,Lawrence,WashingtonandWestmorelandCounties;andFayetteCounty (minusPointMarionboroughandSpringhilltownship),allinPennsylvania. HuntingtonPre-Consummation 5 $3.0B 2.6 FirstMerit 27 $227.0M 0.2 HuntingtonPost-Consummation 5 $3.2B 2.8 2847 1 49 DataareasofJune30,2015.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent.Theremaining numberofcompetitorsnotedineachmarketincludesthriftinstitutions.

354 FederalReserveBulletin|November2016 Chemical Financial Corporation Midland, Michigan OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2016–14(August8,2016) ChemicalFinancialCorporation(“Chemical”),Midland,Michigan,afinancialholding companywithinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1 hasrequestedtheBoard’sapprovalundersection3of theBHCAct2tomergewithTalmer Bancorp,Inc.(“Talmer”),andtherebyindirectlyacquireTalmerBankandTrust(“Talmer Bank”),bothof Troy,Michigan. Inaddition,Chemical’ssubsidiarystatememberbank,ChemicalBank,Midland, Michigan,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDeposit InsuranceAct(“BankMergerAct”)tomergewithTalmerBank,withChemicalBankas thesurvivingentity.3ChemicalBankalsohasappliedundersection9of theFederal ReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeandbranchesof TalmerBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister20383(April7,2016)).5Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneralandacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). Chemical,withconsolidatedassetsof approximately$9.3billion,isthe126thlargest insureddepositoryorganizationintheUnitedStates.6ChemicalBankcontrolsapproximately$7.7billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Chemical controlsChemicalBankandoperatesonlyinMichigan.ChemicalBankistheeighth largestinsureddepositoryinstitutioninMichigan,withdepositsrepresenting3.8percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Talmer,withconsolidatedassetsof approximately$6.7billion,isthe169thlargestinsured depositoryorganizationintheUnitedStates.Talmercurrentlycontrolsapproximately $5.2billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Talmercontrols TalmerBank,whichoperatesinIllinois,Indiana,Michigan,Nevada,andOhio.Talmer Bankisthe11thlargestinsureddepositoryinstitutioninMichigan,controllingdepositsof approximately$3.5billion,whichrepresent1.9percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedinAppendixA. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofMarch31,2016,unlessotherwisenoted.State assetdata,marketshare,andrankingdataareasofJune30,2015,unlessotherwisenoted.Inthiscontext, insureddepositoryinstitutionsincludecommercialbanks,savingsandloanassociations,andsavingsbanks.

LegalDevelopments:ThirdQuarter,2016 355 Onconsummationof thisproposal,Chemicalwouldbecomethe87thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$16.0billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Chemicalwouldcontrolconsolidateddepositsof approximately $12.8billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryorganizationsintheUnitedStates.InMichigan,ChemicalBankwouldbecome thesixthlargestdepositoryorganization,controllingdepositsof approximately $10.9billion,whichrepresent5.7percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.7Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.8Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates9or,incertaincircumstances,thebankholdingcompanywoulduponconsummationcontrol30percentormore of thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateor inanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.10 Forpurposesof theBHCAct,thehomestateof bothChemicalandTalmerisMichigan. TalmeralsoislocatedinIllinois,Indiana,Nevada,andOhio.11Chemicaliswellcapitalized andwellmanaged,andChemicalBankhasanoutstandingCommunityReinvestmentAct of 1977(“CRA”)12rating.Therearenominimumagerequirementsunderthelawsof Illinois,Indiana,Nevada,orOhiothatwouldapplytoChemical’sacquisitionof Talmer.13 Onconsummationof theproposedtransaction,Chemicalwouldcontrollessthan1percent of thetotalamountof consolidateddepositsininsureddepositoryinstitutionsinthe UnitedStates.Inaddition,Chemicalwouldcontrolapproximately5.7percentof thetotal amountof depositsof insureddepositoryinstitutionsinMichigan,theonlystateinwhich 7 12U.S.C.§1842(d)(1)(A). 8 12U.S.C.§1842(d)(1)(B). 9 Similarly,theBankMergerActprovidesthat,ingeneral,theBoardmaynotapproveabankmergerifthe transactioninvolvesinsureddepositoryinstitutionswithdifferenthomestatesandtheresultingbankwould controlmorethan10percentofthetotalamountofdepositsofinsureddepositoryinstitutionsintheUnited States.12U.S.C.§1828(c)(13).ForpurposesoftheBankMergerAct,thehomestateofbothChemicalBank andTalmerBankisMichigan.12U.S.C.§1828(c)(13)(C)(ii)(II).Accordingly,thedepositcaprequirementof theBankMergerActdoesnotapplytotheproposedbankmerger. 10 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). 11 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 12 12U.S.C.§2901etseq. 13 See205Ill.Comp.Stat.5/21.2(a);Ind.Code§28-2-17;Nev.Rev.Stat.§666.405;OhioRev.CodeAnn. §1115.05.

356 FederalReserveBulletin|November2016 ChemicalandTalmerhaveoverlappingbankingoperations.Accordingly,inlightof allthe factsof record,theBoardmayapprovetheproposalundersection3(d)of theBHCAct.14 CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.15Bothstatutesalsoprohibit theBoardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.16 ChemicalandTalmerhavesubsidiarydepositoryinstitutionsthatcompetedirectlyinsix bankingmarkets:BadAxe,BayCity-Saginaw,Detroit,GrandRapids,andKalamazoo- BattleCreek,alllocatedinMichigan;andElkhart-Niles-SouthBend,locatedinMichigan andIndiana. TheBoardhasconsideredthecompetitiveeffectsof theproposalineachof therelevant markets.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthemarkets;therelativesharesof totaldepositsininsureddepositoryinstitutions inthemarkets(“marketdeposits”)thatwouldbecontrolledbyChemical;17theconcentrationlevelsof marketdepositsandtheincreaseintheselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);18andothercharacteristicsof themarkets. BankingMarketsWithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheBayCity-Saginaw,Detroit,Grand Rapids,Elkhart-Niles-SouthBend,andKalamazoo-BattleCreekbankingmarkets.On consummationof theproposal,theGrandRapidsbankingmarketwouldremain unconcentrated,andtheBayCity-Saginaw,Detroit,Elkhart-Niles-SouthBend,and 14 Section102oftheRiegle-NealInterstateBankingandBranchingEfficiencyActof1994(“Riegle-NealAct”) permitstheBoard,incertaincircumstances,toapproveinterstatemergertransactionsthatwouldotherwisebe prohibitedunderstatelaw.12U.S.C.§1831u(a)(1).ForpurposesoftheRiegle-NealAct,an“interstate mergertransaction”isoneinwhichtheinsuredbanksproposingtomergehavedifferenthomestates.See 12U.S.C.§1831u(g)(4)and(6).ThehomestateofbothChemicalBankandTalmerBankisMichigan:thereforesection102oftheRiegle-NealActdoesnotapplytotheproposedbankmerger.Id. 15 12U.S.C.§§1842(c)(1)and1828(c)(5). 16 12U.S.C.§§1842(c)(1)(B)and1828(c)(5)(B). 17 LocaldepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70Federal ReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50-percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 18 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,were notmodified.SeePressRelease,DepartmentofJustice(August19,2010),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html.

LegalDevelopments:ThirdQuarter,2016 357 Kalamazoo-BattleCreekbankingmarketswouldremainmoderatelyconcentrated,as measuredbytheHHI.ThechangeintheHHIinthesemarketswouldbesmall,consistent withBoardprecedent,andwithinthethresholdsintheDOJBankMergerGuidelines.In addition,numerouscompetitorswouldremainineachof thesebankingmarkets.19 BankingMarketWarrantingSpecialScrutiny Thestructuraleffectsthatconsummationof theproposalwouldhaveontheBadAxe bankingmarket20warrantadetailedreviewbecausetheconcentrationlevelonconsummationwouldexceedthethresholdlevelsintheDOJBankMergerGuidelineswhenusing initialcompetitivescreeningdata.Usingtheinitialscreeningdata,Chemicalisthefifth largestdepositoryorganizationintheBadAxebankingmarket,controllingapproximately $99.4millionindeposits,whichrepresent10.5percentof marketdeposits.Talmeristhe secondlargestdepositoryorganizationinthemarket,controllingapproximately $170.1millionindeposits,whichrepresent18.0percentof marketdeposits.Onconsummation,thecombinedentitywouldbethelargestdepositoryinstitutionintheBadAxe bankingmarket,controllingapproximately$269.5millionindeposits,whichwouldrepresentapproximately28.5percentof marketdeposits.TheHHIinthismarketwouldincrease by378points,from1545to1923. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheBadAxebankingmarket.21Inparticular,threecreditunionsexerta competitiveinfluenceintheBadAxebankingmarket.Eachinstitutionoffersawiderange of consumerbankingproducts,operatesstreet-levelbranches,andhasbroadmembership criteriathatincludealmostallof theresidentsintherelevantbankingmarket.22TheBoard findsthatthesecircumstanceswarrantincludingthedepositsof thesecreditunionsata 50percentweightinestimatingmarketinfluence.Thisweightingtakesintoaccountthe limitedlendingdonebycreditunionstosmallbusinessesrelativetocommercialbanks’ lendinglevels. Thisadjustmentsuggeststhattheresultingmarketconcentrationof theproposedtransactionintheBadAxebankingmarketislesssignificantthanwouldappearfromtheinitial competitivescreeningdata,whichfocusedoncommercialbankcompetitors.Afterconsummation,adjustingtoreflectcompetitionfromcreditunionsinthemarket,themarket concentrationlevelintheBadAxebankingmarketasmeasuredbytheHHIwouldincrease by364,fromalevelof 1494to1858,andthemarketshareof Chemicalresultingfromthe transactionwouldincreaseinthemarketfrom10.3percentto28.0percent.Inadditionto thethreecreditunions,sixcommercialbankcompetitorswouldremaininthemarket,three of whichwouldhavemarketsharesof 20percent,17.1percent,and16.5percent,respec- 19 Thesefivebankingmarketsandthestructuraleffectsoftheproposalinthesemarketsaredescribedin AppendixB. 20 TheBadAxebankingmarketisdefinedasHuronCounty;Argyle,Austin,Delaware,Forester,Greenleaf, Minden,MooreandWheatlandtownshipsinSanilacCounty;andElklandandElmwoodtownshipsinTuscola County,allinMichigan. 21 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorporation, 84FederalReserveBulletin129(1998). 22 TheBoardpreviouslyhasconsideredcompetitionfromcertainactivecreditunionswiththesefeaturesasa mitigatingfactor.See,e.g.,BB&TCorporation,FRBOrderNo.2015-18(July7,2015);MitsubishiUFJFinancialGroup,Inc.,FRBOrderNo.2012-12(November14,2012);OldNationalBancorp,FRBOrderNo.2012-9 (August30,2012);UnitedBankshares,Inc.(orderdatedJune20,2011),97FederalReserveBulletin19(2nd Quar.2011);ThePNCFinancialServicesGroup,Inc.,94FederalReserveBulletinC38(2008);ThePNCFinancialServicesGroup,Inc.,93FederalReserveBulletinC65(2007);RegionsFinancialCorporation,93Federal ReserveBulletinC16(2007);PassumpsicBancorp,92FederalReserveBulletinC175(2006);andWachovia Corporation,92FederalReserveBulletinC183(2006).

358 FederalReserveBulletin|November2016 tively.Thepresenceof theseviablecompetitorssuggeststhatChemicalwouldhavelimited abilitytounilaterallyofferlessattractivetermstoconsumersandthatthesecompetitorsare abletoexertcompetitivepressureonChemicalintheBadAxemarket. TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe BadAxeMarket.Inaddition,theappropriatebankingagencieshavebeenaffordedan opportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheBadAxebankingmarketorinanyotherrelevantbankingmarket. Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders thefinancialandmanagerialresourcesandthefutureprospectsof theinstitutions involved.23Initsevaluationof thefinancialfactors,theBoardreviewsinformation regardingthefinancialconditionof theorganizationsinvolvedonbothparent-onlyand consolidatedbases,aswellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance,aswellaspubliccommentsontheproposal.The Boardevaluatesthefinancialconditionof thecombinedorganization,includingitscapital position,assetquality,liquidity,earningsprospects,andtheimpactof theproposed fundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationto absorbthecostsof theproposalandtocompletetheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapital adequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesand theproposedbusinessplan. ChemicalandTalmerarebothwellcapitalizedandthecombinedentitywouldremainso onconsummationof theproposedtransaction.Theproposedtransactionisabank holdingcompanymergerthatisstructuredasacashandstockpurchase,withasubsequent mergerof thesubsidiarydepositoryinstitutions.24Theassetquality,earnings,andliquidity of ChemicalBankandTalmerBankareconsistentwithapproval,andChemicalappears tohaveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegration of theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Chemical,Talmer,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhas 23 12U.S.C.§§1842(c)(2),(5),and(6),and1828(c)(5)and(11). 24 Toeffecttheholdingcompanymerger,eachshareofTalmercommonstockwouldbeconvertedintoarightto receiveChemicalcommonstockandcash,basedonanexchangeratio.Chemicalexpectstofundsomeofthe cashportionoftheexchangewithfinancingfromathird-partylender.Chemicalhasthefinancialresourcesto supporttheobligation.

LegalDevelopments:ThirdQuarter,2016 359 consideredinformationprovidedbyChemical;theBoard’ssupervisoryexperienceswith ChemicalandTalmerandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicablebanking,consumer protection,andanti-money-launderinglaws;aswellasinformationprovidedbythe commenter. Chemicalanditssubsidiarydepositoryinstitutionarebothconsideredtobewellmanaged. Chemicalhasarecordof successfullyintegratingorganizationsintoitsoperationsandriskmanagementsystemsafteracquisitions.Chemical’sdirectorsandseniorexecutiveofficers havesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors, anditsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionary proposal. TheBoardalsohasconsideredChemical’splansforimplementingtheproposal.Chemical hasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialand otherresourcestoaddressallaspectsof thepost-integrationprocessforthisproposal. Chemicalwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,Chemical’smanagementhastheexperienceandresourcestoensurethat thecombinedorganizationoperatesinasafeandsoundmanner,25andChemicalplansto integrateTalmer’sexistingmanagementandpersonnelinamannerthataugmentsChemical’smanagement.26 Basedonallthefactsof record,includingChemical’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andthecommentreceivedontheproposal,theBoardconcludesthatconsiderations relatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof ChemicalandTalmerin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.27 Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelping tomeetthecreditneedsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutionsundertheCRA.TheCRArequiresthefederalfinancialsupervisoryagenciesto encourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,28andrequires theappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’s 25 ChemicalhasthefinancialandmanagerialresourcestocomplywiththeBoard’sregulationsimplementing section165oftheDodd-FrankAct,andtheBoardwillmonitorChemical’scompliancewiththeseregulations throughthesupervisoryprocess. 26 Onconsummation,fiveofTalmer’sdirectorswillbeaddedtoChemical’sboard,whichwillexpandfromseven totwelvemembers,andtwoofTalmer’sdirectorswillbeaddedtoChemicalBank’sboard,whichwillexpand fromtwelvetofourteenmembers.Inaddition,thechairmanofTalmerwillserveasthechairmanofChemical, thechiefexecutiveofficerofTalmerwillserveasthevicechairmanofChemical,andcertainkeyexecutivesof TalmerandTalmerBankwillbeemployedbyChemicalandChemicalBankfollowingconsummationofthe proposal. 27 12U.S.C.§§1842(c)(2)and1828(c)(5). 28 12U.S.C.§2901(b).

360 FederalReserveBulletin|November2016 recordof helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.29 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors, thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovided bytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Chemical BankandTalmerBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisoryviewsof theFDIC;confidentialsupervisoryinformation;informationprovidedby Chemical;andthepubliccommentreceivedontheproposal. PublicCommentRegardingtheProposal Inthiscase,theBoardreceivedacommentfromacommenterwhoobjectedtotheproposal onthebasisof allegeddisparitiesinthenumberof residentialrealestateloansmadeto minorities,ascomparedtowhites,byChemicalBankintheFlint,MichiganMetropolitan StatisticalArea(“FlintMSA”)andtheBattleCreek,MichiganMSA(“BattleCreek MSA”),asreflectedindatareportedundertheHomeMortgageDisclosureAct(“HMDA”) for2014.30ThecommenteralsocriticizedtherateatwhichChemicalBankdeniedapplicationsbyHispanics,comparedtothatforwhites,forhomepurchaseloansintheFlint MSA,asreportedunderHMDAfor2014.Inaddition,thecommentercitedacomplaint aboutanoverdraftfeechargedbyChemicalBank. Businessesof theInvolvedInstitutionsandResponsetotheComment ChemicalBankisafull-servicebank,offeringabroadrangeof financialproductsand servicestoindividualconsumersandbusinesses.ThroughitsbranchnetworkinMichigan, itoffersavarietyof traditionalbankingproductstoconsumers,includingmortgageloan products,consumerloans,creditcards,andcheckingandsavingsproducts.Chemical Bank’sbusiness-focusedproductsandservicesincludebusinesscheckingaccounts, commercialloans,andcommercialrealestateloans.Between2013and2015,Chemical acquiredseveraldepositoryinstitutionsthatwereconsolidatedintoChemicalBank.31 TalmerBankisafull-servicebankthatoffersabroadrangeof retailandcommercial bankingproductsandservicesthroughitsbranchnetworkinMichigan,Ohio,Illinois, Indiana,andNevada.Itsproductsandservicesincludeworkingcapitallinesof credit,businesstermloans,inventoryandaccountsreceivableloans,constructionloans,equipment financeandleasing,assetbasedloans,commercialrealestateloans,homemortgageloans 29 12U.S.C.§2903. 30 Thecommenter’sconcernsfocusedonthenumberofhomepurchaseloans,homerefinanceloans,andhome improvementloansthatChemicalBankofferedtoAfricanAmericansandHispanicscomparedtowhitesinthe FlintMSA,aswellasthenumberofloansthatChemicalBankofferedtoAfricanAmericanscomparedto whitesintheBattleCreekMSA. 31 SeeChemicalFinancialCorporation,FRBOrderNo.2015-13(April20,2015);ChemicalFinancialCorporation, FederalReserveRelease,H.2.No.1,p.2(December30,2014),availableatwww.federalreserve.gov/releases/h2/ 20150103/h2.pdf;ChemicalFinancialCorporation,FRBOrderNo.2014-16(September30,2014).

LegalDevelopments:ThirdQuarter,2016 361 for1-4familyowner-occupiedhomes,homeimprovementloans,andcommercialandresidentialrealestatedevelopmentloans. ChemicaldeniesthattheHMDAdatapresentedbythecommenterreflectdiscriminatory orunfairlendingpracticesbyChemicalBankintheFlintorBattleCreekMSAs.In responsetoallegationsaboutlowratesof lendingtominoritiesintheFlintMSA,Chemical explainsthatChemicalBank,withonlytwobranches,hasasmallpresenceinacompetitivemarket.ChemicalnotesthatloanapplicationsfromAfricanAmericansandHispanics intheFlintMSArepresentedasmallpercentageof totalapplicationsreceivedbyall lendersintheFlintMSAin2014,andthatChemical’sloandecisionswithrespecttoapplicationsitreceivedreflectedjudgmentsbasedoncredithistory,debt-to-incomeratios,and othernondiscriminatoryfactors.WithrespecttohomepurchaseloanstoAfricanAmericans,oneof theproductsof concernforthecommenter,ChemicalrepresentsthatitsoriginationstoAfricanAmericansrepresentedahigherpercentageof ChemicalBank’stotal homepurchaseloansthanthepercentageof aggregateoriginationsbyalllendersinthe FlintMSAin2014. ChemicalalsorepresentsthatChemicalBankparticipatesinanumberof loanprograms designedtomeetthecreditneedsof LMIborrowersintheFlintMSA.ChemicalBankalso hasaprogramdesignedtohelpborrowersqualifyforhomemortgageloans,whichincludes financialliteracyworkshops,educationalresourcesrelatingtothehomeownershipprocess, andprovidingfundsforclosingcostsinexchangeforborrowerscompletingtheprogram. Inadditiontothesehomemortgageprograms,Chemicalalsonotesthatithasproducts designedtomeettheneedsof LMIcustomers,suchasproductsforborrowerswithlittleor nocredithistoryandcheckingaccountswithnominimumopeningdeposit,minimum accountbalancerequirements,ormonthlymaintenancefee.Chemicalalsorepresentsthatit engagesinmarketingeffortstargetedtowardminoritiesintheFlintMSA. Concerningitslevelof lendingintheBattleCreekMSA,Chemicalnotesthatin2014, ChemicalBankoriginatedapproximately8percentof allhomemortgageloansand approximately15percentof allhomerefinanceandhomeimprovementloanstoAfrican AmericanborrowersmadeintheBattleCreekMSA.Chemicalrepresentsthat thepercentageof homerefinanceandhomeimprovementloansthatitoriginatedto AfricanAmericansfarexceededthatof allotherlendersintheMSA.Chemicalassertsthat itworkstopromoteitshomelendingproductsthatmeettheneedsof LMIborrowersin theBattleCreekMSAandthatChemicalBankengagesinvariousoutreacheffortstoLMI individualsintheBattleCreekMSA,includingprovidingfinancialliteracytrainingand educationalresourcesrelatingtohomeownership. Recordsof PerformanceUndertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.32Inthiscase,theBoardconsideredthe supervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserveBank of Chicago(“ReserveBank”). 32 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016).

362 FederalReserveBulletin|November2016 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.33Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,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’sdatareportedunderHMDA,inadditiontosmallbusiness,smallfarm,and communitydevelopmentloandatacollectedandreportedundertheCRAregulations,to assessaninstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors,including(1)thenumberandamountsof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)the geographicdistributionof theinstitution’slending,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberandamountsof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof loansbasedonborrowercharacteristics,including,forhomemortgageloans,thenumber andamountsof loanstolow-,moderate-,middle-,andupper-incomeindividuals;34(4)the institution’scommunitydevelopmentlending,includingthenumberandamountsof communitydevelopmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.35 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof ChemicalBank ChemicalBankwasassignedanoverallratingof “Outstanding”atitsmostrecentCRA performanceevaluationbytheReserveBank,asof October26,2015(“ChemicalBank 33 12U.S.C.§2906. 34 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 35 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

LegalDevelopments:ThirdQuarter,2016 363 Evaluation”).36Thebankreceived“Outstanding”ratingsforeachof theLendingTest,the InvestmentTest,andtheServiceTest.37 ExaminersfoundthatChemicalBank’soveralllendinglevelsreflectedexcellentresponsivenesstocreditneedsinitsassessmentareas.38Accordingtoexaminers,thebankmade extensiveuseof innovativeandflexiblelendingpracticesinordertoserveassessmentarea creditneeds.Examinersfoundthatasubstantialmajorityof thebank’sloansweremadeto borrowerswithinitsassessmentareas.Overall,theexaminersalsofoundthatthe geographicdistributionof thebank’sloansreflectedexcellentpenetrationthroughoutits assessmentareas.Further,examinersfoundthat,overall,thebankexhibitedanexcellent recordof servingthecreditneedsof itsassessmentareas.Examinersnotedthatthedollar amountof ChemicalBank’slendinginitsassessmentareasincreasedbyapproximately 9.3percentfromthepriorevaluation. Examinersfoundthatthedistributionof thebank’sborrowers,giventheproductlines offered,reflectedadequatepenetrationamongcustomersof differentincomelevelsand excellentpenetrationamongbusinessesof differentsizes.Examinersalsofoundthat ChemicalBankwasaleaderinmakingcommunitydevelopmentloans,withanincreaseof 13.3percentof communitydevelopmentlendingfromthepriorevaluation.Chemical Bank’scommunitydevelopmentlendingeffortsprimarilyfocusedonlendingtosupport affordablehousingandcommunitydevelopmentorganizationsthatprovideessential servicestoLMIindividuals,aswellasonrevitalizingandstabilizingeconomically distressedgeographieswithinthebank’sassessmentareas. IntheBattleCreekMSA,anareaof concernforthecommenter,examinersfoundthe bank’slendingtoreflectexcellentresponsivenesstothecreditneedsof theassessmentarea. ExaminersalsonotedChemicalBank’sdistributionof borrowers,giventheproductlines offered,wasgoodamongcustomersof differentincomelevelsandexcellentamongbusinessesof differentsizes.ChemicalBankwasfoundtohaveagoodrecordof servingthe creditneedsof LMIindividualsandgeographiesandof smallbusinesses,andtohavemade anadequatelevelof communitydevelopmentloanswithintheBattleCreekMSA.ExaminersalsohighlightedChemicalBank’sextensiveuseof innovativeandflexiblelending practiceswithinthisassessmentarea. IntheFlintMSA,anotherareaof concernforthecommenter,examinersfoundthebank’s lendingtoreflectadequateresponsivenesstothecreditneedsof theassessmentarea. Examinersalsofoundthatthegeographicdistributionof thebank’sloansreflected 36 TheChemicalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedloansreported,pursuanttoHMDAandCRAdatacollectionrequirements(geographicdistributionandborrowerdistribution)in2013and2014.Theevaluationperiodforcommunitydevelopmentlending, investments,andserviceswasAugust27,2013,throughOctober26,2015. 37 TheChemicalBankEvaluationincludedfull-scopeevaluationsoftheBattleCreek,MichiganMSA;theFlint, MichiganMSA;theGrandRapids-Wyoming,MichiganMSA;theMidland,MichiganMSA;theNiles-Benton Harbor,MichiganMSA;theSaginaw-SaginawTownshipNorth,MichiganMSA;andtheNorthernNon-MSA (comprisedofAlcona,Alpena,Antrim,Arenac,Benzie,Charlevoix,Cheboygan,Clare,Crawford,Emmet, Gladwin,GrandTraverse,Iosco,Isabella,Kalkaska,Lake,Leelanau,Manistee,Mason,Mecosta,Missaukee, Montmorency,Newaygo,Ogemaw,Osceola,Oscoda,Otsego,PresqueIsle,Roscommon,andWexfordcounties).LimitedscopeevaluationswereperformedintheBayCity,MichiganMSA;theKalamazoo-Portage, MichiganMSA;theSouthBend-Mishawaka,Indiana-MichiganMSA(consistingofCassCounty,Michigan); theCentralNon-MSA(comprisedofGratiot,Ionia,andShiawasseecounties);theEasternNon-MSA (comprisedofHuron,Sanilac,andTuscolacounties);theSouthernNon-MSA(comprisedofBranchand Hillsdalecounties);andtheWesternNon-MSA(consistingofAlleganCounty). 38 Thecommentercontendedthat,althoughChemicalpreviouslyassertedthatitsacquisitionofNorthwestern Bancorp,Inc.(“Northwestern”),in2014wouldresultinincreasedlending,suchincreasedlendingdidnot occur.IntheChemicalBankEvaluation,examinersfoundthatthebankexhibitedanexcellentrecordof servingthecreditneedsofitsassessmentareas,includingintheareasofnorthernMichiganwhereitacquired branchesofNorthwestern’ssubsidiarydepositoryinstitution.

364 FederalReserveBulletin|November2016 adequatepenetrationthroughouttheassessmentarea,andthatthedistributionof borrowers,giventheproductlinesoffered,reflectedadequatedistributionamong customersof differentincomelevelsandexcellentpenetrationamongbusinessesof differentsizes.ChemicalBankwasfoundtoexhibitanadequaterecordof servingLMI individualsandareas,andanexcellentrecordof lendingtoverysmallbusinesses.Thebank wasfoundtouseinnovativeandflexiblelendingpractices;however,thebankmadealow levelof communitydevelopmentloansintheassessmentarea. ExaminersfoundthatChemicalBankmadeanexcellentlevelof qualifiedcommunity developmentinvestmentsandgrantswithinitsassessmentareas.Thebankwasfoundtobe aleaderinprovidinginvestmentsnotroutinelyprovidedbyprivateinvestors.Examiners foundthatChemicalBankmadesignificantuseof innovativeandcomplexinvestmentsto supportdevelopmentinitiatives.ExaminersalsofoundthatChemicalBankexhibitedexcellentresponsivenesstocreditandcommunitydevelopmentneeds.Examinersnotedthat ChemicalBank’sCRA-qualifiedinvestmentsandqualifiedcommunitydevelopmentdonationsincreasedbyapproximately49.3percentand19.0percent,respectively,indollar amountsfromthepriorevaluation. IntheBattleCreekMSA,examinersfoundthatChemicalBankhadmadeanexcellentlevel of CRA-qualifiedcommunitydevelopmentinvestmentsandgrants,andintheFlintMSA, ChemicalBankmadeasignificantlevelof CRA-qualifiedcommunitydevelopment investmentsandgrants.Theseinvestmentsandgrantsincludedthosenotroutinely providedbyprivateinvestors,andChemicalBankwasfoundtooccasionallybeinaleadershipposition.Ineachof theseMSAs,ChemicalBankwasalsofoundtomakeextensive useof innovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiatives, aswellastoexhibitexcellentresponsivenesstothecreditandcommunitydevelopment needsof theassessmentareas. ExaminersfoundChemicalBank’sdeliverysystemstobereadilyaccessibletothebank’s geographiesandindividualsof differentincomelevelsinthebank’sassessmentareas. Examinersalsofoundthatthebank’srecordof openingandclosingbranchesdidnot adverselyaffecttheaccessibilityof itsdeliverysystems,particularlyinLMIgeographiesor withLMIindividuals.39Further,examinershighlightedthatChemicalBankwasaleaderin providingcommunitydevelopmentservicesthroughoutitsassessmentareas. IntheBattleCreekMSAandtheFlintMSA,examinersfoundChemicalBank’sdelivery systemstobeaccessibletothebank’sgeographiesandindividualsof differentincome levels.Examinersalsofoundthatthebankwasaleaderinprovidingcommunitydevelopmentservicesinbothof theseMSAs,andthatthebank’sservicesdidnotvaryinaway thatinconveniencedtheseassessmentareas. CRAPerformanceof TalmerBank TalmerBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFDIC,asof September21,2015(“TalmerBankEvaluation”),40 39 ExaminersreviewedallcomplaintsreceivedbyChemicalBankbetweenJanuary2014andJune2016relatedto overdraftfeeschargedbyChemicalBankandfoundthatthebankconsistentlychargedoverdraftfeesinaccordancewithitspolicies,procedures,andcustomerdisclosures.Duringthisreview,examinersdidnotidentifyany unfairordeceptiveactsorpracticesoranyotherviolationsofapplicablelaw. 40 TheTalmerBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedthebank’slendingactivityfromJanuary1,2013,throughJune30,2015.Theevaluationperiodfor communitydevelopmentloans,investments,andserviceswasfromJuly11,2012,throughSeptember21,2015.

LegalDevelopments:ThirdQuarter,2016 365 withratingsof “HighSatisfactory”fortheLendingTest,InvestmentTest,andService Test.41 ExaminersfoundthatTalmerBank’slendinglevelsreflectedadequateresponsivenesstothe creditneedswithinitsassessmentareas,andthatthebankexhibitedagoodrecordof servingthecreditneedsof LMIgeographiesandindividualswithinitsassessmentareas. Examinersalsofoundthebank’sgeographicdistributionof loansreflectedgoodpenetrationthroughoutitsassessmentarea,andthebank’sdistributionof loanstoborrowers reflectedadequatepenetrationamongcustomersof differentincomelevelsandbusinesses of differentsizes.Further,examinersfoundthebankmadeextensiveuseof innovativeand flexiblelendingpracticesinordertoservethecreditneedsof theassessmentareas,and madearelativelyhighlevelof communitydevelopmentloans. ExaminersfoundthatTalmerBankexhibitedgoodresponsivenesstothecreditand communityeconomicdevelopmentneedsof itsassessmentareas.Examinersnotedthat TalmerBankmadeasignificantlevelof communitydevelopmentinvestmentsandgrants andoccasionallywasinaleadershipposition,particularlyforinvestmentsthatwerenot routinelyprovidedbyprivateinvestors.TalmerBankwasalsofoundtomakesignificantuse of innovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiatives. ExaminersnotedthatTalmerBank’sdeliverysystemswereaccessiblethroughoutthe bank’sassessmentareas.Examinersalsofoundthatservicesandbusinesshoursdidnot varyinawaythatinconveniencedLMIgeographiesorindividualsinthebank’sassessment areas.Further,examinersfoundthatTalmerBankprovidedarelativelyhighlevelof communitydevelopmentservices. AdditionalSupervisoryViews TheBoardhasconsideredtheresultsof arecentconsumercomplianceexaminationand fairlendingreviewof ChemicalBankconductedbyReserveBankexaminers.TheBoard reviewedtheexaminationreportregardingChemicalBank’srecordof compliancewithfair lendingandotherconsumerprotectionlawsandregulations;thebank’spoliciesand procedurestohelpensurecompliancewithfairlendingandotherconsumerprotectionlaws andregulations;andasthebank’slendingrecord.ChemicalBankintendstoimplementits policiesandproceduresatthecombinedorganizationfollowingconsummationof the transaction.Moreover,Chemicalplanstoexpanditscomplianceprogram;createacomprehensivefairbankingpolicyandprogram;andsignificantlyincreasethenumberof dedicatedcompliance,fairlending,andCRAstaff forthecombinedorganizationonconsummationof thetransaction. TheBoardhastakentheinformationdiscussedaboveintoaccountinevaluatingwhether Chemicalhastheexperienceandresourcestoensurethatthecombinedorganizationeffectivelyimplementspoliciesandprogramsthatallowthecombinedorganizationtoeffectively servethecreditneedsof allthecommunitieswithinthefirm’sassessmentareas. 41 TheTalmerBankEvaluationincludedfull-scopeevaluationsoftheWarren-Troy-FarmingtonHills,Michigan MetropolitanDivision(“MD”);theDetroit-Livonia-Dearborn,MichiganMD;theNon-MSA,Michigan (consistingoftheHuron,Sanilac,andTuscolacounties);theYoungstown-Warren-Boardman,Ohio,MSA;the Chicago-Naperville-ArlingtonHeights,IllinoisMD;theElkhart-Goshen,IndianaMSA;andtheLasVegas- Henderson-Paradise,NevadaMSA.LimitedscopeevaluationswereperformedintheAnnArbor,Michigan MSA;theFlint,MichiganMSA;theGrandRapids-Wyoming,Michigan,MSA;theKalamazoo-Portage, MichiganMSA;theMuskegon,MichiganMSA;theSaginaw,MichiganMSA;theAkron,OhioMSA;the Cleveland-Elyria,OhioMSA,andtheColumbus,OhioMSA.

366 FederalReserveBulletin|November2016 AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Chemicalrepresentsthatuponconsummationof theproposal,existingcustomersof Talmerwouldhaveaccesstoacomplementof products andservicesthataremoreexpansivethanthosecurrentlyavailabletoTalmercustomers, includingexpandedautomobile,boat,andrecreationalvehiclelending;courierservicesfor commercialcustomers;andcertainconsumerlendingproductsnotcurrentlyofferedby Talmer.Chemicalalsointendstoexpanditsmunicipallendingprogramtomarketsserved byTalmer.Chemicalalsorepresentsthatnoproductswouldbediscontinuedasaresultof theproposal.Moreover,Chemicalassertsthatcustomersof bothinstitutionswouldbenefit fromamoreexpansivebranchnetwork. BranchClosures ThecommenterexpressedconcernsaboutChemical’srecordof openingbranchesin connectionwithprioracquisitions.Thefederalbankingsupervisoryagenciesevaluatea bank’srecordof openingandclosingbranches,particularlybrancheslocatedinLMIgeographiesorprimarilyservingLMIindividuals,aspartof theCRAexaminationprocess.42 Specifically,examinersnotedintheChemicalBankEvaluationthatChemicalBank’s branchopeningsandclosuresdidnotadverselyaffecttheaccessibilityof productsand servicestoLMIindividualsorinLMIgeographies,andthatitsbranchclosureswerethe resultof reductionsinbranchactivity.TheBoardalsohasconsideredthefactthatfederal bankinglawprovidesaspecificmechanismforaddressingbranchclosings,includingthe provisionof noticetothepublicandtheappropriatefederalsupervisoryagencybeforethe branchisclosed.43ChemicalplanstocloseaTalmerBankbranchlocatedinHolland,a moderate-incometract,andabranchineachof FlintandPortHope,whichareboth middle-incometracts,allinMichigan.44ForthebranchesinHollandandFlint,the receivingbranchestowhichcustomers’accountswouldbetransferredarebothwithin 0.6milesfromtheproposedclosingbranch.Followingtheproposedclosures,Chemical wouldcontinuetooperatefourbranchesineachof HollandandFlint.ForthePortHope branch,thereceivingbranchtowhichcustomers’accountswouldbetransferrediscentrally locatedinPortHopeandwouldhavelongerbusinesshoursthanthebranchthatis proposedtobeclosed.45Eachof thereceivingbrancheswouldbeinthesameincomelevel tractasthatof theproposedclosingbranchesfromwhichitwouldreceivecustomers’ accounts. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information 42 See,e.g.,12CFR228.24(d)(2).Inaddition,theBoard,astheprimaryfederalsupervisorofthecombinedbank, willcontinuetoreviewthebank’sbranchclosingrecordinthecourseofconductingCRAperformance evaluations. 43 See12U.S.C.§1831r-1,asimplementedbytheJointPolicyStatementRegardingBranchClosings,64Federal Register34844(June29,1999).TheJointPolicyStatementrequiresthatabankprovidethepublicwithatleast 30days’noticeandtheappropriatefederalsupervisoryagencywithatleast90days’noticebeforethedateof theproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsandothersupportingdataforthe closure,consistentwiththeinstitution’swrittenpolicyforbranchclosings. 44 ChemicalproposestocloseTalmerBank’sbranchofficeslocatedat240E.8thStreet,Holland;4409Miller Road,Flint;and4474MainStreet,PortHope,allofMichigan. 45 ChemicalalsoplanstoselltwoofTalmerBank’sbranches,onelocatedinLasVegas,Nevada,andanotherin Chicago,Illinois,andtoconsolidatefourTalmerBankbrancheslocatedinMichiganwithChemicalBank branchesthatarelocatedwithin1,000feetofeachbranch.

LegalDevelopments:ThirdQuarter,2016 367 providedbyChemical,thepubliccommentontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval.TheBoardexpectsChemicaltoimplementpolicies,programs,andactivitiesthat arecommensuratewiththeincreasedsizeandcomplexityof theinstitution. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’s“risktothestabilityof theUnitedStatesbankingorfinancial system.”46 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.47These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.48 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,Chemicalwouldhaveapproximately$16.0billioninconsolidatedassetsand,byanyof anumberof alternativemeasures of firmsize,Chemicalwouldnotbelikelytoposesystemicrisks.TheBoardgenerally presumesthataproposalthatresultsinafirmwithlessthan$25billioninconsolidated assetswillnotposesignificantriskstothefinancialstabilityof theUnitedStatesabsent evidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness, complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenot presentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. 46 Sections604(d)and(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601–1602,codifiedat 12U.S.C.§§1842(c)(7)and1828(c)(5). 47 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 48 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012).

368 FederalReserveBulletin|November2016 Establishmentof Branches ChemicalBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof TalmerBank.49TheBoardhasassessedthefactorsitisrequiredtoconsider whenreviewinganapplicationunderthatsection.50Specifically,theBoardhasconsidered ChemicalBank’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentin bankpremises.51Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobe consistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe proposalshouldbe,andherebyis,approved.52Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof thisproposalisspecificallyconditionedoncompliancebyChemicalwithalltheconditions setforthinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthe commitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. 49 12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebranchesonthe sametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthatwasabranchofanybankparticipatinginthe mergerpriortoFebruary25,1927,orunderstatelaw,maybeestablishedasanewbranchoftheresultingbank orretainedasanexistingbranchoftheresultingbank.See12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofChemicalBank’sbrancheswouldbepermissibleunderapplicablestatelaw.See205Ill.Comp.Stat. 5/5(15)(a);Mich.Comp.Laws§487.13705;Nev.Rev.Stat.§660.015;OhioRev.CodeAnn.§1117.01;Ind. Code§28-2-13-19. 50 12U.S.C.§322;12CFR208.6. 51 Uponconsummationoftheproposedtransaction,ChemicalBank’sinvestmentsinbankpremiseswould remainwithinlegalrequirementsunder12CFR208.21. 52 ThecommenterrequestedthattheBoardholdpublichearingsormeetingsontheproposal.TheBankMerger Actandsection9oftheFRAdonotrequireapublicmeetingoraformalpublichearingonanapplication. Section3oftheBHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlessthe appropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationof denialoftheapplication.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underitsrules,theBoardalsomay,initsdiscretion,hold apublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhen writtencommentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenter’s requestinlightofallthefactsofrecord.IntheBoard’sview,thecommenterhashadampleopportunityto submitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredin actingontheproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtotheBoard’s decisionthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywritten commentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublic hearingormeetingontheproposalisdenied. Thecommenteralsorequestedanextensionofthecommentperiod.TheBoardprovidesapubliccomment periodforanapplicationtoprovideinterestedpersonstheopportunitytosubmitinformationandviewsrelated tothestatutoryfactorsitmustconsiderundertheBHCAct.TheBoard’srulescontemplatethatthepublic commentperiodwillnotbeextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonfor seekingadditionaltime.Thecommenter’srequestforadditionaltimetocommentdoesnotidentifycircumstancesthatwouldwarrantanextensionofthepubliccommentperiodforthisproposal.Accordingly,the Boardhasdeterminednottoextendthecommentperiod.

LegalDevelopments:ThirdQuarter,2016 369 Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardorbytheReserveBankactingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveAugust8,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard AppendixA IllinoisBranchtoBeEstablished 1. 333WestWackerDrive,Suite710,Chicago,Illinois IndianaBranchestoBeEstablished 1. 303SouthThirdStreet,Elkhart,Indiana 2. 511WestLincolnAvenue,Goshen,Indiana MichiganBranchestoBeEstablished 1. 301SummerStreet,Algonac,Michigan 2. 2950StateStreetSouth,AnnArbor,Michigan 3. 1988NorthOpdykeRoad,AuburnHills,Michigan 4. OneEastHuronAvenue,BadAxe,Michigan 5. 833NorthVanDyke,BadAxe,Michigan 6. 980SouthWoodward,Birmingham,Michigan 7. 8700NorthSecondStreet,Brighton,Michigan 8. 345NorthStateStreet,Caro,Michigan 9. 727SouthStateRoad,Davison,Michigan 10. 645GriswoldStreet,Suite70,Detroit,Michigan 11. 333WestFortStreet,Detroit,Michigan53 12. 31731NorthwesternHighway#105,FarmingtonHills,Michigan 13. 33205GrandRiverAvenue,Farmington,Michigan 14. 37386TwelveMileRoad,FarmingtonHills,Michigan 15. 3213GeneseeRoad,Flint,Michigan 16. 4409MillerRoad,Flint,Michigan 17. 6120FentonRoad,Flint,Michigan 18. 477824thAvenue,FortGratiot,Michigan 19. 220EastMainStreet,Flushing,Michigan 20. 170WestGeneseeStreet,Frankenmuth,Michigan 21. 333WashingtonAvenue,GrandHaven,Michigan 22. 4505CascadeRoadSoutheast,GrandRapids,Michigan 23. 20276MackAvenue,GrossePointeWoods,Michigan 24. 99KerchevalAvenue,GrossePointeFarms,Michigan 25. 9252JosephCampauAvenue,Hamtramck,Michigan 26. 106SouthHuron,HarborBeach,Michigan 27. 240East8thStreet,Holland,Michigan 28. 715SouthCedarStreet,ImlayCity,Michigan 53 ChemicalhasrepresentedthatTalmerhasappliedtotheFDICtorelocateitsbranchlocatedat645Griswold Street,Suite70,Detroit,Michigan,to333WestFortStreet,Detroit.

370 FederalReserveBulletin|November2016 29. 2855WadhamsRoad,Kimball,Michigan 30. 567EastGeneseeStreet,Lapeer,Michigan 31. 17900HaggertyRoad,Livonia,Michigan 32. 624WestNepessingStreet,Suite105,Lapeer,Michigan 33. 5536MainStreet,Lexington,Michigan 34. 1800EastTwelveMileRoad,MadisonHeights,Michigan 35. 210SouthParkerStreet,MarineCity,Michigan 36. 2015GratiotAvenue,Marysville,Michigan 37. 100NorthMainStreet,MountClemens,Michigan 38. 281SeminoleRoad,Muskegon,Michigan 39. 800EastMilham,Portage,Michigan 40. 1527HancockStreet,PortHuron,Michigan 41. 201HuronAvenue,PortHuron,Michigan 42. 3136LapeerRoad,PortHuron,Michigan 43. 4474MainStreet,PortHope,Michigan 44. 525WaterStreet,PortHuron,Michigan 45. 440MainStreet,Rochester,Michigan 46. 629WestSanilacRoad,Sandusky,Michigan 47. 668UnionvilleRoad,Sebewaing,Michigan 48. 50787CorporateDrive,ShelbyTownship,Michigan 49. 270ClintonAvenue,St.Clair,Michigan 50. 24805WestTwelveMileRoad,Southfield,Michigan 51. 3801MetropolitanParkway,SterlingHeights,Michigan 52. 2301WestBigBeaverRoad,Troy,Michigan 53. 14801EastTwelveMileRoad,Warren,Michigan 54. 7950WestMapleRoad,WestBloomfield,Michigan NevadaBranchtoBeEstablished 1. 1700WestHorizonRidgeParkway,Suite101,Henderson,Nevada OhioBranchestoBeEstablished 1. 1977CooperFosterParkRoad,Amherst,Ohio 2. 724Boardman-PolandRoad,Boardman,Ohio 3. 7290WarrenSharonRoad,Brookfield,Ohio 4. 3801BoardmanCanfieldRoad,Canfield,Ohio 5. 325SouthHighStreet,Cortland,Ohio 6. 6033PerimeterDrive,Dublin,Ohio 7. 111AntiochDrive,Elyria,Ohio 8. 200MiddleAvenue,Elyria,Ohio 9. 361MidwayMallBoulevard,Elyria,Ohio 10. 351NorthMainStreet,Grafton,Ohio 11. 35423CenterRidgeRoad,NorthRidgeville,Ohio 12. 10416MainStreet,NewMiddletown,Ohio 13. 2SouthMainStreet,Poland,Ohio 14. 999EastMainStreet,Ravenna,Ohio 15. 4183TallmadgeRoad,Rootstown,Ohio 16. 6150EnterpriseParkway,Solon,Ohio 17. 185EastMarketStreet,Warren,Ohio 18. 2001ElmRoadNortheast,Warren,Ohio 19. 4460MahoningAvenueNorthwest,Warren,Ohio 20. 8226EastMarketStreet,Warren,Ohio 21. 6002YoungstownWarrenRoad,Niles,Ohio 22. 4682BelmontAvenue,Youngstown,Ohio

LegalDevelopments:ThirdQuarter,2016 371 23. 25MarketStreet,Youngstown,Ohio 24. 3900MarketStreet,Youngstown,Ohio 25. 101SouthCanfield-NilesRoad,Youngstown,Ohio 26. 3516SouthMeridianRoad,Youngstown,Ohio AppendixB ChemicalBank/TalmerBankBankingMarketsinMichigan ConsistentwithBoardPrecedentandDOJBankMergerGuidelines Remaining Amountof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors BayCity-Saginaw,Michigan–BayCounty;SaginawCounty;TuscolaCounty(excludingElmwoodandElklandtownships);ArenacCounty (excludingMason,Turner,andWhitneytownships),allofMichigan. ChemicalBankPre-Consummation 2 $590.0M 16.7 Talmer(TalmerBank) 15 $36.5M 1.0 ChemicalBankPost-Consummation 2 $626.5M 17.7 1278 34 17 Detroit,Michigan–OaklandCounty;MacombCounty;WayneCounty;LapeerCounty;GeneseeCounty;WashtenawCounty;St.ClairCounty; LivingstonCounty;LenaweeCounty;ShiawasseeCounty;MonroeCounty(excludingWhiteford,Bedford,andErietownships);SanilacCounty (excludingGreenleaf,Austin,Argyle,Moore,Minden,Wheatland,Delaware,andForestertownships),allofMichigan. ChemicalBankPre-Consummation 24 $278.5M 0.2 Talmer(TalmerBank) 9 $3,148.3M 2.5 ChemicalBankPost-Consummation 8 $3,426.8M 2.7 1451 1 51 GrandRapids,Michigan–AlleganCounty;BarryCounty;IoniaCounty;KentCounty;MecostaCounty;MontcalmCounty;MuskegonCounty; NewaygoCounty;OceanaCounty;OttawaCounty;Newkirk,Dover,Ellsworth,CherryValley,Pinona,Yates,andChasetownshipsofLakeCounty; andRichmond,Evart,Hersey,andOrienttownshipsofOsceolaCounty,allofMichigan. ChemicalBankPre-Consummation 3 $2,201.6M 9.5 Talmer(TalmerBank) 22 $131.8M 0.5 ChemicalBankPost-Consummation 3 $2,333.4M 10.0 941 10 32 Elkhart-Niles-SouthBend,Indiana–Elkhart,St.Joseph,Kosciusko,LaGrange,andMarshallcounties,ofIndiana;Davis,Oregon,Washington, andNorthBend(includingtheentirecityofBassLake)townshipsinStarkeCounty,Indiana;CassCounty;Buchanan,NilesandBertrandtownships inBerrienCounty;theSouthernhalfofSt.JosephCounty(Constantine,Florence,Sherman,BurrOak,Mottville,WhitePigeon,Sturgis,andFawn RiverTownships),ofMichigan. ChemicalBankPre-Consummation 14 $107.4M 1.1 Talmer(TalmerBank) 19 $54.6M 0.5 ChemicalBankPost-Consummation 13 $162.0M 1.6 1291 2 30 Kalamazoo-BattleCreek,Michigan–KalamazooandVanBurencounties;Flowerfield,Park,Mendon,Leonidas,Fabius,Lockport,Nottawa,and ColontownshipsofSt.JosephCounty,allofMichigan. ChemicalBankPre-Consummation 3 $346.7M 9.1 Talmer(TalmerBank) 15 $59.7M 1.6 ChemicalBankPost-Consummation 3 $406.4M 10.6 1334 28 17 DepositdataareasofJune30,2015.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent.

373 Federal Reserve BULLETIN Index B Departmentof Justice(DOJ),151,161 BankHoldingCompanyAct(BHC Departmentof VeteransAffairs Act),ordersissuedunder (VA),2,5 Bankof theOzarks,Inc.,279–290 DepositInsuranceFund,209,214 BannerCorporation,50–62 Dodd-FrankWallStreetReformand BaylakeCorp.,149–157 ConsumerProtectionAct BB&TCorporation,158–168 (Dodd-Frank),46,60,76,86,90, BNCBancorp,258–269 105,121,130,156,198 ChemicalFinancial F Corporation,354–368 FannieMae,5 CITGroup,Inc.,27–49 FarmServiceAgency(FSA),2,5 CommunityBankSystem, FederalDepositInsuranceAct,219 Inc.,169–181 FederalDepositInsuranceCorporation ElementsMergerSub,LLC,50–61 (FDIC),35,71,115,155,163, EmpresasJuanYarurSpA,78–87 215 FirstHorizonNational FederalHomeLoanBankPrograms Corporation,63–77 forCommunityInvestments,194 GoldmanSachsBank,219–232 FederalHousingAdministration HuntingtonBancshares (FHA),2,5 Incorporated,332–350 FederalReserveAct(FRA),orders KeyCorp,313–330 issuedunder ManufacturersandTradersTrust AuburnStateBank,125–131 Company,89–107 ChemicalBank,190–194 M&TBankCorporation,89–107 CompassBank,302–307 OhioValleyBancCorp.,270–278 FrostBank,234–240 PacWestBancorp,111–123 OriginBank,295–300 RepublicBancorp,Inc.,245–256 FederalReserveBankof Chicago,154, RoyalBankof Canada,133–148 195 SumitomoMitsuiTrustHoldings, FederalReserveBankof Kansas Inc.,292–294 City,189 BankMergerAct,orderissuedunder FederalReserveBankof New FarmersBank,182–189 York,227 BankMergerAct,125,127,130, FinancialActionTaskForce,205 220–221 FreddieMac,5 BankSecrecyAct(BSA),93–95 H BaselCapitalAccord,136 Herfindahl-HirschmanIndex C (HHI),52–55,65,91,126,151 CaliforniaHomeownerBillof HomeMortgageDisclosureAct Rights,34 (HMDA),34,36,68,71,83,97, ClaytonAntitrustAct,126 142,154,220,226 CommunityReinvestmentAct HomeOwnershipandEquity (CRA),29,36–37,39–42,57–59, ProtectionAct(HOEPA),19 67–69,71,84,96,98–101,105, HomeOwners’LoanAct,orderissued 112,115,128,153,220,225 under InvestmentTest,38,118 SynchonyFinancial,208–215 LendingTest,38,71,117,118 I ConsumerFinancialProtectionBureau InteragencyFairLendingExamination (CFPB),2,33,71,94,139,163 Procedures,14 D InternationalBankingAct,orders Departmentof JusticeBankMerger issuedunder CompetitiveReview BanqueSYZSA,309–312 guidelines,52–55,65,91,126, KoreaExchangeBank,200–202 151 RoyalBankof Canada,196–198

374 FederalReserveBulletin|Index TaiwanBusinessBank, MultifamilyAcceleratedProcessing Ltd.,204–207 Lender,325 UnionediBancheItaliane, N S.p.A.,241–244 NewYorkDailyNews,241 L NewYorkPost,200,204 Lending O Communitydevelopment,72–73, 118,120 Officeof theComptrollerof the Denialrates,12 Currency(OCC),33,40,45,71, Fair,115 75,83,99,129,139,163,179 Mortgage,143 R Nonconventional,5 RegulationC,25 Smallbusiness,37,117,121 RegulationH,190,295,302 LowIncomeHousingTaxCredits,324 RegulationK,134,196,200,204,241 Low-ormoderate-income(LMI) RegulationY,28,106,123,133,147, Borrowers,censustracts,incomes, 180 neighborhoods,29–34,39,71, RuralHousingService(RHS),2,5 83,96,99,128,144,165,225, 321 S SeniorLoanOfficerOpinionSurveyon M BankLendingPractices,2 MichiganStateHousingDevelopment SmallBusinessAdministration AuthorityProperty (SBA),35,37,39,140 ImprovementProgram,194 Mortgage T Refinance,3 TheJerseyJournal,196

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