Federal Reserve Bulletin, 2017-01

Federal Reserve Bulletin 2017 Compilation Board of Governors of the federal reserve system

Federal Reserve Bulletin 2017 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: PrintingandFulfillment MailStopK1-120 Boardof Governorsof theFederalReserveSystem Washington,DC20551 (ph)202-452-3245 (fax)202-728-5886 (email)Publications-BOG@frb.gov

iii Federal Reserve BULLETIN Contents Preface .................................................................................................................v ResidentialMortgageLendingin2016:EvidencefromtheHomeMortgage DisclosureActData ..............................................................................................1 NeilBhutta,StevenLaufer,andDanielR.Ringo,of theDivisionof ResearchandStatistics,preparedthisarticle.JimmyKelliherprovided researchassistance. ChangesinU.S.FamilyFinancesfrom 2013to2016:EvidencefromtheSurveyof ConsumerFinances .............................29 JesseBricker,LisaJ.Dettling,AliceHenriques,JoanneW.Hsu, LindsayJacobs,KevinB.Moore,SarahPack,JohnSabelhaus, JeffreyThompson,andRichardA.Windleof theBoard’sDivisionof ResearchandStatisticspreparedthisarticlewithassistancefrom PeterHansenandElizabethLlanes. LegalDevelopments:FourthQuarter,2016 ..........................................................71 LegalDevelopments:FirstQuarter,2017 ............................................................133 LegalDevelopments:SecondQuarter,2017 ........................................................237 LegalDevelopments:ThirdQuarter,2017...........................................................335 Index .................................................................................................................441

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 2017 Vol. 103, No. 6 Residential Mortgage Lending in 2016: Evidence from the Home Mortgage Disclosure Act Data NeilBhutta,StevenLaufer,andDanielR.Ringo,of theDivisionof ResearchandStatistics, preparedthisarticle.JimmyKelliherprovidedresearchassistance. Thisarticleprovidesanoverviewof residentialmortgagelendingin2016anddiscussesa numberof changesinmortgagemarketactivityovertimebasedondatareportedunderthe HomeMortgageDisclosureActof 1975(HMDA).Mortgagedebtisbyfarthelargest componentof householddebtintheUnitedStates,andmortgagetransactionscanhave importantimplicationsforhouseholds’financialwell-being.TheHMDAdataarethemost comprehensivesourceof publiclyavailableinformationontheU.S.mortgagemarket, providinguniquedetailsonhowmuchmortgagecreditgetsextendedeachyear,who obtainsthiscredit,andwhichinstitutionsprovidethiscredit. HMDArequiresmostmortgagelendinginstitutionswithofficesinmetropolitanareasto disclosetothepublicdetailedinformationabouttheirhome-lendingactivityeachyear.The HMDAdataincludethedispositionof eachapplicationformortgagecredit;thetype, purpose,andcharacteristicsof eachhomemortgagethatlendersoriginateorpurchase duringthecalendaryear;thecensus-tractdesignationsof thepropertiesrelatedtothose loans;loanpricinginformation;personaldemographicandotherinformationaboutloan applicants,includingtheirraceorethnicityandincome;andinformationaboutloansales (seeappendixAforafulllistof itemsreportedunderHMDA).1 HMDAwasenactedtohelpmembersof thepublicdeterminewhetherfinancialinstitutionsareservingthehousingneedsof theirlocalcommunitiesandtreatingborrowersand loanapplicantsfairly,toprovideinformationthatcouldfacilitatetheeffortsof publicentitiestodistributefundstolocalcommunitiesforthepurposeof attractingprivateinvestment,andtohelphouseholdsdecidewheretheymaywanttodeposittheirsavings.2The datahaveproventobevaluableforresearchandareoftenusedinpublicpolicydeliberationsrelatedtothemortgagemarket.3 1 The2016HMDAdatareflectpropertylocationsusingthecensus-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|November2017 Mortgagelendingduring2016occurredinthecontextof risinghouseprices,thecontinuationof anupwardtrendinpricesevidentsince2012.4Mortgageinterestratesremainedlow formostof theyear,hoveringjustslightlyabovetheirhistoricallowsreachedinlate2012 andearly2013.Mortgageratesjumpedsharply,however,followingtheNovemberelections.Mortgagecreditconditionscontinuedtoslowlyease,butcreditremainedmoredifficulttoobtainforindividualswithlowercreditscoresorhard-to-documentincomes. AccordingtotheSeniorLoanOfficerOpinionSurveyonBankLendingPractices,muchof theeasinginmortgageunderwritingthatoccurredoverthecourseof 2016wasforloans thatwereeligibleforpurchasebythegovernment-sponsoredenterprises(GSEs).5Growth innewhousingconstructionremainedsluggishdespitethegainsinhousepricesand strengtheningdemandforbothnewandexistinghomes.6 ThisarticlepresentsfindingsfromtheHMDAdatadescribingmortgagemarketactivity andlendingpatternsovertime,includingtheincidenceof higher-pricedlendingandrates of denialonmortgageapplications,acrossdifferentdemographicgroupsandlendertypes.7 Someof thekeyfindingsareasfollows: 1. Thenumberof mortgageoriginationsin2016rose13percent,to8.4millionfrom 7.4millionin2015.Forloanssecuredbyone-tofour-familyproperties,growthwas stronginbothhome-purchaseoriginations—whichincreasedto4.0millionfrom 3.7millionin2015—andrefinanceoriginations—whichincreasedto3.8millionfrom 3.2millionin2015. 2. BlackandHispanicwhiteborrowersincreasedtheirshareof home-purchaseloansfor one-tofour-family,owner-occupied,site-builtpropertiesin2016,thethirdconsecutive annualriseforbothgroups.TheHMDAdataindicatethat6.0percentof suchloans wenttoblackborrowers,upfrom5.5percentin2015,while8.8percentwentto Hispanicwhiteborrowers,upfrom8.3percentin2015.Theshareof home-purchase loanstolow-ormoderate-income(LMI)borrowersdecreasedto26percentin2016 from28percentin2015. 3. Theaveragevalueof home-purchaseloansrose3.2percentin2016,to$257,000,with similarincreasesforloansmadetoborrowersof differentracialandethnicgroups.The averagevalueof home-purchaseloanstoHispanicwhiteborrowersremainedwell belowthe2006peak,whiletheaveragesforAsian,black,andnon-Hispanicwhite borrowerswereallabovetheir2006–07peaks. 4. BlackandHispanicwhiteborrowerscontinuedtobemuchmorelikelytouse nonconventionalloans(thatis,loanswithmortgageinsurancefromtheFederal HousingAdministration(FHA)orguaranteesfromtheDepartmentof Veterans Affairs(VA),theFarmServiceAgency(FSA),ortheRuralHousingService(RHS)) thanconventionalloanscomparedwithotherracialandethnicgroups.In2016,among home-purchaseborrowers,69percentof blacksand60percentof Hispanicwhites tookoutanonconventionalloan,whereasabout35percentof non-Hispanicwhites andjust16percentof Asiansdidso. 4 Foradditionalanalysisofhowrapidhousepricegrowthinsomepartsofthecountrycouldbedeterringlowerincomefamilies’homebuying,seeNeilBhutta,StevenLaufer,andDanielRingo(2017),“AreRisingHome ValuesRestrainingHomebuyingforLower-IncomeFamilies?”FEDSNotes(Washington:BoardofGovernors oftheFederalReserveSystem,September28),https://www.federalreserve.gov/econres/notes/feds-notes/arerising-home-values-restraining-home-buying-for-lower-income-families-20170928.htm. 5 ThesurveyisavailableontheBoard’swebsiteatwww.federalreserve.gov/boarddocs/snloansurvey. 6 Formoreinformationoncreditandeconomicconditionsduring2016,seeBoardofGovernorsoftheFederal ReserveSystem(2017),MonetaryPolicyReport(Washington:BoardofGovernors,February14), www.federalreserve.gov/monetarypolicy/mpr_default.htm. 7 SomelendersfileamendedHMDAreports,whicharenotreflectedintheinitialpublicdatarelease.Thedata usedtopreparethisarticlearedrawnfromtheinitialpublicreleasesfor2016and2015andfromamended HMDAdataforpreviousyears.Consequently,numbersinthisarticlefortheyears2014andearliermaydiffer somewhatfromnumberscalculatedfromthepublicreleasefiles.

ResidentialMortgageLendingin2016 3 5. Theshareof mortgagesorigi- Figure1.Numberofhome-purchaseandrefinance natedbynondepository,indemortgageoriginationsreportedundertheHomeMortgage pendentmortgagecompanies DisclosureAct,1994–2016 hasincreasedsharplyinrecent years.In2016,thisgroupof A. Home purchase Millions of loans lendersaccountedfor 6 53percentof first-lienowner- 5 occupanthome-purchase loans,upfrom50percentin 4 2015.8Independentmortgage companiesalsooriginated 3 52percentof first-lienowneroccupantrefinanceloans,an 2 increasefrom48percentin 2015.Forthefirsttimesinceat 1 least1995,nondepository, 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 independentmortgagecompaniesaccountedforamajority of eachof thesetypesof loans. B. Refinance Millions of loans 15 12 Mortgage Applications and Originations 9 In2016,6,762financial 6 institutions—banks,savingsassociations,creditunions,and 3 nondepositorymortgagelenders— reporteddataunderHMDAonthe 0 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 nearly14millionhomemortgage applicationstheyreceived Note:Thedataareannual.Mortgageoriginationsforone-tofour-familyowner- (includingabout2.4millionappli- occupiedproperties,withjunior-lienloansexcludedin2004andlater. cationsthatwereclosedbythe lenderforincompletenessorwere withdrawnbytheapplicantbeforeadecisionwasmade),whichresultedinabout 8.4millionoriginations.Thenumberof originationsin2016wasupfrom7.4millionoriginationsin2015(table1). Refinancemortgagesforone-tofour-familypropertiesincreasedby530,000,or16percent, from2015to2016.One-tofour-familyhome-purchaseoriginationsgrewby384,000,or 10percent,from2015.Mostone-tofour-familyhome-purchaseloansarefirstliensfor owner-occupiedproperties.Inthepastfiveyears,thenumberof suchloansgrewover 70percent,fromlessthan2.1millionin2011to3.5millionin2016.However,thenumber of suchhome-purchaseoriginationsremainedwellbelowitspeakin2005andwasnear levelsobservedinthemid-1990s(figure1).9Thenumberof first-lienhome-purchaseloans 8 ForadditionalanalysiscomparingpatternsoflendingtoLMIborrowersbynonbanksandbanks,seeNeil Bhutta,StevenLaufer,andDanielRingo(2017),“TheDeclineinLendingtoLower-IncomeBorrowersbythe BiggestBanks,”FEDSNotes(Washington:BoardofGovernorsoftheFederalReserveSystem, September28),https://www.federalreserve.gov/econres/notes/feds-notes/the-decline-in-lending-to-lowerincome-borrowers-by-the-biggest-banks-20170928.htm. 9 TheHMDAdatapriorto2004didnotprovidelienstatusforloans,andthusthenumberofloanspriorto2004 includesbothfirst-andjunior-lienloans.Thatsaid,includingjunior-lienhome-purchaseloansin2016doesnot changetheconclusionthathome-purchaselendingin2016wassimilartothatinthemid-1990s,particularly 1994.

4 FederalReserveBulletin|November2017 Table1.Applicationsandoriginations,2004–16 Numbersofloans,inthousands,exceptasnoted Characteristicofloan 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 andofproperty 1–4Family Homepurchase Applications1 9,804 11,685 10,929 7,609 5,060 4,217 3,848 3,650 4,023 4,586 4,679 5,181 5,693 Originations 6,437 7,391 6,740 4,663 3,139 2,793 2,547 2,430 2,742 3,139 3,248 3,662 4,046 Firstlien,owneroccupied 4,789 4,964 4,429 3,454 2,628 2,455 2,218 2,073 2,343 2,703 2,815 3,200 3,545 Site-built,conventional 4,107 4,425 3,912 2,937 1,581 1,089 1,005 999 1,251 1,630 1,741 1,894 2,123 Site-built,nonconventional 553 411 386 394 951 1,302 1,151 1,019 1,033 1,007 1,006 1,230 1,340 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 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 26.9 FSA/RHSshare(percent) 3.9 4.7 5.0 7.1 5.9 9.0 7.4 10.9 12.0 13.1 13.3 9.4 8.5 Manufactured,conventional 106 100 101 95 68 43 44 40 44 51 51 56 59 Manufactured, nonconventional 24 27 30 29 28 21 17 15 14 14 16 20 22 Firstlien,non-owneroccupied 857 1,053 880 607 412 292 285 314 355 388 378 403 436 Juniorlien,owneroccupied 738 1,224 1,269 552 93 44 42 41 43 46 53 58 65 Juniorlien,non-owner occupied 53 150 162 50 6 2 2 1 1 1 2 2 2 Refinance Applications 16,085 15,907 14,046 11,566 7,805 9,983 8,433 7,422 10,526 8,564 4,526 5,940 7,178 Originations 7,591 7,107 6,091 4,818 3,491 5,772 4,969 4,330 6,668 5,141 2,370 3,228 3,755 Firstlien,owneroccupied 6,497 5,770 4,469 3,659 2,934 5,301 4,516 3,856 5,930 4,393 2,001 2,841 3,371 Site-built,conventional 6,115 5,541 4,287 3,407 2,363 4,264 3,835 3,315 4,971 3,634 1,608 2,152 2,527 Site-built,nonconventional 297 151 110 180 506 979 646 508 917 715 363 658 810 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 49.4 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 50.3 FSA/RHSshare(percent) .2 .3 .2 .1 .2 .4 .4 .9 .9 1.2 .5 .3 .4 Manufactured,conventional 77 70 60 56 42 36 25 25 31 32 22 21 20 Manufactured, nonconventional 7 8 12 16 22 22 10 9 11 12 8 10 14 Firstlien,non-owneroccupied 618 582 547 474 330 350 359 394 660 673 310 328 329 Juniorlien,owneroccupied 464 729 1,036 661 219 115 88 74 73 70 55 55 52 Juniorlien,non-owner occupied 13 25 39 23 9 7 6 5 5 5 4 4 3 Homeimprovement Applications 2,200 2,544 2,481 2,218 1,413 832 670 675 779 833 846 921 1,005 Originations 964 1,096 1,140 958 573 390 341 335 382 425 411 474 537 Multifamily2 Applications 61 58 52 54 43 26 26 35 47 51 46 52 50 Originations 48 45 40 41 31 19 19 27 37 40 35 41 40 Totalapplications 28,151 30,193 27,508 21,448 14,320 15,057 12,977 11,782 15,375 14,034 10,097 12,094 13,926 Totaloriginations 15,040 15,638 14,011 10,480 7,234 8,974 7,876 7,122 9,828 8,744 6,064 7,404 8,378 Memo Purchasedloans 5,142 5,868 6,236 4,821 2,935 4,301 3,229 2,939 3,163 2,788 1,800 2,102 2,232 Requestsforpreapproval3 1,068 1,260 1,175 1,065 735 559 445 429 474 474 496 531 530 Requestsforpreapprovalthat wereapprovedbutnotactedon 167 166 189 197 99 61 53 55 64 69 64 63 60 Requestsforpreapproval thatweredenied 171 231 222 235 177 155 117 130 149 123 125 114 115 Note:Componentsmaynotsumtototalsbecauseofrounding.FHAisFederalHousingAdministration;VAisU.S.DepartmentofVeteransAffairs; FSAisFarmServiceAgency;RHSisRuralHousingService. 1 Applicationsbyyearofaction,asopposedtoyearofapplicationsubmission.Applicationsincludethosewithdrawnandthoseclosedfor incompleteness. 2 Amultifamilypropertyconsistsoffiveormoreunits. 3 Consistsofallrequestsforpreapproval.Preapprovalsarenotrelatedtoaspecificpropertyandthusaredistinctfromapplications. Source:Hereandinsubsequenttablesandfigures,exceptasnoted,FederalFinancialInstitutionsExaminationCouncil,datareportedunderthe HomeMortgageDisclosureAct(www.ffiec.gov/hmda).

ResidentialMortgageLendingin2016 5 fornon-owner-occupied Figure2.Nonconventionalshareofhome-purchase properties—whichareprimarily mortgageoriginations,1994–2016 usedasrentalpropertiesand secondhomes—increased Percent 100 8percent,from403,000in2015to 90 436,000in2016. 80 Conventional Intable1,thevolumeof first-lien 70 lendingforowner-occupiedproper- 60 tiesisfurtherdisaggregatedbyloan 50 andpropertytype.(Versionsof 40 table1containingloancountsand FHA 30 dollarvaluesbymonthareavailable 20 intheExcelfilepostedonlinewith VA 10 thisarticle.)10Inadditiontolien FSA/RHS 0 andoccupancystatus,theHMDA 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 dataprovidedetailsonthetypeof propertysecuringtheloan(site- Note:Thedataareannual.Home-purchasemortgageoriginationsforone-to four-familyowner-occupiedproperties,withjunior-lienloansexcludedin2004 builtormanufacturedhome)and andlater.NonconventionalloansarethoseinsuredbytheFederalHousing onthetypeof loan(conventional Administration(FHA)orbackedbyguaranteesfromtheU.S.Departmentof ornot).11Asnotedearlier, VeteransAffairs(VA),theFarmServiceAgency(FSA),ortheRuralHousing Service(RHS). nonconventionallendinginvolves loanswithmortgageinsuranceor otherguaranteesfromfederalgovernmentagencies,includingtheFHA,theVA,theRHS, andtheFSA.Conventionallendingencompassesallotherloans,includingthosesoldtothe GSEsFannieMaeandFreddieMacaswellasthoseheldinbanks’portfolios. Nonconventionalloansusuallyinvolvehighloan-to-value(LTV)ratios—thatis,the borrowersproviderelativelysmalldownpayments.Forsite-builtproperties, nonconventionalhome-purchaseloansincreasedabout9percentin2016,whileconventionalloansroseabout12percent.Thenonconventionalshareof first-lienhome-purchase loansforone-tofour-family,owner-occupied,site-builtpropertiesstoodatabout 39percentin2016,littlechangedfrom2015anddownfromapeakof 54percentin2009 (figure2).12 Figure2showsthatthemarkeddeclineinthenonconventionalsharesince2009reflectsa decreaseintheFHAshareof loans,whiletheVAandFSA/RHSshareshavebeensteadier. OnefactorthatappearstohelpexplainthefluctuationsintheFHAshareconcerns changesintheup-frontandannualmortgageinsurancepremiums(MIPs)thattheFHA chargesborrowers.Forexample,betweenOctober2010andApril2013,theannualMIPfor 10 Inadditiontothemonthlydataatthenationallevelpostedonline,adatasetprovidingthecountofhomepurchaseandrefinanceapplicationsandoriginations,andthedollarvolumeofhome-purchaseandrefinance originations,bymonthandcountysince1994forthe500largestcountieseachyearisprovidedonlineaswell. BothfilesareavailableontheBoard’swebsiteathttps://www.federalreserve.gov/publications/bulletin.htm. 11 Manufactured-homelendingdiffersfromlendingonsite-builthomes,inpartbecausemostofthehomesare soldwithoutlandandaretreatedaschattel-securedlending,whichtypicallycarrieshigherinterestratesand shortertermstomaturitythanthoseonloanstopurchasesite-builthomes(forpricinginformationonmanufacturedhomeloans,seetable8).Thisarticlefocusesalmostentirelyonsite-builtmortgageoriginations,which constitutethevastmajorityoforiginations(asshownintable1).Thatsaid,itisimportanttokeepinmind that,becausemanufacturedhomestypicallyarelessexpensivethansite-builthomes,theyprovidealow-cost housingoptionforhouseholdswithmoremoderateincomes. 12 Foramoredetaileddiscussionofthepost-crisisriseinnonconventionallending,seeRobertB.Avery,Neil Bhutta,KennethP.Brevoort,andGlennB.Canner(2010),“The2009HMDAData:TheMortgageMarketin aTimeofLowInterestRatesandEconomicDistress,”FederalReserveBulletin,vol.96(December), pp.A39–A77,https://www.federalreserve.gov/pubs/bulletin/2010/articles/2009HMDA/default.htm.

6 FederalReserveBulletin|November2017 atypicalhome-purchaseloanmorethandoubled,from0.55percentof theloanamountto 1.35percent.13DropsintheFHA’smarketsharehavebeenobservedeachtimetheFHA hasraisedpremiums.InJanuary2015,theannualMIPwasreducedto0.85percentfor mostborrowers,andtheFHAshareof home-purchaseloanssubsequentlyincreased.14 Theremainderof table1providesadditionaldetailsonthebreakdownof one-tofourfamilyhome-purchaseandrefinanceloansbylienandoccupancystatusandbyproperty andloantype.15Table1alsoprovidesthenumberof applicationsforandoriginationsof home-improvementloansforone-tofour-familyproperties,manyof whicharejuniorliens orunsecured,andloansforthepurchaseof multifamilyproperties(consistingof fiveor moreunits).Finally,theHMDAdataincludedetailsaboutpreapprovalrequestsforhomepurchaseloansandloanspurchasedbyreportinginstitutionsduringthereportingyear, althoughthepurchasedloansmayhavebeenoriginatedatanypointintime.Lenders reportedroughly530,000preapprovalrequests;roughly67percentof theserequeststurned intoanactualloanapplicationforaspecificpropertyin2016.16Table1alsoshowsthat, for2016,lenderspurchased2.2millionloansfromotherinstitutions. The HMDA Data’s Coverage of the Mortgage Market ItisimportanttonotethattheHMDAdatadonotprovideuniversalcoverageof residentialmortgagelendingintheUnitedStates.TherearetwomainreasonsHMDAcoverageis notuniversal.First,notalllendersarerequiredtoreportdata.Amongdeposit-takinginstitutionslikebanks,thesmallestinstitutionsaswellasinstitutionswithoutanybranchesin ametropolitanstatisticalarea(MSA)donothavetoreportdata.Amonginstitutionsthat takenodeposits,nonprofits,smallerinstitutions,andthosethatoperateentirelyoutsideof anMSAalsodonothavetoreportdata.17 Second,notalltypesof mortgageoriginationsarereported.Inparticular,lendersdonot reportmortgagesthatarenotforthepurposeof purchasingaresidentialproperty,refinancinganoutstandingmortgage,ormakinghomeimprovements.Thus,amortgagetaken outsolelytofinanceeducationexpenses,forexample,wouldnotbereported.Inaddition, 13 ChangestotheFHA’sup-frontandannualMIPsovertimehavebeendocumentedinUrbanInstitute,Housing FinancePolicyCenter(2014),HousingFinanceataGlance:AMonthlyChartbook(Washington:UrbanInstitute,March),www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-1.Atypical FHAhome-purchaseloanhasanLTVofover95percentandaloanterminexcessof15years.Theup-front premium,onnet,wasunchangedbetween2010and2013;itwasbrieflyincreasedfrom1.75percentto 2.25percentandloweredbackto1.00percentin2010,andthenitwasraisedbackto1.75percentin2012. 14 ForastudyoftheeffectofMIPchangesonFHAmarketsharesandtotallending,seeNeilBhuttaandDaniel Ringo(2016),“ChangingFHAMortgageInsurancePremiumsandtheEffectsonLending,”FEDSNotes (Washington:BoardofGovernorsoftheFederalReserveSystem,September29),https://www.federalreserve .gov/econresdata/notes/feds-notes/2016/changing-fha-mortgage-insurance-premiums-and-the-effects-on-l ending-20160929.html.AlsoseeNeilBhuttaandDanielRingo(2017),“TheEffectofInterestRatesonHome Buying:EvidencefromaDiscontinuityinMortgageInsurancePremiums,”FinanceandEconomicsDiscussion Series2017-086(Washington:BoardofGovernorsoftheFederalReserveSystem,August),https://www .federalreserve.gov/econres/feds/files/2017086pap.pdf. 15 NotethatundertheregulationsthatgovernHMDAreporting,manystandalonejunior-lienloansarenot reportedbecauseeitherthelenderdoesnotknowthepurposeoftheloanorthereasonscitedfortheloanare notonesthattriggerareportingrequirement.Unlessajuniorlienisusedforhomepurchaseorexplicitlyfor homeimprovements,ortorefinanceanexistinglien,itisnotreportedunderHMDA.Further,homeequity linesofcredit,manyofwhicharejuniorliensandcouldalsobeusedtohelppurchaseahome,donothaveto bereportedintheHMDAdataregardlessofthepurposeoftheloan. 16 Reporterscan,butarenotrequiredto,reportpreapprovalrequeststhattheyapprovebutarenotactedonby thepotentialborrower. 17 Underthecurrentrules,depositorieswithlessthan$44millioninassetsandnondepositoriesthathadlessthan $10millioninassetsandoriginatedfewerthan100home-purchaseandrefinanceloansinthepreviousyearare notrequiredtoreport.Foradditionaldetails,seeFederalFinancialInstitutionsExaminationCouncil(2017), “AGuidetoHMDAReporting:GettingItRight!”webpage,https://www.ffiec.gov/hmda/guide.htm.

ResidentialMortgageLendingin2016 7 homeequitylinesof credit(HELOCs),regardlessof theirpurpose,arenotrequiredtobe reportedundercurrentrules.18 Onewaytoassessthecoverageof theHMDAdataistocomparethenumberof loans reportedunderHMDAwiththenumberof loansreportedinconsumercreditfiles.In contrasttotheHMDAdata,allmortgageloansregardlessof purposecanbereportedin consumercreditfiles,andallfinancialinstitutionshaveanincentivetoreporttheirmortgageloanstoconsumercreditbureaus,sincereportingencouragesborrowerstomake on-timepayments.19AccordingtoestimatesbasedontheconsumercreditrecordsmaintainedbyEquifax,oneof thethreenationwideconsumercredit-reportingagencies,about 8.4millionfirst-lienhome-purchaseandrefinanceloanswereoriginatedduring2016, comparedwithnearly7.7millionfirst-lienhome-purchaseandrefinanceloansforone-to four-familypropertiesreportedunderHMDA.20Thus,thenumberof first-lienhomepurchaseandrefinanceloansintheHMDAdataisapproximately90percentof the numberreportedinconsumercreditfiles.21 Inaddition,Equifaxestimatesthatabout874,000homeequityloansand1.4million HELOCswereoriginatedin2016.Manyof theseloansmaynotbereportedunderHMDA forthereasonsstatedearlier.If theywerereportedunderHMDA,theywouldbeclassified ashome-improvementloansorasjunior-lienhome-purchaseorjunior-lienrefinance loans.Lendersreportedabout658,000suchloansinthe2016HMDAdata,lessthan 30percentof thenumberof homeequityloansandHELOCsreportedbyEquifax. 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.Suchloansaccountedforabout81percentof allHMDAoriginationsin2016. 18 BeginningonJanuary1,2018,coveredloansundertheHMDArule(RegulationC)generallywillinclude closed-endmortgageloansandopen-endlinesofcreditsecuredbyadwelling.Formoreinformation,see ConsumerFinancialProtectionBureau(2017),“HomeMortgageDisclosureActRuleImplementation: ResourcestoHelpIndustryUnderstand,Implement,andComplywiththeHomeMortgageDisclosureAct andRegulationC,”webpage,https://www.consumerfinance.gov/policy-compliance/guidance/implementationguidance/hmda-implementation. 19 Insomecases,institutionsmayberequiredtoreportloanstothecreditbureaus;forexample,theGSEsrequire servicerstoreportdataonGSEloanstoallofthemajorcreditbureaus.Inothercases,home-purchaseand refinanceloanstakenoutbycompaniesthatarereportedunderHMDAmaynotbereportedinconsumer creditbureaudata.Forexample,theHMDAdataindicatethatin2016,about97,000first-lienhome-purchase andrefinancemortgagesforone-tofour-familynon-owner-occupiedpropertieswereissuedtoapplicants whosesexandracewerereportedas“notapplicable,”whichimpliesthattheborrowerwasnota“natural person”(anindividual,asopposedtoacompany,governmentagency,ornongovernmentalorganization)and thattheloanmaynotappearonanyindividual’screditrecord. 20 SeeEquifax(2017),QuarterlyU.S.ConsumerCreditTrends(Atlanta:Equifax,July),https://investor.equifax.com /~/media/Files/E/Equifax-IR/reports-and-presentations/events-and-presentation/consumer-credit-trends -report-2q-2017.pdf. 21 Thedollarvolumeoffirst-lienhome-purchaseandrefinanceloansforone-tofour-familypropertiesreported underHMDAisabout94percentofthedollarvolumeoffirst-lienhome-purchaseandrefinanceoriginations estimatedbyEquifaxfor2016.

8 FederalReserveBulletin|November2017 The Distribution of Home Loans across Demographic Groups Table2showsdifferentgroups’sharesof home-purchaseandrefinanceloansandhow theseshareshavechangedovertime.Forexample,blackborrowers’shareof homepurchaseloans(conventionalandnonconventionalloanscombined)was6.0percentin 2016,upfrom5.5percentin2015.Similarly,theHispanicwhiteshareof home-purchase loanswas8.8percentin2016,upfrom8.3percentin2015.Bothsharesremainwellbelow their2006peaks(8.7percentand11.7percentforblackandHispanicwhiteborrowers, respectively)buthavenowincreasedfortwoyearsinarow.22 Intermsof borrowerincome,theshareof home-purchaseloanstoLMIborrowersslipped from28.0percentin2015to26.2percentin2016.23Inaccordancewithdefinitionsusedby thefederalbanksupervisoryagenciestoenforcetheCommunityReinvestmentAct,LMI borrowersaredefinedasthosewithincomesof lessthan80percentof estimatedcurrent areamedianfamilyincome(AMFI);AMFIisestimatedbasedontheincomesof residents of themetropolitanareaornonmetropolitanportionof thestateinwhichtheloansecuringpropertyislocated.24 TheHMDAdataalsoshedlightonborrowingpatternsacrossneighborhoods,definedas censustracts.From2015to2016,theshareof home-purchaseloansoriginatedinhighincomecensustractsdecreasedslightlyfrom41.0percentto40.0percent.25LMIand middle-incometractsbothsawsmallgains.Intable2,itisimportanttonotethatsharesby neighborhoodincomein2012andthereafterarenotperfectlycomparablewiththosein 2011andearlierbecausecensus-tractdefinitionsandcensus-tractmedianfamilyincome estimateswererevisedin2012.Thecurrenttractdemographicmeasuresarebasedon2010 censusdataand2006–10AmericanCommunitySurveydata,whereasthe2004–11data reliedon2000censusincomeandpopulationdata.26Inaddition,theOfficeof ManagementandBudgetpublishednewmetropolitanareadelineationsin2014,socautionshould beexercisedincomparingrelativeincomemeasurementsbetween2013andlateryears. Average Loan Size by Demographic Group Table3showstheaveragedollarvalueof home-purchaseandrefinanceloansbydifferent groupsandhowtheseaverageshavechangedovertime.Alldollaramountsarereportedin nominalterms.Thedatarevealsignificantdifferencesinthevalueof loanstodifferent racialandethnicgroups.Asianborrowerstookoutthelargestloans,averaging$373,000for 22 Thebottomoftable2providesthetotalloancountsforeachyear,andthusthenumberofloanstoagiven groupinagivenyearcanbeeasilyderived.Forexample,thenumberofhome-purchaseloanstoAsiansin2016 wasabout190,000,derivedbymultiplying3.4millionloansby5.5andthendividingby100. 23 Notethatthesumofrefinancesharesacrossborrower-incomegroupsissignificantlylessthan100percent becauseincomeisnotalwaysreliedoninunderwritingdecisions,particularlyinrecentyears,whichappearsto reflectincreasedusageofnonconventionalstreamlinerefinanceprograms.Indeed,in2016,about90percentof refinanceloansforwhichborrowerincomewasnotreportedwerenonconventional. 24 Middle-incomeborrowershaveincomesofatleast80percentandlessthan120percentofAMFI,andhighincomeborrowershaveincomesofatleast120percentofAMFI.ForAMFIestimates,seeFederalFinancial InstitutionsExaminationCouncil(2017),“FFIECMedianFamilyIncomeReport,”webpage,https://www.ffiec .gov/Medianincome.htm.NotethatAMFIestimatestendtoreflectlaggedincomelevels.Duringtimeswhen incomesarechangingrapidly,suchasduringtheGreatRecession,AMFIestimatescanbesignificantlyunderstatedoroverstated. 25 DefinitionsforLMI,middle-income,andhigh-incomeneighborhoodsareidenticaltothoseforLMI,middleincome,andhigh-incomeborrowersbutarebasedontheratioofcensus-tractmedianfamilyincometoAMFI measuredfromthe2006–10AmericanCommunitySurveydata. 26 Formoreinformationonthetransitiontothenewcensus-tractdata,seeRobertB.Avery,NeilBhutta,Kenneth P.Brevoort,andGlennB.Canner(2012),“TheMortgageMarketin2011:HighlightsfromtheDataReported undertheHomeMortgageDisclosureAct,”FederalReserveBulletin,vol.98(December),pp.1–46,https:// www.federalreserve.gov/pubs/bulletin/2012/articles/HMDA/default.htm.

ResidentialMortgageLendingin2016 9 Table2.Distributionofhomeloans,bypurposeofloan,2004–16 Percentexceptasnoted Characteristicofborrower 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 5.5 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 6.0 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 8.8 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 66.4 Otherminority2 1.4 1.3 1.1 1.0 .9 .9 .9 .8 .8 .7 .8 .8 .8 Joint 2.3 2.3 2.3 2.5 2.8 2.8 2.7 2.8 2.9 3.1 3.4 3.5 3.6 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 8.9 All 100 100 100 100 100 100 100 100 100 100 100 100 100 Borrowerincome3 Lowormoderate 27.7 24.6 23.6 24.7 28.1 36.7 35.5 34.4 33.3 28.5 27.0 28.0 26.2 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 26.4 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 46.4 Incomenotusedornot applicable 4.0 4.2 5.0 3.1 1.7 1.9 1.5 1.6 1.5 1.6 1.2 1.2 1.0 All 100 100 100 100 100 100 100 100 100 100 100 100 100 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 14.1 Middle 48.7 49.2 49.5 49.6 49.8 50.2 49.4 49.4 43.6 43.7 44.7 45.2 45.8 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 40.0 All 100 100 100 100 100 100 100 100 100 100 100 100 100 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 5.5 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 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 6.2 Non-Hispanicwhite 57.2 60.9 59.6 62.7 70.7 74.6 74.3 73.5 72.5 70.5 67.8 67.2 65.2 Otherminority2 1.4 1.4 1.3 1.1 .8 .6 .5 .6 .6 .7 .9 .8 .9 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 3.4 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 13.8 All 100 100 100 100 100 100 100 100 100 100 100 100 100 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 16.9 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 20.3 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 47.5 Incomenotusedornot applicable 8.7 6.9 5.5 5.0 6.2 12.1 8.9 11.4 10.9 10.9 11.1 14.9 15.3 All 100 100 100 100 100 100 100 100 100 100 100 100 100 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 12.0 Middle 50.0 51.3 52.0 52.2 51.9 47.5 46.1 46.1 41.9 43.7 45.3 43.8 43.4 High 33.9 31.6 29.4 31.0 35.2 43.5 46.0 46.0 47.6 43.9 41.3 43.7 44.4 All 100 100 100 100 100 100 100 100 100 100 100 100 100 Memo Numberofhome-purchase loans(thousands) 4,660 4,836 4,298 3,331 2,533 2,391 2,157 2,018 2,284 2,638 2,747 3,124 3,463 Numberofrefinanceloans (thousands) 6,412 5,692 4,397 3,588 2,869 5,243 4,481 3,823 5,888 4,349 1,971 2,810 3,338 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 incomefromthe2006–10AmericanCommunitySurveydatafor2012–16andfromthe2000censusfor2004–11,andthethreecategories havethesamecutoffsastheborrower-incomegroups(seenote3).

10 FederalReserveBulletin|November2017 Table3.Averagevalueofhomeloans,bypurposeofloan,2004–16 Thousandsofdollars,nominal,exceptasnoted Characteristicofborrowerandof 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 neighborhood A.Homepurchase Borrowerraceandethnicity1 Asian 280 316 326 334 299 276 293 291 304 328 344 360 373 BlackorAfricanAmerican 166 183 197 197 184 172 174 174 179 193 199 209 217 Hispanicwhite 189 224 238 220 186 168 168 168 176 190 198 209 220 Non-Hispanicwhite 193 211 216 222 209 195 204 204 213 226 231 239 246 Otherminority2 206 240 257 245 216 196 201 198 206 219 229 241 249 Joint 233 255 261 269 255 248 263 261 274 289 293 303 311 Missing 216 248 261 280 265 242 256 262 279 298 293 303 308 Borrowerincome3 Lowormoderate 114 116 117 123 128 129 128 125 131 132 132 141 146 Middle 165 170 170 176 182 187 189 184 192 194 193 204 209 High 281 306 313 317 297 291 303 302 313 323 328 340 345 Incomenotusedornot applicable 208 235 254 266 218 195 214 225 233 260 277 315 314 Neighborhoodincome4 Lowormoderate 159 180 189 188 175 160 164 163 158 171 178 188 199 Middle 172 190 197 196 186 174 177 173 178 191 196 206 216 High 258 284 294 301 277 257 270 271 282 300 306 316 324 Memo Allhome-purchaseloans 201 221 228 232 217 202 210 210 221 235 240 249 257 Conventionaljumboloans (percentoforiginations)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 5.2 Conventionaljumboloans (percentofloaneddollars)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 16.8 B.Refinance Borrowerraceandethnicity1 Asian 274 325 370 368 321 298 313 309 308 304 341 363 368 BlackorAfricanAmerican 151 180 199 192 173 184 180 174 181 171 174 199 212 Hispanicwhite 178 219 252 244 193 190 191 183 190 180 190 214 228 Non-Hispanicwhite 180 205 221 222 205 209 210 208 212 206 216 239 251 Otherminority2 190 229 269 258 211 217 218 207 213 201 213 240 252 Joint 210 246 265 262 243 247 254 249 254 249 266 292 305 Missing 194 226 246 250 242 243 248 253 253 244 245 268 277 Borrowerincome3 Lowormoderate 114 124 124 126 129 138 133 128 135 128 123 136 143 Middle 162 181 183 181 180 185 179 174 182 171 174 193 202 High 256 294 320 311 275 268 274 280 277 276 301 324 330 Incomenotusedornot applicable 150 178 240 240 194 204 203 185 212 193 198 231 243 Neighborhoodincome4 Lowormoderate 142 169 188 185 164 172 172 167 163 153 157 182 196 Middle 158 184 201 198 182 184 182 175 181 173 180 201 214 High 245 282 313 311 272 259 265 269 269 270 290 311 321 Memo Allrefinanceloans 185 212 232 231 212 216 220 218 221 213 222 247 259 Conventionaljumboloans (percentoforiginations)5 9.2 11.4 10.2 7.5 2.0 .9 1.6 2.4 2.2 3.0 4.2 4.9 4.6 Conventionaljumboloans (percentofloaneddollars)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 15.7 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes. 1 Seetable2,note1. 2 Seetable2,note2. 3 Seetable2,note3. 4 Seetable2,note4. 5 Fractionofconventionalplusnonconventionalloansthatareconventionalandhaveloanamountsinexcessofthesingle-familyconforming loan-sizelimitsforeligibilityforpurchasebythegovernment-sponsoredenterprises.

ResidentialMortgageLendingin2016 11 homepurchasesand$368,000forrefinancingsin2016,whereasloanstoblackborrowers averaged$217,000forhomepurchasesand$212,000forrefinancings.27 Overtime,home-purchasedollarvalueshavefollowedthehistoricaltrendof homeprices, risingduringthemid-2000s,fallingsharplythrough2008and2009,andthenbeginningto recoversinceabout2011.Thetrendsdiffersubstantiallybyraceandethnicity,however. Theaveragehome-purchaseloantoaHispanicwhiteborrowerin2016wasfor$220,000, upfrom$209,000in2015butstillwellbelowthepeakof $238,000in2006.Incontrast,the averagehome-purchaseloanamountforanon-Hispanicwhiteborrowerwasabout $246,000in2016,higherthanthepre-crisispeakin2007of about$222,000.Thevaluesof loanstoAsianandblackborrowersin2016werealsohigherthantheir2006–07peaks. Intermsof borrowerincome,forLMIborrowers,theaveragehome-purchaseloanamount increasedto$146,000in2016from$141,000in2015;loanamountsincreasedbyasimilar magnitudeformiddle-andhigh-incomeborrowers.Averageloanvaluesalsoincreased acrossallborrower-incomegroupsforrefinanceloans. Jumbo Lending Theshareof conventionaljumboloans—thosewithloanamountsinexcessof theGSEs’ conformingloanlimitsandnoothergovernmentguarantee—wasabout5percentin2016, littlechangedfrom2015.Asshownintable3,conventionaljumboloansmadeup 5.2percentof allfirst-lienhome-purchaseloansforowner-occupied,one-tofour-family, site-builthomesin2016,roughlythesameasin2015.28Amongrefinanceloans,the conventionaljumbofractiondecreasedto4.6percentfrom4.9percentin2015.Becauseof theirlargersize,jumboloansmakeupacorrespondinglylargershareof thedollar volumeof mortgages,accountingfor16.8percentof home-purchaseloansand 15.7percentof refinanceloansin2016.Sincethefinancialcrisis,mostnewjumboloans havebeenheldontheoriginatingbank’sportfolio,asthemarketformortgage-backed securitieswithoutagovernmentguaranteeisthin.29 Variation across Demographic Groups in Nonconventional Loan Use Table4showsthatblackandHispanicwhiteborrowersaremuchmorelikelytouse nonconventionalloans(FHA,VA,RHS,andFSAloans)thanconventionalloans comparedwithotherracialandethnicgroups.In2016,amonghome-purchaseborrowers, about69percentof blacksand60percentof Hispanicwhitestookoutanonconventional loan,whereasabout35percentof non-Hispanicwhitesandjust16percentof Asiansdid so.Thesenumbershavedeclinedfromtheirpeaksin2009and2010,whenwelloverthreefourthsof blackandHispanicwhiteborrowersandoverone-half of non-Hispanicwhite borrowerstookoutnonconventionalloans. 27 Medianloanamounts(notshownintables)followedsimilartrendsasaverageloanamounts. 28 Aloanqualifiesasjumbointable3iftheloanamountisabovetheGSEs’conformingloan-sizelimitfora single-familyhomeforthatyearandlocation.Theconformingloan-sizelimitwasmostlyuniformacrossthe nationpriorto2008.ThelimitsinAlaska,Hawaii,theU.S.VirginIslands,andGuamare50percenthigher thaninthenationatlarge.Fortheyears2008andthereafter,designatedhigher-costareashaveelevatedlimits. For2016,thegeneralconformingloan-sizelimitwas$417,000,andthemaximumhigh-costarealoan-sizelimit was$625,000(and50percenthigherinAlaska,Hawaii,theU.S.VirginIslands,andGuam).Conforming loan-sizelimitsincreasewiththenumberofunitsthatmakeuptheproperty,buttheHMDAdatadonotdifferentiatebetweenpropertieswithanywherefromonetofourunits.Someloansinthetablemaythereforehave beenmisclassifiedasjumbodespitebeingeligibleforpurchasebyaGSE. 29 SeeNeilBhutta,JackPopper,andDanielR.Ringo(2015),“The2014HomeMortgageDisclosureActData,” FederalReserveBulletin,vol.101(November),pp.1–43,https://www.federalreserve.gov/pubs/bulletin/2015/ default.htm.

12 FederalReserveBulletin|November2017 Table4.Nonconventionalshareofhomeloans,bypurposeofloan,2004–16 Percentexceptasnoted Characteristicofborrower 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 15.6 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 68.5 Hispanicwhite 13.7 7.5 7.0 12.4 51.4 75.4 77.0 74.1 70.7 63.1 59.6 62.6 59.8 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 35.2 Otherminority2 14.0 9.3 9.4 14.8 48.4 67.6 68.8 65.9 62.2 55.5 54.0 55.1 54.2 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 43.1 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 34.7 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 51.7 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 47.5 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 26.7 Neighborhoodincome4 Lowormoderate 15.8 9.7 9.6 13.8 45.5 64.4 65.1 61.2 57.9 49.9 48.1 50.3 48.7 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 44.6 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 28.4 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 38.7 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 8.3 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 53.0 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 30.5 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 21.7 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 36.6 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 29.2 Missing 4.2 1.9 1.7 4.1 18.7 19.0 12.5 13.6 16.5 16.7 21.5 25.5 27.6 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 18.3 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 15.2 High .8 .6 1.1 2.7 10.5 7.2 6.7 6.3 5.5 6.1 8.8 9.2 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 30.4 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 28.1 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 18.9 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 24.3 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.

ResidentialMortgageLendingin2016 13 Nonconventionalusageisalsomoreprevalentforborrowerswithlowerincomesandin neighborhoodswithlowerincomes.In2016,about52percentof LMIhome-purchase borrowersand49percentof thoseborrowingtopurchasehomesinLMIneighborhoods usednonconventionalloans,comparedwithabout27percentof high-incomeborrowers and28percentof borrowersinhigh-incomeneighborhoods.WhileblackandHispanic whiteborrowerstendtohavelowerincomes,onaverage,thannon-Hispanicwhite borrowers,thepreviouslymentionedracialandethnicdifferencesinnonconventionalloan usepersistwithinincomegroups.30Withrespecttorefinanceloans,minorityandlowerincomeborrowersareagainmorelikelytousenonconventionalthanconventionalloans.In general,however,nonconventionalloansarelessprevalentinrefinancelending.31 Greaterrelianceonnonconventionalloansmayreflecttherelativelylowdown-payment requirementsof theFHAandVAlendingprograms,whichservetheneedsof borrowers whohavefewassetstomeetdown-paymentandclosing-costrequirements.32Thepatterns of productincidencecouldalsoreflectthebehaviorof lenderstosomeextent;forexample, concernshavebeenraisedaboutthepossibilitythatlenderssteerborrowersincertain neighborhoodstowardsuchloans.33 Denial Rates and Denial Reasons In2016,theoveralldenialrateonapplicationsforhome-purchaseloanswas11.4percent, somewhatlowerthanin2015(table5).Thedecreasein2016continuesatrendof declining denialratesforhome-purchasemortgagesoverthepastdecade.34Inaddition,denialrates haveexhibitedsignificantvariation,andchangesindenialrateshavedifferedbytypeof loan.Forexample,forconventionalhome-purchaseloanapplications,thedenialrateof 10.2percentin2016was8.3percentagepointslowerthanin2006,whilefor nonconventionalhome-purchaseloanapplications,thedenialrateof 13.4percentin2016 was1.3percentagepointshigherthanin2006.Variationsinrawdenialratesovertime reflectnotonlychangesincreditstandards,butalsochangesinthedemandforcreditand inthecompositionof borrowersapplyingformortgages.Forexample,thedenialrateon applicationsforconventionalhome-purchaseloanswaslowerin2016thanduringthe housingboomyears,eventhoughmostmeasuresof creditavailabilitysuggestthatcredit standardsaretightertoday.35Thisresultmaystemfromarelativelylargedropinapplicationsfromriskierapplicants. Asinpastyears,black,Hispanicwhite,and“otherminority”borrowershadnotablyhigher denialratesin2016thannon-Hispanicwhiteborrowers,whiledenialratesforAsian 30 SeeBhutta,Popper,andRingo,“The2014HomeMortgageDisclosureActData,”innote29. 31 Thereportednonconventionalshareofrefinanceloansislowerthanthetrueshareforthegroupscategorized byborrowerincomebecause,inmostnonconventionalrefinanceloans,incomeisnotreported.Thus,when incomeisreportedonarefinanceloan,theloanislikelytobeconventional. 32 FindingsoftheFederalReserveBoard’sSurveyofConsumerFinancesfor2013indicatethatliquidassetlevels andfinancialwealthholdingsforminoritiesandlower-incomegroupsaresubstantiallysmallerthantheyare fornon-Hispanicwhiteborrowersorhigher-incomepopulations.SeeBoardofGovernorsoftheFederal ReserveSystem,“2013SurveyofConsumerFinances,”webpage,www.federalreserve.gov/econresdata/scf/ scfindex.htm. 33 See,forexample,GlennB.Canner,StuartA.Gabriel,andJ.MichaelWoolley(1991),“Race,DefaultRiskand MortgageLending:AStudyoftheFHAandConventionalLoanMarkets,”SouthernEconomicJournal,vol.58 (July),pp.249–62. 34 Denialratesarecalculatedasthenumberofdeniedloanapplicationsdividedbythetotalnumberofapplications,excludingwithdrawnapplicationsandapplicationfilesclosedforincompleteness. 35 BoththeMortgageBankersAssociationandtheUrbanInstitutepublishindexesofmortgagecreditavailability suggestingthatstandardshavebeenmuchtightersincethecrisis.SeeWeiLi,LaurieGoodman,EllenSeidman, JimParrott,JunZhu,andBingBai(2014),“MeasuringMortgageCreditAccessibility,”workingpaper (Washington:UrbanInstitute,November),www.urban.org/research/publication/measuring-mortgage-creditaccessibility.

14 FederalReserveBulletin|November2017 Table5.Denialrates,bypurposeofloan,2004–16 Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 13.3 12.1 11.4 Asian 13.7 15.9 16.9 17.5 19.2 16.3 15.8 16.5 15.8 15.3 14.1 12.6 11.6 BlackorAfricanAmerican 23.6 26.5 30.3 33.5 30.6 25.5 24.8 26.0 26.0 25.5 23.0 20.8 19.8 Hispanicwhite 18.3 21.1 25.1 29.5 28.3 22.2 21.8 21.1 20.2 20.5 18.4 16.1 14.9 Non-Hispanicwhite 11.1 12.2 12.9 13.3 14.0 12.8 12.9 13.1 12.5 12.0 11.1 10.0 9.4 Otherminority2 19.4 20.8 24.0 26.7 25.5 21.2 21.9 20.9 20.8 21.2 19.0 17.2 16.6 Conventionalonly Allapplicants 14.6 16.3 18.5 19.0 18.3 15.8 15.2 15.1 13.6 12.9 11.9 10.8 10.2 Asian 13.7 16.0 17.1 17.5 19.1 15.8 14.8 15.5 14.4 14.2 13.3 11.9 10.9 BlackorAfricanAmerican 25.0 27.8 31.9 35.7 37.6 35.8 33.6 33.2 32.0 28.5 25.1 23.3 22.0 Hispanicwhite 18.6 21.4 25.7 30.5 32.5 26.9 24.9 24.2 22.4 21.5 18.9 17.2 15.4 Non-Hispanicwhite 11.2 12.3 13.2 13.3 14.1 13.3 12.9 12.7 11.6 10.8 9.9 9.1 8.4 Otherminority2 19.7 21.2 24.8 27.8 29.0 25.9 28.0 24.6 23.6 22.5 20.2 18.3 16.8 Nonconventionalonly1 Allapplicants 13.3 12.5 12.1 16.2 17.4 15.3 16.0 16.5 16.3 16.8 15.8 13.9 13.4 Asian 12.6 11.6 10.6 15.5 20.2 17.7 18.6 19.3 20.2 20.6 18.9 16.1 14.9 BlackorAfricanAmerican 17.7 16.8 16.2 22.8 25.3 22.6 22.7 23.9 24.0 24.1 21.9 19.7 18.7 Hispanicwhite 16.3 17.2 15.7 20.5 23.1 20.4 20.7 19.9 19.3 19.9 18.0 15.5 14.6 Non-Hispanicwhite 10.7 10.2 10.0 13.1 13.9 12.5 13.0 13.6 13.7 14.1 13.4 11.7 11.2 Otherminority2 16.8 16.3 15.2 18.6 20.9 18.7 18.7 18.8 18.9 20.1 17.9 16.3 16.4 B.Refinance Conventionalandnonconventional1 Allapplicants 29.5 32.6 35.4 39.6 37.7 24.0 23.3 23.8 19.9 23.3 31.0 27.4 29.8 Asian 18.8 23.5 27.5 32.6 32.5 21.4 19.5 20.1 17.3 21.0 28.1 23.8 25.0 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 45.9 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 33.8 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 26.9 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 44.2 Conventionalonly Allapplicants 30.1 32.9 35.6 39.9 37.0 22.1 21.3 22.3 19.4 22.5 29.6 26.4 28.8 Asian 18.8 23.5 27.5 32.5 31.5 20.2 18.5 19.4 17.0 20.5 27.2 23.1 23.7 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 52.3 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 35.2 Non-Hispanicwhite 24.6 27.1 30.4 33.9 31.5 19.1 18.9 20.1 17.4 19.9 26.2 23.2 25.7 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 45.9 Nonconventionalonly1 Allapplicants 15.0 20.1 21.9 31.6 40.9 31.1 33.3 32.2 22.2 26.7 36.5 30.3 32.9 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 36.6 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 38.8 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 30.3 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 30.9 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 41.1 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 NonconventionalloansarethoseinsuredbytheFederalHousingAdministrationorbackedbyguaranteesfromtheU.S.Departmentof VeteransAffairs,theFarmServiceAgency,ortheRuralHousingService. 2 Seetable2,note2.

ResidentialMortgageLendingin2016 15 borrowersweremoresimilartothosefornon-Hispanicwhiteborrowers.Forexample,the denialratesforconventionalhome-purchaseloanswereabout22percentforblack borrowers,15percentforHispanicwhiteborrowers,11percentforAsianborrowers, 17percentforotherminorityborrowers,and8percentfornon-Hispanicwhiteborrowers. Previousresearchandexperiencegainedinthefairlendingenforcementprocessshowthat differencesindenialratesandintheincidenceof higher-pricedlending(thetopicof the nextsubsection)amongracialorethnicgroupsstem,atleastinpart,fromfactorsrelatedto creditriskthatarenotavailableintheHMDAdata,suchascredithistory(includingcredit score),ratioof totaldebtservicepaymentstoincome(DTI),andLTVratio.Differential costsof loanoriginationandthelocalcompetitiveenvironment,aswellasillegaldiscrimination,mayalsobearonthedifferencesinpricing. Despitetheselimitations,theHMDAdataplayanimportantroleinfairlendingenforcement.Thedataareregularlyusedbybankexaminerstofacilitatethefairlendingexaminationandenforcementprocesses.Whenexaminersforthefederalbankingagenciesevaluate aninstitution’sfairlendingrisk,theyanalyzeHMDApricedataandloanapplication outcomesinconjunctionwithotherinformationandriskfactorsthatcanbedrawndirectly fromloanfilesorelectronicrecordsmaintainedbylenders,asdirectedbytheInteragency FairLendingExaminationProcedures.36Theavailabilityof broaderinformationallows theexaminerstodrawstrongerconclusionsaboutinstitutioncompliancewiththefair lendinglaws. Lenderscan,butarenotrequiredto,reportuptothreereasonsfordenyingamortgage application,selectingfromninepotentialdenialreasons(asshownintable6).Among deniedfirst-lienapplicationsforone-tofour-family,owner-occupied,site-builtproperties in2016,about72percentof deniedhome-purchaseapplicationsandabout46percentof deniedrefinanceapplicationshadatleastonereporteddenialreason.Thetwomost frequentlyciteddenialreasonsforbothhome-purchaseandrefinanceloansweretheapplicant’scredithistoryandDTIratio(notethatthesumacrosscolumnsintable6canadd uptomorethan100percentbecauselenderscancitemorethanonedenialreason).For bothhome-purchaseandrefinanceapplications,theDTIratioandcollateralaremore likelytobecitedasdenialreasonsonconventionalthannonconventionalapplications. Denialreasonsvaryacrossracialandethnicgroupstosomedegree.Forexample,among deniedhome-purchaseloanapplicationsin2016,credithistorywascitedasadenialreason forabout24percentof deniedblackapplicants,17percentof deniedHispanicwhite applicants,18percentof deniednon-Hispanicwhiteapplicants,andjust11percentof deniedAsianapplicants.TheDTIratiowascitedmostoftenasadenialreasonforhomepurchaseapplicantsinallracialandethnicgroups.ForAsianhome-purchaseapplicants, collateralwasthesecondmostcommonreasoncitedfordenial,whileforothergroups, credithistorywasthesecondmostcommonreasoncited. The Incidence of Higher-Priced Lending Currentprice-reportingrulesunderHMDA,ineffectsinceOctober2009,definehigherpricedfirst-lienloansasthosewithanannualpercentagerate(APR)of atleast 1.5percentagepointsabovetheaverageprimeofferrate(APOR)forloansof asimilartype (forexample,a30-yearfixed-ratemortgage).37Thespreadforjunior-lienloansmustbeat 36 TheInteragencyFairLendingExaminationProceduresareavailableatwww.ffiec.gov/PDF/fairlend.pdf. 37 Formoreinformationabouttherulechangesrelatedtohigher-pricedlendingandthewaysinwhichtheyaffect theincidenceofreportedhigher-pricedlendingovertime,seeAveryandothers,“The2009HMDAData,”in note12.

16 FederalReserveBulletin|November2017 Table6.Reasonsfordenial,bypurposeofloan,2016 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 23.1 3.8 18.5 13.8 7.1 5.8 9.0 .4 10.1 27.6 Asian 29.5 5.0 11.0 11.7 9.4 9.6 11.1 .3 11.2 23.3 BlackorAfricanAmerican 26.1 3.2 24.0 10.4 7.9 4.6 6.7 .4 10.1 28.7 Hispanicwhite 25.4 4.4 17.2 11.7 7.3 7.2 6.7 .4 11.7 29.5 Non-Hispanicwhite 21.7 3.8 18.2 15.0 6.7 5.5 9.1 .5 9.9 27.9 Otherminority2 24.8 4.1 20.9 10.7 8.0 4.9 7.0 .6 10.6 29.8 Conventionalonly Allapplicants 24.7 3.2 19.2 15.8 7.9 6.1 9.8 .7 9.9 23.4 Asian 29.9 4.7 10.6 12.1 10.2 9.9 11.9 .4 11.0 21.8 BlackorAfricanAmerican 27.6 2.6 29.3 12.8 9.3 4.2 6.7 .9 10.7 22.0 Hispanicwhite 27.2 3.2 19.7 14.6 8.2 7.0 6.9 .8 11.9 24.0 Non-Hispanicwhite 23.4 3.2 18.6 16.8 7.4 5.9 9.7 .7 9.3 24.4 Otherminority2 26.5 3.6 24.3 12.2 9.9 5.1 6.7 1.3 12.1 24.7 Nonconventionalonly1 Allapplicants 21.3 4.5 17.7 11.5 6.2 5.4 8.0 .1 10.4 32.5 Asian 27.8 6.1 12.7 10.0 6.2 8.5 8.2 .20 12.0 29.0 BlackorAfricanAmerican 25.3 3.6 21.0 9.0 7.1 4.9 6.7 .2 9.8 32.5 Hispanicwhite 24.1 5.3 15.3 9.6 6.6 7.3 6.7 .2 11.5 33.4 Non-Hispanicwhite 19.3 4.6 17.7 12.5 5.8 4.9 8.3 .1 10.6 32.8 Otherminority2 23.4 4.6 18.0 9.5 6.3 4.7 7.3 .0 9.2 34.2 B.Refinance Conventionalandnonconventional1 Allapplicants 12.0 .7 12.5 9.7 2.3 2.3 9.5 .1 6.1 53.8 Asian 18.3 1.1 10.3 7.3 2.9 3.9 9.8 .1 7.0 50.1 BlackorAfricanAmerican 9.2 .4 15.2 7.8 2.2 1.5 7.0 .0 6.2 58.9 Hispanicwhite 18.1 .9 17.6 7.8 3.2 3.3 8.8 .1 8.6 44.9 Non-Hispanicwhite 11.5 .7 11.7 9.8 2.1 2.3 8.4 .1 5.7 56.0 Otherminority2 10.4 .6 12.6 6.3 1.9 1.9 7.2 .0 5.4 61.8 Conventionalonly Allapplicants 14.5 .8 13.4 10.0 2.4 2.7 8.7 .1 6.1 51.5 Asian 20.2 1.2 10.6 7.8 3.1 4.2 9.6 .1 7.1 47.7 BlackorAfricanAmerican 11.9 .4 16.7 8.0 2.2 1.6 5.7 .1 6.2 57.5 Hispanicwhite 21.6 .9 19.3 8.4 3.5 3.5 7.7 .1 8.5 41.6 Non-Hispanicwhite 13.9 .8 12.6 10.5 2.2 2.6 7.8 .1 5.8 53.3 Otherminority2 12.9 .6 14.1 6.6 2.2 2.2 6.1 .0 5.7 59.2 Nonconventionalonly1 Allapplicants 5.5 .5 10.1 8.8 1.9 1.5 11.6 .03 6.2 59.4 Asian 7.8 .5 8.7 4.5 1.7 2.2 10.9 .0 6.3 64.0 BlackorAfricanAmerican 5.3 .3 12.9 7.5 2.4 1.3 8.9 .01 6.1 61.0 Hispanicwhite 8.4 .7 13.0 6.0 2.4 2.7 11.9 .06 9.1 53.9 Non-Hispanicwhite 4.9 .6 9.2 8.0 1.7 1.4 10.3 .03 5.6 63.4 Otherminority2 5.3 .4 9.6 5.7 1.4 1.2 9.3 .0 4.9 67.2 Note:Deniedfirst-lienmortgageapplicationsforone-tofour-family,owner-occupied,site-builthomes.Columnssumtomorethan100because lendersmayreportuptothreedenialreasons.Foradescriptionofhowborrowersarecategorizedbyraceandethnicity,seetable2,note1. 1 Seetable5,note1. 2 Seetable2,note2.

ResidentialMortgageLendingin2016 17 least3.5percentagepointsforsuchloanstobeconsideredhigherpriced.TheAPRof a mortgagediffersfromtheinterestratebecausetheAPRmeasureincorporatesup-frontfees andotherloancostssuchasmortgageinsurance.TheAPOR,whichispublishedweeklyby theFederalFinancialInstitutionsExaminationCouncil,isanestimateof theAPRon loansbeingofferedtohigh-qualityprimeborrowersbasedonthecontractinterestrates anddiscountpointsreportedbyFreddieMacinitsPrimaryMortgageMarketSurvey.38 In2016,thefractionof home-purchaseloans(again,firstliensforone-tofour-family, owner-occupied,site-builtproperties)abovethehigher-pricedthresholdwas7.7percent (table7.A).Althoughtheoverallfractionof higher-pricedloanswaslittlechangedfrom 2015,thereweremoderatechangesintheshareof higher-pricedlendingamongdifferent typesof loans.Inparticular,thehigher-pricedshareof nonconventionalloansdeclined from14.5percentto13.9percent,whilethehigher-pricedshareof conventionalloansrose from3.2percentto3.7percent. Table7.Aalsoshowsthat,in2016aswellasearlieryears,blackandHispanicwhite borrowershadthehighestincidencesof higher-pricedloanswithinboththeconventional andnonconventionalloantypes.Thistableprovidestherawratesof higher-pricedlending bygroupfrom2004to2016,but,asdiscussedindetailinpreviousBulletinarticles,the rawratesreportedinthepublicHMDAdatacanbedifficulttocompareoverlongertime horizonsfortwomainreasons.First,adifferentprice-reportingrulewasinplacepriorto October2009,withthespreadbetweenamortgage’sAPRandtherateonaTreasurybond of comparableterm(ratherthantheAPOR)reportedif itroseabove3percentagepoints.39 Second,evendatafromyearspriorto2009arenoteasilycomparablefromyeartoyear,as theprice-reportingruleusedduringthisperiodcreatedunintendeddistortionsinreporting overtime(whichiswhythereportingrulewaschanged).40 Table7.Bprovidesadjustedratesof higher-pricedlendingthatareintendedtobemore comparableovertime.Usingthedatesof applicationandorigination(whicharenot releasedinthepublicHMDAdatafiles)andassumingallloansare30-yearfixed-rate mortgages,wecanestimatetheAPRof loansthatwereoriginatedwhentheoldpricing rulewasineffect.41ThisestimatedAPRcanthenbecomparedwiththeAPOR,asisdone underthenewprice-reportingrule.Finally,becausetheimpliedthresholdspreadoverthe APORduringthepreviousreportingregimegottoashighasabout2.5percentagepoints, table7.Breportsthefractionof loanswithanestimatedAPRspreadovertheAPOR(or theactualreportedspreadforloansmadeunderthenewrules)of atleast2.5percentage points—ratherthan1.5percentagepoints,asintable7.A.42Higher-pricedlendingbythis measurevirtuallydisappearedby2008andhasnotreemerged,likelyreflectingthelackof subprimemortgagelending. 38 SeeFreddieMac,“MortgageRatesSurvey,”webpage,www.freddiemac.com/pmms;andFederalFinancial InstitutionsExaminationCouncil,“FFIECRateSpreadCalculator,”webpage,www.ffiec.gov/ratespread/ newcalc.aspx. 39 Thereportingthresholdforjuniorlienswas5percentagepoints. 40 Thesedistortionsarerelatedtothefactthatchangesinlong-termTreasuryratesdonotalwaysleadtoparallel changesinmortgagerates.Foradiscussionofhowtheoldrulecouldproducemisleadingdataabouttrends inhigher-pricedlending,seeNeilBhuttaandDanielR.Ringo(2014),“The2013HomeMortgageDisclosure ActData,”FederalReserveBulletin,vol.100(November),pp.1–32,https://www.federalreserve.gov/pubs/ bulletin/2014/articles/hmda/2013-HMDA-Data.htm. 41 Theassumptionthatallmortgageswerefixedratelikelyunderstatestheextentofhigher-pricedlendingduring theearlyyearsofthehousingboom.Duringthisperiod,adjustable-ratemortgageswerequiteprevalent,and theAPRsonsuchloansaretiedtoevenshorter-termTreasuryratesthanaretheAPRsonfixed-ratemortgages.Thus,whentheyieldcurveisrelativelysteep,asitwasin2004,thebarforadjustable-ratemortgagesto bereportedashigherpricedwouldhavebeenevenhigherthanforfixed-ratemortgages. 42 Foramoredetaileddiscussionofthisadjustmenttechnique,seeAveryandothers,“The2009HMDAData,”in note12.

18 FederalReserveBulletin|November2017 Table7.Incidenceofhigher-pricedlending,bypurposeofloan,2004–16 A.Unadjusted Percent Typeofloanand raceandethnicity 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 7.7 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 3.7 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 15.7 Hispanicwhite 17.5 42.0 43.3 25.9 15.8 8.1 3.9 6.1 5.9 16.9 28.5 18.5 17.9 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 6.2 Otherminority2 14.4 30.3 30.7 16.1 9.1 5.3 2.3 3.5 3.4 8.8 13.7 8.9 9.2 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 3.7 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 2.5 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 8.3 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 10.1 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 3.3 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 5.6 Nonconventionalonly1 Allborrowers 1.2 .9 1.8 3.0 9.5 4.6 1.3 2.7 3.0 13.9 26.3 14.5 13.9 Asian 2.4 .6 .8 1.3 8.2 3.9 .8 2.0 1.9 13.4 26.3 11.4 10.1 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 19.1 Hispanicwhite 2.0 1.4 3.5 4.5 14.0 7.1 2.2 4.5 4.8 22.5 43.4 24.6 23.2 Non-Hispanicwhite 1.0 .7 1.5 2.5 8.4 3.9 1.0 2.3 2.6 12.1 22.5 12.2 11.7 Otherminority2 4.4 .7 2.1 2.4 8.8 4.7 1.2 2.5 2.4 11.9 21.0 12.2 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 2.0 Asian 5.8 15.1 19.5 12.5 3.1 .9 .4 .5 .4 .5 1.1 .7 .6 BlackorAfricanAmerican 30.0 46.2 50.7 38.1 22.8 9.0 6.5 6.8 4.1 3.8 5.7 5.1 3.8 Hispanicwhite 18.2 32.6 36.9 26.5 15.1 7.0 4.4 4.4 2.6 3.1 4.8 3.9 3.1 Non-Hispanicwhite 12.3 20.4 25.0 17.6 10.2 3.7 1.8 2.2 1.5 2.0 3.4 2.4 2.1 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 2.2 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 1.5 Asian 5.8 15.2 19.6 12.5 2.9 .7 .2 .3 .3 .3 .7 .4 .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 3.2 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 2.3 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 1.6 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 1.7 Nonconventionalonly1 Allborrowers 1.5 .9 3.1 6.6 13.2 6.7 4.9 5.9 3.2 3.9 8.3 5.4 3.8 Asian 3.6 2.1 2.5 4.9 8.9 4.8 3.1 4.0 1.8 2.6 7.2 3.3 2.6 BlackorAfricanAmerican 1.0 1.2 4.1 7.8 15.2 8.2 9.8 10.9 6.0 4.6 8.5 7.1 4.4 Hispanicwhite 2.0 .9 2.6 6.2 11.6 6.6 7.3 7.9 3.6 5.1 12.2 7.0 5.0 Non-Hispanicwhite 1.3 .7 2.8 6.0 12.1 6.5 4.6 5.9 3.3 4.2 8.9 5.4 3.9 Otherminority2 8.1 3.9 9.6 9.9 10.5 4.5 4.6 4.3 2.9 2.8 6.0 4.4 2.9 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1. 1 Seetable5,note1. 2 Seetable2,note2.

ResidentialMortgageLendingin2016 19 Table7.Incidenceofhigher-pricedlending,bypurposeofloan,2004–16 B.Adjusted Percent Typeofloanandraceand 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ethnicityofborrower Homepurchase Conventionalandnonconventional1 Allborrowers 7.4 18.3 17.1 6.3 1.3 1.3 .6 .8 .8 .7 .8 .7 .8 Asian 3.8 13.0 11.4 3.1 .5 .5 .3 .3 .3 .3 .4 .5 .6 BlackorAfricanAmerican 19.3 40.3 38.5 16.7 1.9 1.3 .6 .7 .9 1.0 1.2 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 1.6 Non-Hispanicwhite 5.8 12.1 10.9 4.3 1.3 1.4 .7 .8 .8 .7 .7 .6 .7 Otherminority2 10.5 24.7 22.7 8.0 1.5 1.4 .8 .9 1.1 .9 .9 .9 .8 Conventionalonly Allborrowers 8.2 20.0 18.7 7.1 1.9 2.3 1.3 1.4 1.2 .9 .8 .8 .8 Asian 3.8 13.3 11.6 3.2 .5 .6 .3 .4 .4 .3 .4 .5 .7 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 1.6 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 2.9 Non-Hispanicwhite 6.5 13.2 12.0 4.9 1.9 2.6 1.3 1.5 1.2 .8 .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 1.3 Nonconventionalonly1 Allborrowers .9 .3 .2 .3 .4 .4 .1 .2 .3 .5 .8 .5 .6 Asian 2.2 .3 .1 .2 .2 .2 .1 .2 .2 .3 .5 .2 .3 BlackorAfricanAmerican 1.0 .5 .3 .6 .4 .7 .2 .3 .3 .8 1.1 1.0 1.1 Hispanicwhite 1.6 .3 .3 .2 .5 .4 .1 .3 .3 .8 1.1 .7 .7 Non-Hispanicwhite .8 .2 .2 .2 .3 .3 .1 .2 .3 .5 .7 .5 .6 Otherminority2 3.9 .3 .2 .2 .3 .3 .1 .1 .2 .3 .6 .4 .4 Refinance Conventionalandnonconventional1 Allborrowers 11.3 20.1 21.3 12.7 4.3 1.4 .6 .8 .7 .7 1.0 .6 .4 Asian 4.1 12.2 12.1 5.4 .8 .2 .1 .2 .1 .1 .2 .1 .1 BlackorAfricanAmerican 24.3 38.5 39.0 26.4 10.6 3.5 2.6 3.3 2.5 1.6 2.1 1.3 .6 Hispanicwhite 13.4 27.0 25.8 14.8 5.6 2.5 1.8 1.8 1.1 .9 1.1 .7 .5 Non-Hispanicwhite 9.5 15.9 16.9 10.3 4.1 1.4 .6 .8 .7 .7 1.1 .6 .4 Otherminority2 13.2 22.0 22.3 14.5 7.1 2.1 .9 1.1 1.1 .8 1.1 .7 .3 Conventionalonly Allborrowers 11.8 20.7 21.9 13.3 5.1 1.5 .5 .6 .4 .4 .7 .5 .4 Asian 4.1 12.3 12.1 5.4 .9 .2 .1 .1 .0 .0 .1 .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 1.0 Hispanicwhite 14.1 27.7 26.2 15.4 6.9 3.5 1.4 1.3 .8 .7 .8 .8 .6 Non-Hispanicwhite 9.9 16.3 17.3 10.9 4.8 1.6 .5 .6 .4 .5 .8 .5 .4 Otherminority2 13.6 22.6 22.7 14.9 8.3 2.8 .9 .9 .7 .7 .7 .6 .4 Nonconventionalonly1 Allborrowers 1.0 .6 .7 .5 .4 .5 1.2 2.5 2.4 1.8 2.5 .9 .3 Asian 2.9 1.8 1.3 1.4 .5 .3 .5 1.5 1.4 1.1 2.0 .4 .3 BlackorAfricanAmerican .6 .8 1.2 .6 .5 1.1 3.5 5.9 4.9 2.6 3.2 1.5 .2 Hispanicwhite 1.4 .4 .3 .6 .7 .8 2.8 3.5 1.9 1.3 2.1 .6 .3 Non-Hispanicwhite .8 .4 .4 .3 .4 .5 1.0 2.4 2.5 2.1 3.0 1.0 .4 Otherminority2 6.3 3.4 7.8 6.3 1.9 .4 1.1 2.0 2.2 1.2 2.2 .8 .1 Note:First-lienmortgagesforone-tofour-family,owner-occupied,site-builthomes.Foradescriptionofhowborrowersarecategorizedbyrace andethnicity,seetable2,note1.Seetextfordetailsonhowadjustedincidencesofhigher-pricedlendingarecalculated. 1 Seetable5,note1. 2 Seetable2,note2.

20 FederalReserveBulletin|November2017 Thehigher-pricedfractionof FHAhome-purchaseloanswasabout21percentin2016, muchhigherthanforothertypesof loans,inpartbecauseof therelativelyhighup-front andannualMIPschargedbytheFHA(table8).Incontrast,onlyabout1percentof VA/RHS/FSAhome-purchaseloanswerehigherpriced.Thehigher-pricedfractionsfor bothtypesof loanswerelittlechangedfrom2015. Table8.Distributionofpricespread,2016 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 2,123,365 78,775 3.7 56.1 21.5 9.4 7.5 2.9 2.6 FHA2 865,897 180,864 20.9 76.6 19.1 2.9 1.3 .08 .04 VA/RHS/FSA3 473,755 5,563 1.2 83.6 5.9 1.2 8.6 .6 .1 Refinance Conventional 2,527,430 36,826 1.5 54.0 18.5 9.3 9.9 4.9 3.3 FHA2 400,147 28,831 7.2 76.9 14.8 2.7 4.7 .6 .2 VA/RHS/FSA3 410,163 1,911 .5 87.2 10.2 .7 1.7 .2 .1 Manufacturedhomes Homepurchase Conventional 59,093 44,971 76.1 5.6 5.0 5.3 13.7 12.2 58.3 FHA2 17,572 9,871 56.2 53.9 25.5 8.7 2.1 1.0 8.9 VA/RHS/FSA3 4,912 234 4.8 73.5 13.2 6.4 6.0 0 0 Refinance Conventional 19,553 5,775 29.5 29.0 15.5 12.4 18.2 9.9 15.0 FHA2 8,560 1,897 22.2 69.0 20.5 7.0 3.1 .4 .2 VA/RHS/FSA3 5,031 129 2.6 70.5 26.4 1.6 1.6 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-purchaseloansandHELOCsbecameeffectiveonJanuary10,2014.Theserulesalso addednewprotectionsforhigh-costmortgages,suchasapre-loancounselingrequirementforborrowers. 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

ResidentialMortgageLendingin2016 21 similartermforfirstliens,and10percentagepointsforjuniorliens.Finally,underthenew rules,HOEPAcoverageisalsotriggeredif thepointsandfeesexceedcertainthresholds.43 WhileHOEPAloanswereneveralargefractionof themortgagemarket,theyhavebecome evenrarersincethehousingboom.In2005,lendersreportednearly36,000HOEPAloans (table9).In2016,thetotalwasonly1,903loans,despitetheextensionof HOEPAprotectionstohome-purchaseloans.44 Table9.DistributionofHOEPAloans,bycharacteristicofloan,2004–16 Percentexceptasnoted Loansbypurpose,lien status,propertytype, 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 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 1,903 Loanpurpose Homepurchase 0 0 0 0 0 0 0 0 0 0 31.4 39.5 58.7 Homeimprovement 37.7 26.1 42.4 45.4 30.5 31.1 32.6 32.3 31.5 30.1 17.9 14.9 14.9 Refinance 62.3 73.9 57.6 54.6 69.5 68.9 67.4 67.7 68.5 69.9 50.7 45.6 26.3 Lienstatus First 55.5 60.5 53.6 52.8 78.5 84.1 83.9 82.8 84.6 84.2 90.3 88.4 90.0 Junior 44.5 39.5 46.4 47.2 21.5 15.9 16.1 17.2 15.4 15.8 9.7 11.6 10.0 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 86.3 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 13.7 Loanamount Lessthan$50,000 72.4 48.4 72.1 74.3 66.7 72.5 76.5 77.8 75.6 71.3 52.9 36.9 35.0 Greaterthan$50,000 27.6 51.6 27.9 25.7 33.3 27.5 23.5 22.2 24.4 28.7 47.1 63.1 65.0 Note:Mortgagesforone-tofour-familyhomes.HOEPAloansaremortgageswithtermsthattriggeredtheadditionalprotectionsprovidedbythe HomeOwnershipandEquityProtectionAct. Lending Institutions In2016,therewere6,762reportinginstitutions(table10).Thetotalconsistedof 3,805 banksandthrifts(hereafter,banks),of which3,033weresmall,definedashavingassetsof lessthan$1billion;1,939creditunions;131mortgagecompaniesaffiliatedwithdepositories(banksandcreditunions);and887independentmortgagecompanies.45Banks collectivelyaccountedforabout38percentof allreportedmortgageoriginations;independentmortgagecompanies,about48percent;creditunions,about9percent;andaffiliates, theremainder.Overthepastfewyears,theshareof loansoriginatedbyindependentmortgagecompanieshasrisensharply.In2016,theselendersoriginated53percentof first-lien owner-occupanthome-purchaseloans,upfrom50percentin2015andjust35percentin 2010.Independentmortgagecompaniesalsooriginated52percentof first-lienowneroccupantrefinanceloans,anincreasefrom48percentin2015. 43 Underthenewrules,aloanisalsoconsideredhighcostifthepointsandfeesexceed5percentofthetotalloan amountforaloanamountequaltoormorethan$20,000and8percentofthetotalloanamountor$1,000for aloanlessthan$20,000,withtheloanamountsadjustedannuallyforinflationfromthebaseyearof2014. 44 ForananalysisofthepotentialeffectsofthenewHOEPAruleonlendingpatterns,seeBhutta,Popper,and Ringo,“The2014HomeMortgageDisclosureActData,”innote29. 45 DataonbankassetsweredrawnfromtheFederalDepositInsuranceCorporationReportsofConditionand Income.The$1billionthresholdisbasedonthecombinedassetsofallbankswithinagivenbankingorganization.DataavailableintheHMDAReporterPanel(availableathttps://www.ffiec.gov/hmda/hmdaflat.htm)can beusedtohelpidentifythevarioustypesofinstitutions.Affiliateinstitutionsincludeallmortgagecompanies knowntobewhollyorpartiallyownedbyadepository—thatis,institutionsforwhichthe“otherlendercode” intheReporterPanelequals1,2,or5.MostcreditunionsreporttotheNationalCreditUnionAdministration, exceptafewlargecreditunions,whichreporttotheConsumerFinancialProtectionBureau.

22 FederalReserveBulletin|November2017 Table10.Lendingactivity,bytypeofinstitution,2016 Percentexceptasnoted Typeofinstitution1 Institutionsandtypeofactivity Affiliated Independent Smallbank Largebank Creditunion mortgage mortgage All company company Numberofinstitutions 3,033 772 1,939 131 887 6,762 Applications(thousands) 894 4,059 1,190 567 7,216 13,926 Originations(thousands) 651 2,573 724 384 4,046 8,378 Purchases(thousands) 23 1,099 18 182 910 2,232 Numberofinstitutionswithfewerthan100loans 1,630 136 1,025 25 84 2,900 Originations(thousands) 66.9 5.9 40.5 .9 3.4 117.5 Numberofinstitutionswithfewerthan25loans 557 39 374 11 37 1,018 Originations(thousands) 7.0 .4 4.5 .1 .4 12.4 Home-purchaseloans(thousands)2 246 948 215 210 1,845 3,463 Conventional 71.9 77.3 86.7 58.0 49.1 61.3 Higher-pricedshareofconventionalloans 10.4 2.3 5.0 2.2 3.5 3.7 LMIborrower3 28.1 21.8 25.2 29.2 27.9 26.2 LMIneighborhood4 12.4 12.0 13.2 13.4 15.5 14.1 Non-Hispanicwhite5 79.1 68.4 69.2 69.6 62.9 66.4 Minorityborrower5 13.0 18.7 15.8 17.0 24.5 21.1 Sold6 75.2 71.5 48.2 97.0 97.2 85.5 Refinanceloans(thousands)2 179 1,007 277 130 1,744 3,338 Conventional 83.5 91.7 96.0 71.5 62.8 75.7 Higher-pricedshareofconventionalloans 6.2 1.2 2.6 .6 .8 1.5 LMIborrower3 17.1 17.3 21.2 15.6 16.0 16.9 LMIneighborhood4 9.5 10.5 12.8 11.5 13.1 12.0 Non-Hispanicwhite5 82.2 68.9 68.9 69.3 60.4 65.2 Minorityborrower5 8.5 16.9 15.1 14.9 19.6 17.6 Sold6 73.9 70.5 39.6 97.2 98.5 84.0 1 Smallbanksconsistofthosebankswithassets(includingtheassetsofallotherbanksinthesamebankingorganization)oflessthan $1billionattheendof2016.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). Manyinstitutionsreportlittleactivity.About43percentof institutions(2,900outof 6,762) reportedfewerthan100mortgageoriginationsin2016,accountingforabout118,000 originations,orlessthan2percentof alloriginations.About15percentof institutions originatedfewerthan25loans,intotalaccountingforaboutone-tenthof 1percentof all originations.46 46 UnderchangestotheHMDAregulations(RegulationC)finalizedin2015,banks,savingsassociations,and creditunionsthatoriginatedfewerthan25home-purchaseloans(includingrefinancingsofhome-purchase loans)ineither2015or2016willnotbesubjecttoHMDAreportingrequirementsin2017.Beginningin2018, lendinginstitutionswillnotbesubjecttoHMDAreportingrequirementsunlesstheyoriginatedatleast 25coveredclosed-endmortgageloansor100coveredopen-endlinesofcreditineachofthetwopreceding calendaryears.ForamoredetaileddescriptionoftheseandotherchangestoRegulationC,seeConsumer

ResidentialMortgageLendingin2016 23 Table10providesseveralotherstatisticstohelpcomparethelendingpatternsof different typesof institutionsin2016,andwediscusssomehighlightshere.First,depositoriestend tooriginateasignificantlyhigherfractionof conventionalloansthannondepositories. Second,smallbanksandcreditunionshaveaccountedforahighlydisproportionateshare of conventionalhigher-pricedloansinrecentyears. Third,independentmortgagecompaniesoriginatedahighershareof theirhome-purchase loanstominorityborrowersandinLMIneighborhoodsthanothertypesof lenders. Fourth,largebanksoriginateasignificantlylowershareof home-purchasemortgagesto LMIborrowerscomparedwithothertypesof lenders.Inasupplementaryanalysis,we showthatmuchof thedeclineinlendingbylargebankstoLMIborrowersinrecentyears canbeexplainedbytheirdecreasingshareof FHA-guaranteedmortgages,whicharemore likelytobeoriginatedtoLMIborrowers.47 Finally,theHMDAdataprovideinformationonwhetheroriginatedloansweresoldwithin thesamecalendaryearandthetypeof institutiontowhichtheyweresold,suchasoneof theGSEsorabankinginstitution(seeappendixAforafulllistof purchasertypes). Table10displaysthefractionof loanssoldwithinthecalendaryear,asopposedtobeing heldinportfolio.48Nondepositoriessoldvirtuallyallof theirloansin2016.Incontrast, creditunionssoldaboutone-half of thehome-purchaseloanstheyoriginatedandabout 40percentof therefinanceloanstheyoriginated.Thatsaid,portfoliolendingamong depositorieshasdeclinedsignificantlyoverthelongerterm.49 Table11liststhetop25reportinginstitutionsaccordingtotheirtotalnumberof originations,alongwiththesamesetof lendingcharacteristicsasthoselistedintable10.50Wells Fargoreportedthemostoriginations,withabout438,000.51Thenext-highesttotalwasfor QuickenLoans,followedbyJPMorganChase(JPMC)andBankof America.Overall,the top25lendersaccountedforabout34percentof allloanoriginationsin2016,upslightly from33percentin2015.Thesesamefirmsalsoprovidedadditionalfundingbypurchasing over1.2millionloansfromotherlendinginstitutionsduring2016(theseloanscouldhave beenoriginatedin2015orinearlieryears),equaltoabout43percentof thenumberof loanstheyoriginatedduringtheyear. Thetopinstitutionsdiffersignificantlyintheirlendingpatterns.Someof thisvariation reflectsdifferencesbetweentypesof institutions,whichwerediscussedearlier.Forexample, FinancialProtectionBureau(2015),“NewRuleSummary:HomeMortgageDisclosure(RegulationC),” October15,http://files.consumerfinance.gov/f/201510_cfpb_hmda-executive-summary.pdf. 47 SeeBhutta,Laufer,andRingo,“DeclineinLendingtoLower-IncomeBorrowers,”innote8. 48 BecauseloansalesarerecordedintheHMDAdataonlyiftheloansareoriginatedandsoldinthesame calendaryear,loansoriginatedtowardtheendoftheyeararelesslikelytobereportedassold.Forthatreason, statisticsonloansalesarecomputedusingonlyloansoriginatedduringthefirstthreequartersoftheyear. 49 Seetable13inBhutta,Popper,andRingo,“The2014HomeMortgageDisclosureActData,”innote29. 50 Someinstitutionsmaybepartofalargerorganization;however,thedataintable11areatthereporterlevel. Becauseaffiliateactivityhasdeclinedmarkedlysincethehousingboom,atop25listattheorganizationlevelis notlikelytobesignificantlydifferent.SunTrustisonenotableexception.Combinedmortgageoriginations acrossitsbankandmortgageaffiliatestotaledabout75,000. 51 Notably,loancountsandmarketsharesderivedfromtheHMDAdatacandiffermarkedlyfrommarketshares basedoninformationcompiledbyInsideMortgageFinance.ForHMDAreportingpurposes,institutions reportonlymortgageapplicationsinwhichtheymakethecreditdecision.UnderHMDA,ifanapplicationis approvedbyathirdparty(suchasacorrespondent)ratherthanthelendinginstitution,thenthatpartyreports theloanasitsownoriginationandthelendinginstitutionreportstheloanasapurchasedloan.Alternatively,if athirdpartyforwardsanapplicationtothelendinginstitutionforapproval,thenthelendinginstitution reportstheapplicationunderHMDA(andthethirdpartydoesnotreportanything).Incontrast,InsideMortgageFinanceconsidersloanstohavebeenoriginatedbytheacquiringinstitutionevenifathirdpartymakes thecreditdecision.Thus,manyofthelargerlendingorganizationsthatworkwithsizablenetworksofcorrespondentsreportconsiderablevolumesofpurchasedloansintheHMDAdata,whileInsideMortgageFinance considersmanyofthesepurchasedloanstobeoriginations.

24 FederalReserveBulletin|November2017 Table11.Top25respondentsintermsoftotaloriginations,2016 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 438 513 154 85.1 2.2 16.2 11.2 66.4 21.2 72.9 QuickenLoans,Inc. Ind.mort.co. 436 0 89 52.8 .5 29.1 14.8 53.2 13.6 99.9 JPMorganChaseBank,NA Largebank 185 154 56 96.7 .8 10.9 8.8 60.5 23.0 47.7 BankofAmerica,NA Largebank 159 30 47 91.1 .1 15.4 10.9 58.7 30.2 45.7 FreedomMortgageCorp. Ind.mort.co. 155 87 22 33.5 1.9 29.0 17.2 55.2 32.1 99.7 loanDepot.com Ind.mort.co. 133 0 36 58.6 3.4 18.6 14.4 52.5 28.8 98.7 U.S.Bank,NA Largebank 122 139 34 82.4 1.2 26.7 11.8 68.3 13.5 75.8 CaliberHomeLoans,Inc. Ind.mort.co. 108 49 65 52.6 4.2 30.4 16.2 60.2 25.7 99.8 FlagstarBank,FSB Largebank 103 18 43 53.3 2.8 24.7 13.4 65.6 25.8 98.3 UnitedShoreFinancial Ind.mort.co. 83 0 32 84.3 2.2 27.1 14.6 60.2 29.7 98.7 Services,LLC FairwayIndependent Ind.mort.co. 73 0 52 51.7 4.1 31.3 15.0 70.8 18.4 99.7 MortgageCorp. NationstarMortgage Ind.mort.co. 70 29 1 74.5 2.4 16.1 13.8 48.9 19.7 90.9 GuildMortgageCo. Ind.mort.co. 67 3 38 47.1 5.0 28.7 18.0 57.8 20.3 99.9 USAAFederalSavingsBank Largebank 67 0 42 31.1 .1 14.0 10.5 65.1 15.7 96.6 GuaranteedRate,Inc. Ind.mort.co. 65 0 32 73.8 1.8 21.2 14.1 71.2 17.4 100.0 PrimeLending,a Affiliated 64 1 44 57.9 4.5 28.8 14.1 67.3 17.8 99.9 PlainsCapitalCompany mort.co. NavyFederalCreditUnion Creditunion 64 0 29 42.3 26.5 19.8 12.6 55.8 23.2 56.4 PNCBank,NA Largebank 64 1 17 74.2 .0 30.5 13.8 61.1 13.5 83.1 FinanceofAmericaMortgage Ind.mort.co. 62 0 30 48.9 1.4 24.7 18.6 61.6 24.7 99.9 Citibank,NA Largebank 55 22 17 97.9 .0 16.0 16.6 37.3 38.7 51.3 MovementMortgage,LLC Ind.mort.co. 54 0 43 46.0 3.8 30.8 16.7 68.7 24.7 87.8 StearnsLending,Inc. Ind.mort.co. 54 40 27 47.6 2.5 26.7 17.5 59.4 28.8 100.0 SunTrustMortgage,Inc. Affiliated 51 59 16 87.1 .2 16.5 10.8 62.4 17.8 98.9 mort.co. DitechFinancial,LLC Ind.mort.co. 47 58 3 78.4 1.2 23.9 13.3 75.0 16.2 98.0 MortgageResearch Ind.mort.co. 46 0 36 1.6 .0 28.2 14.0 61.7 21.9 100.0 Center,LLC Top25institutions … 2,828 1,203 1,004 62.6 2.8 23.2 13.7 62.0 22.0 86.3 Allinstitutions … 8,378 2,232 3,463 61.3 3.7 26.2 14.1 66.4 21.1 85.5 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) table11showsthatlargebankslikeBankof Americahaveahighershareof conventional mortgagesandasmallershareof lendinginLMIneighborhoodscomparedwithindependentmortgagecompanieslikeQuickenLoans. Inadditiontothevariationacrosslendertypes,thereissubstantialvariationinlending patternswithinlendertypes.Forexample,regardinglargebanks,about97percentof JPMC’shome-purchaseloanswereconventional,comparedwithabout82percentforU.S. Bank.Thereisalsosignificantvariationamongthelargebanksinthefractionof loans sold,withWellsFargosellingalmost73percentof itshome-purchaseoriginations, comparedwithlessthan46percentforBankof America.

ResidentialMortgageLendingin2016 25 Table11.Top25respondentsintermsoftotaloriginations,2016–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 b M or i r n o o w ri e ty r6 Sold7 WellsFargoBank,NA Largebank 195 88.7 1.0 16.8 11.2 66.9 19.7 88.1 QuickenLoans,Inc. Ind.mort.co. 325 67.2 .1 23.3 13.0 46.6 10.8 100.0 JPMorganChaseBank,NA Largebank 102 97.2 .8 16.6 9.7 65.5 20.3 60.9 BankofAmerica,NA Largebank 88 99.5 .1 19.1 11.5 63.1 24.9 61.0 FreedomMortgageCorp. Ind.mort.co. 123 10.6 .0 4.1 15.1 59.6 24.4 99.8 loanDepot.com Ind.mort.co. 88 64.5 1.9 16.7 12.1 65.0 18.0 99.9 U.S.Bank,NA Largebank 62 95.9 3.1 20.9 12.3 65.7 12.8 43.8 CaliberHomeLoans,Inc. Ind.mort.co. 31 72.0 .9 15.4 11.9 63.9 20.1 99.9 FlagstarBank,FSB Largebank 47 76.5 .7 13.1 11.0 61.7 27.3 97.6 UnitedShoreFinancial Ind.mort.co. 42 96.1 .2 13.9 11.1 59.0 27.8 98.9 Services,LLC FairwayIndependentMortgage Ind.mort.co. 13 80.3 .6 16.3 10.9 76.1 11.8 99.9 Corp. NationstarMortgage Ind.mort.co. 59 72.2 1.2 9.8 17.2 59.9 25.6 99.9 GuildMortgageCo. Ind.mort.co. 17 68.8 .2 17.5 15.6 64.2 16.5 100.0 USAAFederalSavingsBank Largebank 20 33.9 .1 6.4 9.5 60.7 18.4 90.9 GuaranteedRate,Inc. Ind.mort.co. 25 93.4 .4 11.3 9.7 75.4 13.1 100.0 PrimeLending,aPlainsCapital Affiliated 12 89.1 1.3 17.1 10.7 73.6 14.0 99.9 Company mort.co. NavyFederalCreditUnion Creditunion 17 49.8 2.2 12.9 11.1 54.4 25.6 62.8 PNCBank,NA Largebank 30 90.6 .0 25.3 12.1 67.1 11.6 58.6 FinanceofAmericaMortgage Ind.mort.co. 26 81.3 .0 14.4 13.8 62.6 24.3 99.9 Citibank,NA Largebank 28 97.1 .0 19.9 12.2 56.3 20.0 82.1 MovementMortgage,LLC Ind.mort.co. 6 78.4 .5 19.6 12.5 75.8 17.5 77.3 StearnsLending,Inc. Ind.mort.co. 22 69.4 .2 14.4 13.6 62.6 24.4 100.0 SunTrustMortgage,Inc. Affiliated 29 89.5 .1 18.9 10.6 63.8 15.0 99.1 mort.co. DitechFinancial,LLC Ind.mort.co. 34 94.9 .0 36.4 16.8 65.0 19.8 99.8 MortgageResearchCenter,LLC Ind.mort.co. 10 1.6 .0 7.3 12.1 62.9 20.6 99.9 Top25institutions … 1,453 74.1 .6 17.3 12.4 60.1 18.5 88.9 Allinstitutions … 3,338 75.7 1.5 16.9 12.0 65.2 17.6 84.0 Finally,thecompositionof borrowersvariedacrossthetop25institutions,bothwithinand acrosslendertypes.Forsomeinstitutions,morethan30percentof home-purchase borrowerswereLMI,whileatotherinstitutions,fewerthan20percentof borrowerswere inthatcategory.52Althoughitisdifficulttoknowpreciselywhysuchvariationexists,these differencescouldreflectdifferentbusinessstrategiesordifferentcustomerdemandsinthe marketsandgeographicregionstheinstitutionsserve,amongotherpossibilities. 52 Notethatforlenderswithasignificantnonconventionalshareofrefinanceloans(forexample,FreedomMortgageCorporation),borrowerincomemaynotbereportedformostloans,thuspushingdowntheLMIshareof borrowers.

26 FederalReserveBulletin|November2017 Appendix A: Requirements of Regulation C RegulationCrequireslenderstoreportthefollowinginformationonhome-purchaseand home-improvementloansandonrefinancings:53 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 53 ChangestoRegulationCpassedin2015willaffecttheinformationthatcoveredinstitutionsarerequiredto reportbeginningwiththe2018data.Foradescriptionofthesechanges,seeConsumerFinancialProtection Bureau,“NewRuleSummary,”innote46ofthemaintext.

ResidentialMortgageLendingin2016 27 ‰ sex ‰ incomereliedonincreditdecision 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

29 Federal Reserve BULLETIN September 2017 Vol. 103, No. 3 Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances JesseBricker,LisaJ.Dettling,AliceHenriques,JoanneW.Hsu,LindsayJacobs,KevinB. Moore,SarahPack,JohnSabelhaus,JeffreyThompson,andRichardA.Windleof the Board’sDivisionof ResearchandStatisticspreparedthisarticlewithassistancefromPeter HansenandElizabethLlanes. TheFederalReserveBoard’striennialSurveyof ConsumerFinances(SCF)collectsinformationaboutfamilyincomes,networth,balancesheetcomponents,credituse,andother financialoutcomes.1The2016SCFrevealsbroad-basedgainsinincomeandnetworth sincetheprevioustimethesurveywasconducted,in2013.2 Duringthethreeyearsbetweenthebeginningof the2013and2016surveys,realgross domesticproductgrewatanannualrateof 2.2percent,thecivilianunemploymentratefell from7.5percentto5percent,andtheannualrateof changeintheconsumerpriceindex averaged0.8percent.3Thesechangesinaggregateeconomicperformanceledtobroadbasedincomegainsacrossmanydifferenttypesof families.Severalobservationsfromthe SCFaboutfamilyincomesstandout:4 ‰ Between2013and2016,medianfamilyincomegrew10percent,andmeanfamily incomegrew14percent(figure1). ‰ Familiesthroughouttheincomedistributionexperiencedgainsinaveragerealincomes between2013and2016,reversingthetrendfrom2010to2013,whenrealincomesfellor remainedstagnantforallbutthetopof theincomedistribution. ‰ Familiesatthetopof theincomedistributionsawlargergainsinincomebetween2013 and2016thanotherfamilies,consistentwithwideningincomeinequality. ‰ FamilieswithoutahighschooldiplomaandnonwhiteandHispanicfamiliesexperienced largerproportionalgainsinincomesthanotherfamiliesbetween2013and2016, althoughmore-educatedfamiliesandwhitenon-Hispanicfamiliescontinuetohave higherincomesthanotherfamilies. Theimprovementsineconomicactivityalongwithrisinghouseandcorporateequityprices combinedtosupportincreasesinaverageandmedianfamilynetworth(wealth)between 2013and2016afterbothmeasuresremainedstagnantbetween2010and2013.The nationalCoreLogicHomePriceIndexincreasedatanannualrateof 6.5percentbetween 1 Seebox1,“TheDataUsedinThisArticle,”forageneraldescriptionoftheSCFdata.Theappendixtothisarticle providesasummaryofkeytechnicalaspectsofthesurvey. 2 Foradetaileddiscussionofthe2013surveyaswellasreferencestoearliersurveys,seeJesseBricker,LisaJ.Dettling, AliceHenriques,JoanneW.Hsu,KevinB.Moore,JohnSabelhaus,JeffreyThompson,andRichardWindle(2014), “ChangesinU.S.FamilyFinancesfrom2010to2013:EvidencefromtheSurveyofConsumerFinances,”Federal ReserveBulletin,vol.100(September),https://www.federalreserve.gov/pubs/bulletin/2014/pdf/scf14.pdf. 3 ChangesinaggregatestatisticsreportedherearemeasuredfromMarchtoMarchorfirstquartertofirstquarterofthe respectivesurveyyears,justpriortothebeginningofthefieldperiodforeachsurvey. 4 Incomeismeasuredfortheyearbeforethesurvey.

30 FederalReserveBulletin|September2017 early2013andearly2016,greatly Figure1.Changeinmedianandmeanfamilyincomes, surpassingtherateof consumer 2010–16surveys priceinflation.Thevalueof corporateequityholdings,asmeasured Percent 15 Median bymajorstockpriceindexes,grew atarounda9percentannualrate 12 Mean betweenthetwosurveys,leadingto largeinflation-adjustedincreasesin 9 equityholdings.5Thesepricetrends contributedtothefollowing 6 changesinthedistributionof net 3 worthacrossthepopulation: ‰ Overall,between2013and2016, 0 mediannetworthgrew 16percent,andmeannetworth -3 grew26percent(figure2). -6 ‰ 2010-13 2013-16 Familiesatthetopof theincome andwealthdistributionsexperi- Note:Changesarebasedoninflation-adjusteddollars. encedlargegainsinmeanand Source:Hereandinsubsequentfiguresandtables,FederalReserveBoard, SurveyofConsumerFinances. mediannetworthafterexperiencingmodestgainsbetween 2010and2013. ‰ Familiesnearthebottomof theincomeandwealthdistributionexperiencedlargegains inmeanandmediannetworthafterexperiencinglargedeclinesbetween2010and2013. ‰ FamilieswithoutacollegeeducationandnonwhiteandHispanicfamiliesexperiencedlarger proportionalincreasesinnetworththanothertypesof families,althoughmore-educated familiesandwhitenon-Hispanicfamiliescontinuetohavehigherwealththanotherfamilies. ‰ Homeownershipratesdecreasedbetween2013and2016to63.7percent,continuingadecline fromtheirpeakof 69.1percentin2004.Forfamiliesthatownahome,meannethousing values(valueof ahomeminusoutstandingmortgages)rose. ‰ Retirementplanparticipationandretirementaccountassetvaluesrosebetween2013and 2016forfamiliesacrosstheincomedistribution,withthelargestproportionalincreases inparticipationoccurringamongfamiliesinthebottomhalf of theincomedistribution. ‰ Ownershipratesandthevalueof directandindirectholdingsof corporateequities increasedbetween2013and2016,withthelargestproportionalincreaseinownership amongfamiliesinthebottomandupper-middlepartsof theincomedistribution. ‰ Businessownershipincreasedfrom2013to2016to13.0percent,nearingits2010level. Thesegainswerebroadbased,occurringthroughouttheincomedistribution,withthe largestproportionalgainsoccurringamongthehighestearners. Theconsumerloaninterestrateenvironmentwasaboutthesamein2013and2016:Typical fixed-rate30-yearmortgageinterestratesroseslightlyfrom3.6percentto3.7percent,new vehicleloaninterestratesfellfrom4.7percentto4.2percent,andcreditcardinterestrates rosefrom11.9percentto12.3percent.Atthesametime,whiletheproportionof families withanydebtincreased,debtburdensof familiesmostlydecreased: 5 BetweenMarch2016andMarch2017,roughlythe2016SCFfieldperiod,thenationalCoreLogicHomePrice Indexgrewanadditional5.8percentandtheStandardandPoor’sS&P500stockpriceindexincreasedanadditional17percent.ThesepricechangesemphasizetheneedtoevaluateSCFfindingsintheappropriatetime frame.

ChangesinU.S.FamilyFinancesfrom2013to2016 31 ‰ Overall,debtobligationsfell Figure2.Changeinmedianandmeanfamilynetworth, between2013and2016:Median 2010–16surveys debtdeclined4percent,and meandebtdecreased2percent, Percent forfamilieswithdebt. 30 Median ‰ Forthemedianfamilywithdebt, 25 Mean debtburdensalsofellbetween 2013and2016:Leverageratios, 20 debt-to-incomeratios,and payment-to-incomeratiosallfell. 15 Thefractionof familieswith 10 payment-to-incomeratios greaterthan40percentdeclined 5 to7.0percent,thelowestlevel seensince2001. 0 ‰ Someof thedeclineindebtcan -5 beexplainedbythedeclineinthe 2010 –13 2013 –16 fractionof familieswithhomesecureddebt,whichfellfrom Note:Changesarebasedoninflation-adjusteddollars. 42.9percentto41.9percent,a declinethatiscomparabletothesizeof thedropinhomeownership. ‰ Between2013and2016,thefractionof familieswithcreditcarddebtincreased. Althoughmedianandmeanbalancesforfamilieswithcreditcarddebtbothfell 3percent,thefractionof familiesthatpayoff creditcardseverymonthdecreased. ‰ Althoughmanymeasuresof debtanddebtobligationsindicatethatdebthasfallen, educationdebtincreasedsubstantiallybetween2013and2016. ‰ In2016,20.8percentof familieswereconsideredcreditconstrained—thosewho reportedbeingdeniedcreditinthepastyear,aswellasthosewhodidnotapplyforcredit forfearof beingdeniedinthepastyear. Income Medianandmeaninflation-adjustedbefore-taxfamilyincomesincreasedbetween2013 and2016.6Overall,medianincomerose10percentbetween2013and2016,from $48,100to$52,700(table1).Meanincomeincreased14percent,from$89,900to$102,700. Therelativelylargerriseinmeanincomerelativetomedianincomeisconsistentwitha wideningincomedistributionduringthisperiod.7 Overtheprecedingthree-yearperiod,from2010to2013,medianincomefell5percent, whilemeanincomerose4percent,afterbothmedianandmeanincomefellsharply between2007and2010.Thepatternsseeninthe2007–10and2010–13periodsstoodin starkcontrasttoprecedingsurveys,andtherecentgrowthinmeanandmedianincomes 6 Tomeasureincome,theinterviewersrequestinformationonthefamily’scashincome,beforetaxes,forthefull calendaryearprecedingthesurvey.ThecomponentsofincomeintheSCFarewages,self-employmentand businessincome,taxableandtax-exemptinterest,dividends,realizedcapitalgains,foodstampsandother relatedsupportprogramsprovidedbygovernment,pensionsandwithdrawalsfromretirementaccounts,Social Security,alimonyandothersupportpayments,andmiscellaneoussourcesofincomeforallmembersofthe primaryeconomicunitinthehousehold. 7 Box3,“RecentTrendsintheDistributionofIncomeandWealth,”discussestrendsinincomeandwealth shares,asmeasuredbytheSCF,since1989.

32 FederalReserveBulletin|September2017 Table1.Before-taxmedianandmeanfamilyincome,byselectedcharacteristicsoffamilies, 2013and2016surveys Thousandsof2016dollars,exceptasnoted Medianincome Meanincome Familycharacteristic Percentchange Percentchange 2013 2016 2013 2016 2013–16 2013–16 Allfamilies 48.1 52.7 10 89.9 102.7 14 (.6) (.7) (1.6) (2.0) Percentileofusualincome Lessthan20 15.7 16.2 3 15.7 17.1 9 20–39.9 31.4 33.1 5 31.4 34.2 9 40–59.9 50.2 54.1 8 51.1 54.8 7 60–79.9 80.3 86.1 7 82.5 94.1 14 80–89.9 125.5 135.3 8 127.3 139.4 10 90–100 230.1 251.5 9 409.9 487.5 19 Ageofhead(years) Lessthan35 36.4 40.5 11 50.2 56.4 12 35–44 62.8 65.8 5 105.2 97.1 -8 45–54 62.8 69.5 11 107.1 131.4 23 55–64 56.8 61.0 7 113.5 141.3 24 65–74 47.4 50.1 6 101.9 106.6 5 75ormore 29.4 40.0 36 54.8 77.1 41 Educationofhead Nohighschooldiploma 23.1 26.5 15 31.0 38.8 25 Highschooldiploma 38.1 40.5 6 52.3 57.2 9 Somecollege 45.0 47.7 6 67.2 67.4 0 Collegedegree 90.2 92.1 2 165.1 189.7 15 Raceorethnicityofrespondent Whitenon-Hispanic 57.5 61.2 6 107.8 123.4 14 BlackorAfrican-American non-Hispanic 32.2 35.4 10 44.3 54.0 22 HispanicorLatino 33.5 38.5 15 45.4 57.3 26 Otherormultiplerace 42.5 50.6 19 72.7 86.9 20 Housingstatus Owner 65.3 71.2 9 115.9 134.0 16 Renterorother 28.7 31.6 10 41.3 47.8 16 Urbanicity Metropolitanstatisticalarea(MSA) 50.2 55.2 10 95.2 109.7 15 Non-MSA 37.8 38.7 2 54.3 54.1 0 Percentileofnetworth Lessthan25 24.5 25.3 3 32.4 34.2 6 25–49.9 39.8 42.0 6 48.3 50.9 5 50–74.9 57.5 64.8 13 67.9 74.9 10 75–89.9 90.2 90.8 1 103.1 113.4 10 90–100 189.1 215.9 14 372.4 456.9 23 Note:Incomeismeasuredfortheyearpriortothesurvey.Seetheappendixfordetailsonstandarderrors(showninparenthesesbelowthefirst rowofdataforthemeansandmedians).

ChangesinU.S.FamilyFinancesfrom2013to2016 33 Box 1. The Data Used in This Article DatafromtheSurveyofConsumerFinances(SCF)arethebasisoftheanalysispresented inthisarticle.TheSCFisatriennialinterviewsurveyofU.S.familiessponsoredbythe BoardofGovernorsoftheFederalReserveSystemwiththecooperationoftheU.S. DepartmentoftheTreasury.Since1992,datafortheSCFhavebeencollectedbyNORC,a researchorganizationattheUniversityofChicago.Themajorityofthedataarecollected betweenMayandDecemberofeachsurveyyear. Themajorityofstatisticsincludedinthisarticlearerelatedtocharacteristicsof“families.” Asusedhere,thistermismorecomparablewiththeU.S.CensusBureaudefinitionof “households”thanwithitsuseof“families,”whichexcludesthepossibilityofone-person families.Theappendixprovidesfulldefinitionsof“family”fortheSCFandtheassociated family“head,”alongwithhowdemographicandeconomicgroupsareconstructedfor thisarticle. Thesurveycollectsinformationonfamilies’totalincomebeforetaxesforthecalendaryear precedingthesurvey.Butthebulkofthedatacoverthestatusoffamiliesasofthetimeof theinterview,includingdetailedinformationontheirbalancesheetsanduseoffinancial servicesaswellasontheirpensions,laborforceparticipation,anddemographiccharacteristics.Mostofthecoresurveyquestionnairehaschangedinonlyminorwaysrelevantto thisarticlesince1989.For2016,thesurveyunderwentasubstantialredesignthat updatedandaddednewquestionstotheinterview(seebox2,“NewQuestionsfromthe 2016SurveyofConsumerFinancesRedesign”);however,everyeffortwasmadetoensure themaximumdegreeofcomparabilityofthedataovertime. Theneedtomeasurefinancialcharacteristicsimposesspecialrequirementsonthesample designforthesurvey.TheSCFisexpectedtoprovidereliableinformationbothonattributesthatarebroadlydistributedinthepopulation(suchashomeownership)andonthose thatarehighlyconcentratedinarelativelysmallpartofthepopulation(suchascloselyheld businesses).Toaddressthisrequirement,theSCFemploysasampledesignconsistingof twoparts:astandard,geographicallybasedrandomsampleandaspecialoversampleof relativelywealthyfamilies.Weightsareusedtocombineinformationfromthetwosamples tomakeestimatesforthefullpopulation.Inthe2016survey,6,254familieswereinterviewed,andinthe2013survey,6,026wereinterviewed. Thisarticledrawsprincipallyuponthefinaldatafromthe2016and2013surveys.To providealargercontext,someinformationisalsoincludedfromthefinalversionsofearlier surveys.1Differencesbetweenestimatesfromearliersurveysasreportedhereandas reportedinearlierFederalReserveBulletinarticlesareattributabletoadditionalstatistical processing,correctionofminordataerrors,revisionstothesurveyweights,conceptual changesinthedefinitionsofvariablesusedinthearticles,andadjustmentsforinflation. Inthisarticle,alldollaramountsfromtheSCFareadjustedto2016dollarsusingthe “currentmethods”versionoftheconsumerpriceindexforallurbanconsumers (CPI-U-RS).Theappendixprovidesadditionaldetailontheadjustments. Theprincipaldetailedtables(tables1through4)describingincome,networth,andasset anddebtholdingsfocusonthepercentageofvariousgroupsthathavesuchitemsand/or themedianandmeanholdingforthosewhohavethem.2Generally,whenonedealswith datathatexhibitverylargevaluesforarelativelysmallpartofthepopulation—asisthe caseformanyoftheitemsconsideredinthisarticle—estimatesofthemedianareoften statisticallylesssensitivetosuchoutliersthanareestimatesofthemean.Atthesame time,meansaregenerallymoreusefulforcomparingacrosspopulationsubgroups becauseeverymemberofthegroupcontributesequallytotheoverallaverage. Oneliabilityofusingthemedianasadescriptivedeviceisthatmediansarenotadditive— thatis,thesumofthemediansoftwoitemsforthesamepopulationisnotgenerally equaltothemedianofthesum(forexample,medianassetslessmedianliabilitiesdoesnot equalmediannetworth).Incontrast,meansforacommonpopulationareadditive.Inthe contextofthisarticle,whereacomparablemedianandmeanaregiven,thegainorlossof themeanrelativetothemedianmayusuallybetakenasindicativeoftherelativechangeat thetopofthedistribution;forexample,whenthemeandecreasesmorerapidlythanthe continuedonnextpage

34 FederalReserveBulletin|September2017 Box 1. The Data Used in This Article—continued median,itistypicallytakentoindicatethatthevaluesintheupperpartofthedistribution fellmorethanthoseinthelowerpartofthedistribution. Toprovideameasureofthestatisticalsignificanceofthedevelopmentsdiscussedinthis article,standarderrorscausedbysamplingandimputationformissingdataaregivenfor selectedestimates.Spacelimitspreventtheinclusionofthestandarderrorsforallestimates.Althoughthestatisticalsignificanceoftheresultsisnotdirectlyaddressed,the articlehighlightsfindingsthataresignificantorareinterestinginabroadercontext. 1 AdditionalinformationaboutthesurveyisavailableontheBoard’swebsiteathttps://www.federalreserve.gov/ econresdata/scf/scfindex.htm. 2 Themedianofadistributionisdefinedasthevalueatwhichequalpartsofthepopulationconsideredhavevalues thatarelargerorsmaller. between2013and2016representsareturntoageneralpatternof substantialincreasesin boththemedianandthemeanbetweensurveysdatingbacktotheearly1990s.8 Somepredictablepatternsinincomelevelsacrossdemographicgroupsareobservedinthe 2016SCF,andthosepatternsarelargelyconsistentwithpriorsurveys.9Acrossagegroups, medianandmeanincomesshowalife-cyclepattern,risingtoapeakinthemiddleage groupsandthendecliningforgroupsthatareolderandincreasinglymorelikelytobe retired.Incomealsoshowsastrongpositiveassociationwitheducation;inparticular, incomesforfamiliesheadedbyapersonwhohasacollegedegreetendtobesubstantially higherthanforthosewithlowerlevelsof schooling.Incomesof whitenon-Hispanicfamiliesaresubstantiallyhigherthanthoseof allthreenonwhiteandHispanicgroups:blackor African-Americannon-Hispanic,HispanicorLatino,andotherormultipleracefamilies.10Incomeisalsohigherforhomeownersandforfamilieslivinginurbanareasthanfor otherfamilies,andincomeissystematicallyhigherforgroupswithgreaternetworth.11 Changes in Income by Family Characteristics Medianandmeanincomesdisplayedbroad-basedgainsbetween2013and2016across differenttypesof families,whethergroupedbyeconomiccharacteristicssuchasincome, wealth,urbanicity,andhomeownerstatus,orbypurelydemographicvariablessuchasage, education,orraceandethnicity. Foragivenfamily,incomeataparticulartimemaynotbeindicativeof its“usual”income. Unemployment,abonus,acapitallossorgain,orotherfactorsmaycauseincometo deviatetemporarilyfromtheusualamount.12Acrossthedistributionof familiesgrouped byusualincome,allquintilessawincreasesinmedianincomebetween2013and2016,with 8 Between1992and2007,meanandmedianincomegenerallyincreasedbetweensurveywaves.Meanincome increased,onaverage,8.0percentbetweensurveywaves,andmedianincomeincreased,onaverage,4.2percent betweensurveywaves.Theperiodfrom2001to2004istheonlyexception,whenmeanincomefellmodestly. 9 Tabulateddatafromthesurveybeyondthatpresentedinthisarticleareavailableathttps://www.federalreserve .gov/econres/scfindex.htm.Thisinformationincludessomealternativeversionsofthetablesinthisarticle, includingtablesthatmatchthestructureusedinearlierversionsofthispublication.Forthosewhowishto makefurtheralternativecalculations,thiswebsiteprovidesavarietyofdatafilesaswellasaccesstoonline tabulationsoftwarethatmaybeusedtocreatecustomizedtablesbasedonthevariablesanalyzedinthisarticle. 10 TheappendixtothisarticleprovidesinformationonracialandethnicidentificationintheSCF. 11 Inthisarticle,afamilyisconsideredahomeownerifatleastonepersoninthefamilyownsatleastsomepartof thefamily’sprimaryresidence. 12 Box4,“UsualversusActualIncome,”discussesincomevariabilityandtheimplicationsofcategorizingfamilies bythetwoincomemeasures.

ChangesinU.S.FamilyFinancesfrom2013to2016 35 Box 2. New Questions from the 2016 Survey of Consumer Finances Redesign Inordertostayup-to-datewithnewdevelopmentsinfamilyfinances,theSurveyof ConsumerFinances(SCF)underwentasubstantialredesignin2016.Despitethese changes,thecorequestionnaireremainscomparablewithearliersurveys.Thegoalsofthe redesignweretoimprovethecollectionofdataonnewdevelopmentskeytofamily finances,improvecoordinationandintegrationwithotherhouseholdsurveysandadministrativedatasources,reducerespondentburden,andgenerallyimproveuponthequality ofdatacollected.Asapartoftheredesign,thequestionnaireunderwentchangesin severalareas,includingstreamliningofexistingmodulesandtheintroductionofnewquestions.1Thisdiscussionbrieflyhighlightsthreenewtopicsthatwereaddedtothesurveyin 2016:financialliteracy,families’responsetohypotheticalincomeshortfalls,andparental educationalattainment. FinancialLiteracy Financialliteracyandfinancialknowledgeprovidecontextforunderstandingafamily’s responsestotheirinterviewquestions,financialdecisions,andoveralleconomiccircumstances.The2016surveyincludedfournewquestionsdesignedtocapturetherespondent’sleveloffinancialliteracyandself-assessedfinancialknowledge.2 Thefirstquestionasksrespondentstoratetheirownlevelofknowledgeaboutpersonal financeona0to10scale,wherearesponseof0indicatesthattherespondentis“not knowledgeableatall”andaresponseof10indicatesthattherespondentis“veryknowledgeable.”Thisquestionisdesignedtoelicitrespondents’subjectiveopinionsontheir ownknowledge,basedontheirownconceptualizationofwhatfinancialknowledgeentails. FigureA.Objectivefinancialliteracybyself-ratedfinancialknowledge,2016survey Number of correct responses (mean) 2.5 2.0 1.5 1.0 0.5 0.0 Not at all 1 2 3 4 5 6 7 8 9 Very knowledgeable knowledgeable Self-rated financial knowledge Threeadditionalquestionsweredesignedtomeasureconceptsfundamentaltomanyfinancial decisions,includingsaving,borrowing,andinvesting.Onequestionjointlymeasuresa respondent’sknowledgeoftheconceptofstocksandofstockmutualfunds,alongwithrisk diversification.Thesecondquestionmeasuresnumeracyinthecontextofinterestrate compounding.Athirdquestionmeasuresunderstandingofinflation,alsointhecontextof saving.3Thequestionsemployamultiple-choiceformatthatisintendedtofocusonthebasic conceptswithoutrequiringrespondentstoperformprecisecalculations.Respondentsalso havetheoptionofrespondingthatthey“don’tknow”orskippinganyquestionwithoutexplacontinuedonnextpage

36 FederalReserveBulletin|September2017 Box 2. New Questions from the 2016 Survey of Consumer Finances Redesign—continued nation.Overall,43percentofrespondentsprovidedcorrectanswerstoallthreequestions, 36percenthadtwocorrectanswers,and16percenthadonecorrectanswer. Respondentswhoratetheirownknowledgeofpersonalfinancemorehighlytendto providemorecorrectanswerstoobjectivefinancialliteracyquestions(figureA).For respondentswhoratedtheirknowledgeofpersonalfinanceas1outof10,theaverage numberofcorrectanswerswasjustover1.5outof3.Forthosewithaself-ratingof9out of10,theaveragenumberofcorrectanswerswasabout2.4.However,respondentswho gavethemselvesthemaximumself-ratingof10providedfewercorrectanswersthanthose withaself-ratingof9,andthosewithaself-ratingof0gavemorecorrectanswers,on average,thanthosewithaself-ratingof1. ResponsestoHypotheticalIncomeShortfalls Understandinghowfamiliesrespondtoincomeshortfallsisimportantforunderstanding borrowingandspendingbehaviorinthepresenceoffinancialconstraints.Since1992,the SCFhasincludedquestionsidentifyingfamiliesthatspentmorethantheyearnedin incomeoverthepreviouscalendaryearand,forthosefamilies,theprimarywaythatthey resolvedtheshortfall.Anewquestionwasaddedtothe2016surveythataskedrespondentswhoseincomewasequaltoorgreaterthantheirspendinghowtheywouldresolvea hypotheticalshortfall. In2016,15percentoffamiliesreportspendingmorethantheyreceivedinincome.The mostcommonapproachesforresolvingincomeshortfallsforfamiliesthatexperienceda shortfallwerespendingoutofsavingsorinvestments(44percent)andborrowing, includingtheuseofcreditcards(43percent)(figureB).4 FigureB.Mainapproachestoresolvingincomeshortfallbywhetherafamilyactually experiencedanincomeshortfall,2016survey Percent 60 Actual shortfall of income Hypothetical shortfall of income 50 40 30 20 10 0 Spend out Borrow Postpone Cut back of savings Approach to resolving income shortfall Thenewquestiononthe2016surveyasks,“Iftomorrowyouexperiencedafinancialemergencythatleftyouunabletopayallofyourbills,howwouldyoudealwithit?”Approaches todealingwithshortfallsarebroadlysimilaracrossfamilieswhoactuallydidspendmore continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2013to2016 37 Box 2. New Questions from the 2016 Survey of Consumer Finances Redesign—continued thantheirincomeandthosewhodidnot.Themostcommonproposedwayofdealingwith ahypotheticalshortfallistospendoutofsavingsandinvestments,chosenby58percent ofrespondents,followedbyborrowing,whichwaschosenby21percentofrespondents. ParentalEducationalAttainment Thelevelofeducationobtainedbyone’sparentsisonemeasureofsocioeconomicstatus thatcanbeusedtoinvestigateeconomicmobilityacrossgenerationsandtheintergenerationalpersistenceofeconomicresources.In2016,theSCFbeganaskingfamilies aboutthehighestlevelofeducationobtainedbytheirparents. Higherlevelsofparentaleducationareassociatedwithhigherincomesandwealth-holding (figureC).Thetypicalfamilyinwhichatleastoneoftherespondent’sparentshasafouryearcollegedegreehadalittlemorethandoubletheincomeandwealthoffamiliesin whichneitheroftherespondent’sparentshadahighschooldiploma.However,therelationshipbetweenparentaleducationandincomeandwealthisnotasstrongastherelationshipbetweenarespondent’sowneducationandincomeandwealth.In2016,the typicalfamilyheadedbyrespondentswithacollegedegreehadover3timesmoreincome andalmost13timesmorewealththanfamiliesheadedbyrespondentswithoutahigh schooldiploma(tables1and2ofthemaintext). FigureC.Medianincomeandnetworthbyparentaleducationalattainment,2016survey Thousands of 2016 dollars 150 No high school diploma High school diploma or some college 120 College degree 90 60 30 0 Income Net worth 1 Acompletelistofallofthechangestothe2016SCF,includingthewordingofallnewandrevisedquestions,can befoundathttps://www.federalreserve.gov/econres/scfindex.htm. 2 Thesequestionsareaskedonlyoftherespondentofthesurvey(whoisnotnecessarilythehouseholdhead)and assuchreflectanindividualrespondent’sfinancialliteracy,ratherthanthefamilyasawhole. 3 Thethreequestions,designedbyAnnamariaLusardiandOliviaMitchell,havebeenfieldedinidenticalorsimilar formonsurveysbothintheUnitedStates,includingtheHealthandRetirementStudy,theNationalLongitudinal StudyofYouth,andtheNationalFinancialCapabilitiesStudy,andinternationally,includingtheBankofItaly’s SurveyonHouseholdIncomeandWealthandtheDutchCentralBank’sHouseholdSurvey.Formoreinformation aboutthesequestions,seeAnnamariaLusardiandOliviaS.Mitchell(2011),“FinancialLiteracyandRetirement PlanningintheUnitedStates,”JournalofPensionEconomicsandFinance,vol.10(October),pp.509–25. 4 Spentoutofsavingsincludesspentoutofsavings/investmentsandsoldassets.Familiescouldalsorespondthat theydidoneofthefollowing:gothelpfromothers,gotadditionalincome,bankruptcy,renegotiatedpayments,and nothing.BecausetheseoptionsarenotincludedinfigureB,thecategorieslisteddonotsumto100.

38 FederalReserveBulletin|September2017 Box 3. Recent Trends in the Distribution of Income and Wealth Thedistributionofincomeandwealthhasgrownincreasinglyunequalinrecentyears.The SurveyofConsumerFinances(SCF)hasplayedacrucialroleinourunderstandingofthese trendsbecausethesurveycollectsdataonnetworthinadditiontoincome,anditpays particularattentiontosamplingaffluentfamilies.1 Datafromthe2016SCFindicatethatthesharesofincomeandwealthheldbyaffluent familieshavereachedhistoricallyhighlevelssincethemodernSCFbeganin1989.The shareofincomereceivedbythetop1percentoffamilieswas20.3percentin2013and roseto23.8percentin2016(figureA).Thetop1percentoffamiliesnowreceivesnearlyas largeashareoftotalincomeasthenexthighest9percentoffamiliescombined(percentiles91through99),whoreceived26.5percentofallincome.Thissharehasremained fairlystableoverthepastquarterofacentury.Correspondingly,therisingincomeshareof thetop1percentmirrorsthedecliningincomeshareofthebottom90percentofthedistribution,whichfellto49.7percentin2016. FigureA.Incomesharesbyincomepercentile,1989–2016surveys Percent 70 Top 1 percent Next 9 percent Bottom 90 percent 60 50 40 30 20 10 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Thewealthshareofthetop1percentclimbedfrom36.3percentin2013to38.6percentin 2016,slightlysurpassingthewealthshareofthenexthighest9percentoffamilies combined(figureB).Afterrisingoverthesecondhalfofthe1990sandmostofthe2000s, thewealthshareofthenexthighest9percentoffamilieshasbeenfallingsince2010, reaching38.5percentin2016.Similartothesituationwithincome,thewealthshareofthe bottom90percentoffamilieshasbeenfallingovermostofthepast25years,dropping from33.2percentin1989to22.8percentin2016.AlthoughtheSCFmeasureofwealthis fairlycomprehensive,someassetsthatmaybewidelyheld,suchasdefined-benefit continuedonnextpage familiesinhigherquintilesgenerallyseeinglargergains.13Medianincomeincreased 9percentforthetopincomedecile,between5and8percentforthemiddlethreequintiles, and3percentforthebottomincomequintile.Meanincomealsoincreasedforallquintiles, withgainsbetween7and14percentforthebottomfourquintiles.Thetopdecile’smean incomerose19percent.Thesepatternsareconsistentwithawideningof theincomedistributionbetween2013and2016. 13 Eachquintilerepresents20percentofthepopulation.Seetheappendixforinformationaboutdistribution groupcutoffs.

ChangesinU.S.FamilyFinancesfrom2013to2016 39 Box 3. Recent Trends in the Distribution of Income and Wealth— continued pensionandSocialSecuritywealth,arenotincludedinnetworthdefinitionsbecauseof themanyassumptionsrequiredtoestimatetheirvalues.2 FigureB.Wealthsharesbywealthpercentile,1989–2016surveys Percent 45 40 35 30 25 20 15 Top 1 percent Next 9 percent 10 Bottom 90 percent 5 0 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 1 SeethesamplingtechniquessectionoftheappendixforfurtherdiscussionoftheSCF’sabilitytocaptureaffluent families.AmoredetaileddiscussioncanbefoundinJesseBricker,AliceHenriques,JacobKrimmel,andJohn Sabelhaus(2016),“MeasuringIncomeandWealthattheTopUsingAdministrativeandSurveyData,”Brookings PapersonEconomicActivity,Spring,pp.261–321,https://www.brookings.edu/wp-content/uploads/2016/03/ brickertextspring16bpea.pdf. 2 Forexamplesofwhatthedistributionofwealthwouldlooklikewiththeseassetsincluded,seeSebastian Devlin-Foltz,AliceHenriques,andJohnSabelhaus(2016),“IstheU.S.RetirementSystemContributingtoRising WealthInequality?”RussellSageFoundationJournaloftheSocialSciences,vol.2(October),pp.59–85,and SebastianDevlin-Foltz,AliceHenriques,andJohnSabelhaus(2016),“TheRoleofSocialSecurityinOverall RetirementResources:ADistributionalPerspective,”FEDSNotes(Washington:BoardofGovernorsoftheFederal ReserveSystem,July29),https://www.federalreserve.gov/econresdata/notes/feds-notes/2016/role-of-socialsecurity-in-overall-retirement-resources-a-distributional-perspective-20160729.html. Allagegroupsexperiencedincreasesinmedianincomebetween2013and2016.Mean incomesalsoincreasedfornearlyallagegroups,withtheexceptionof familiesheadedby thoseaged35to44.Bothmedianandmeanincomesincreasedmostfortheoldestfamilies, whosemedianandmeanincomesrose36percentand41percent,respectively. Between2013and2016,bothmedianandmeanincomegrewforallfamiliesgroupedby educationalattainment.Thehighestgrowthratesoccurredamongfamilieswithoutahigh schooldiploma,whosemedianandmeanincomegrew15percentand25percent,respectively.Medianincomeamongfamilieswithacollegedegreegrewonlyamodest2percent, whilemeanincomeamongthosefamiliesgrew15percent.Thesepatternsdifferfromthe 2010–13period,whenmeanandmedianincomesfellforfamilieswithoutacollegedegree androseforfamilieswithacollegedegree.14However,despiteexperiencingrelativelylarge 14 Between2010and2013,medianandmeanincomesfell9percentand17percent,respectively,forfamilies withoutahighschooldiploma,6percentand2percent,respectively,forfamilieswithahighschooldiploma, and11percentand3percent,respectively,forfamilieswithsomecollege.Medianandmeanincomerose 1percentand5percent,respectively,forfamilieswithacollegedegreebetween2010and2013.

40 FederalReserveBulletin|September2017 proportionalgains,disparitiesinincomebyeducationpersist:Medianincomesforcollegeeducatedfamiliesaremorethantwicethoseof familieswithoutahighschooldiploma. Overthe2013–16period,meanandmedianincomesgrewforallfamiliesgroupedbyrace orethnicity.15LargeincomegainsoccurredamongnonwhiteandHispanicgroups:black orAfrican-Americannon-HispanicandHispanicorLatinofamilies’medianincomesgrew 10percentand15percent,respectively,andmeanincomegrew22percentand26percent, respectively.Largegains(19to20percent)alsooccurredforfamiliesidentifiedasotheror multipleraces.Whitenon-Hispanicfamiliesexperiencedsmallergainsinmedianandmean income,of 6percentand14percent,respectively.Thesepatternsdifferfromthe2010–13 period,whenmeanandmedianincomesfellforallraceorethnicitygroupsexceptwhite non-Hispanicfamilies.16DespitenonwhiteandHispanicfamiliesexperiencingrelatively largerproportionalgains,disparitiesbetweenwhitenon-Hispanicfamiliesandnonwhite andHispanicfamiliespersist:Medianincomesforwhitenon-Hispanicfamiliesarebetween 20and75percenthigherthanforfamiliesinallnonwhiteandHispanicgroups. Bothhomeownersandrentersandothernon-homeownersexperiencedincomegrowth between2013and2016.Medianincomesincreasedbetween9and10percent,respectively. Meanincomesincreased16percentduringthisperiodto$134,000forhomeownersand $47,800forrentersandothernon-owners. Theincomegapbetweenfamilieslivinginmetropolitanstatisticalareas(MSAs)and non-MSAswidenedbetween2013and2016.FamilieslivinginMSAsexperiencedgainsin medianandmeanincome(10percentand15percent,respectively),whilefamiliesinother areasexperiencedamodest2percentincreaseinmedianincomeandalmostnochangein meanincome.In2016,meanincomesforfamiliesinMSAsweremorethandoublethoseof familiesinnon-MSAs. Groupingfamiliesbypercentileof networth(measuredconcurrentlyintheSCF),both meanandmedianincomegrewacrossthedistribution.Forfamiliesinthelowestquartileof networth,medianincomegrew3percentandmeanincomegrew6percent,to$25,300and $34,200,respectively.Familiesinthesecondandthirdquartilesalsosawgrowthinmean andmedianincomes,risingbetween5and13percent.In2016,medianincomereached $42,000forthoseinthesecondquartileof networthand$64,800forthoseinthethird quartile.Thetopdecileof networthexperienceda14percentincreaseinmedianincome anda23percentincreaseinmeanincome. Net Worth Medianandmeaninflation-adjustednetworth—thedifferencebetweenfamilies’gross assetsandtheirliabilities—rosebetween2013and2016(table2).Overall,themediannet worthof allfamiliesrose16percentto$97,300,andmeannetworthrose26percentto $692,100.ThesepatternsdifferedfromthepasttwointervalsrecordedbytheSCF,asthere waslittlechangeinmedianormeannetworthinthe2010–13periodanddeclinesinthe 2007–10period.17Thesepatternsinnetworthoverthepastseveralsurveyswerelargely drivenbytheGreatRecessionandsubsequentrecoveryinhouseandotherassetprices. 15 AnupcomingFEDSNotediscussesdifferencesinincomeandwealth-holdingbyraceandethnicityinmore detailandcanbefoundathttps://www.federalreserve.gov/econres/notes/feds-notes/default.htm. 16 Seetheappendixformoreontheracial/ethniccategoriesusedinthisarticle.Inversionsofthisarticlefor earlieryearsoftheSCF,nonwhiteandHispanicfamilieswerenotseparatelytabulatedbyrace/ethnicity. 17 Betweenthe2010and2013surveys,mediannetworthdecreased2percentandmeannetworthwasunchanged. Between2007and2010,mediannetworthdeclined40percentandmeannetworthdeclined15percent.

ChangesinU.S.FamilyFinancesfrom2013to2016 41 Table2.Familymedianandmeannetworth,byselectedcharacteristicsoffamilies, 2013and2016surveys Thousandsof2016dollars,exceptasnoted Mediannetworth Meannetworth Familycharacteristic Percentchange Percentchange 2013 2016 2013 2016 2013–16 2013–16 Allfamilies 83.7 97.3 16 551.3 692.1 26 (3.0) (2.8) (10.6) (12.9) Percentileofusualincome Lessthan20 6.6 7.0 6 66.6 77.5 16 20–39.9 28.8 30.0 4 116.7 120.5 3 40–59.9 57.1 88.6 55 169.9 227.8 34 60–79.9 166.3 170.6 3 361.8 370.7 2 80–89.9 296.9 396.5 34 651.1 800.5 23 90–100 1,161.0 1,629.0 40 3,430.7 4,526.6 32 Ageofhead(years) Lessthan35 10.7 11.1 4 77.8 76.2 -2 35–44 48.2 59.8 24 358.0 288.7 -19 45–54 108.6 124.2 14 546.6 727.5 33 55–64 171.1 187.3 9 823.3 1,167.4 42 65–74 239.3 224.1 -6 1,089.8 1,066.0 -2 75ormore 200.8 264.8 32 665.3 1,067.0 60 Educationofhead Nohighschooldiploma 17.7 22.8 29 112.2 157.2 40 Highschooldiploma 54.1 67.1 24 205.8 249.6 21 Somecollege 52.3 66.1 26 328.3 340.6 4 Collegedegree 285.6 292.1 2 1,219.7 1,511.1 24 Raceorethnicityofrespondent Whitenon-Hispanic 146.4 171.0 17 727.8 933.7 28 BlackorAfrican-American non-Hispanic 13.6 17.6 29 102.1 138.2 35 HispanicorLatino 14.2 20.7 46 111.0 191.2 72 Otherormultiplerace 42.5 64.8 52 383.6 457.8 19 Housingstatus Owner 201.5 231.4 15 807.3 1,034.2 28 Renterorother 5.5 5.2 -5 72.5 91.1 26 Urbanicity Metropolitanstatisticalarea(MSA) 87.3 99.0 13 593.2 751.3 27 Non-MSA 70.1 87.9 25 269.4 276.3 3 Percentileofnetworth Lessthan25 † .2 … –13.8 –12.1 12 25–49.9 32.3 39.8 23 37.0 44.7 21 50–74.9 173.3 192.0 11 183.2 204.1 11 75–89.9 521.6 605.0 16 563.2 659.3 17 90–100 1,930.0 2,387.5 24 4,150.0 5,336.0 29 Note:Networthisthedifferencebetweenfamilies'grossassetsandtheirliabilities.Seeappendixfordefinitionsofassetandliabilitycategories usedintheSCF,aswellasdetailsonstandarderrors(showninparenthesesbelowthefirstrowofdataforthemeansandmedians). †Lessthan0.05($50). ...Notapplicable.

42 FederalReserveBulletin|September2017 Declinesinhousepricesinparticularhadadisproportionateeffectonfamiliesinthe middleof thenetworthdistribution,whosewealthportfolioisdominatedbyhousing. Divergenttrendsinmedianandmeannetworthoverthepastfewsurveyssuggestsubstantialheterogeneityinwealthchangesacrossfamilies.18 Themedianandmeanvaluesof wealthrisesystematicallywithusualincome,arelationship reflectingahigherlevelof savingamonghigher-incomefamilies,andthefeedbackeffectof higherincomesfromtheaccumulatedassets.19Medianandmeanfamilynetworthgenerallyincreasewithage,withaplateauormodestdecreasesfortheoldestagegroupsrelative tothenear-retirementagegroups,apatternreflectinglife-cyclesavingbehavior.Wealth showsstrongdifferentialsacrossgroupsdefinedintermsof education,racialorethnic background,urbanicity,andhousingstatus;thesedifferentialsgenerallymirrorthosefor income,butthewealthdifferencesarelarger. Changes in Net Worth by Family Characteristics Familieswithhigherlevelsof usualincomereportedgreaterlevelsof networth,but changesinnetworthvariedsubstantiallyacrosstheusualincomedistribution.Mediannet worthrosebetween2013and2016formostusualincomegroups,risingbetween3and 55percent.Thoseinthelowestusualincomequintilesawamodestgaininmediannet worth(6percent,from$6,600to$7,000)butalargerproportionalincreaseinmeannet worth(16percent,from$66,600to$77,500).Familiesinthethirdquintileof usualincome sawalargeincreaseinbothmedianandmeannetworth(55percentand34percent,respectively).Familiesinthefourthquintileexperiencedonlymodestgainsbetween2013and 2016.However,thisquintilewastheonlyonetoexperiencegainsbetween2010and2013.20 Thoseatthetopof theusualincomedistributionexperiencedlargeincreasesinmedianand meannetworth,whichrose40percentand32percent,respectively. Nearlyallagegroupsexperiencedincreasesinmediannetworthbetween2013and2016, withtheexceptionof familiesbetweenages65and74,whoexperiencedamodestdecline. Meannetworthgrewforabouthalf of theagegroups.Familiesunder45andfamilies betweenages65and74experienceddeclinesinmeannetworthbetween2013and2016. Thelargestgainsinbothmedianandmeannetworthoccurredamongtheoldestfamilies, whoexperienceda32percentincreaseinmediannetworthanda60percentincreasein meannetworth.Thesepatternsbyagegroupweregenerallytheoppositeof the2010–13 period,whenmeanandmediannetworthincreasedforfamiliesunderage45,decreasedfor thosebetweenages45and64,increasedforthosebetweenages65and74,anddecreased fortheoldestgroup. From2013to2016,medianandmeannetworthincreasedforalltypesof households groupedbyeducationalattainment.Thelargestgainsinmediannetworthoccurredamong familieswithoutacollegedegree,whosemediannetworthincreasedbetween24and 29percent.Formeannetworth,thelargestgainsoccurredamongfamilieswithoutahigh schooldiploma,whoexperienceda40percentincreaseinmeannetworth.Incontrast, familieswithacollegedegreesawamodest2percentgaininmediannetworthanda 24percentgaininmeannetworth.Althoughfamilieswithoutacollegedegreeexperienced stronggainsinmedianandmeannetworthovertherecentperiod,thedifferencesinthe levelof networthforfamilieswithandwithoutacollegedegreewaslittlechanged. 18 Box3,“RecentTrendsintheDistributionofIncomeandWealth,”discussessharesofincomeandwealth,as measuredbytheSCF,since1989. 19 Seebox5,“SavingBehavior,”foradiscussionofpatternsofsavingbyusualincome. 20 Mediannetworthincreased16percentandmeannetworthincreased6percentforthefourthquintilebetween 2010and2013andeitherfellorwasunchangedforallotherquintiles.

ChangesinU.S.FamilyFinancesfrom2013to2016 43 Box 4. Usual versus Actual Income TheincomeclassifierusedthroughoutthisreportistheSurveyofConsumerFinances respondent-reportedmeasureof“usual”income.Thisclassifierisdesignedtocapturea versionofhouseholdincomewithtransitoryfluctuationssmoothedawayinorderto approximatetheeconomicconceptof“permanent”income.Usualincomediffersfrom actualincomewhentherespondentreportsthatthefamilyexperiencedanegativeorpositiveincome“shock”thatisunlikelytopersist,sayfromatemporaryunemploymentspell oranunexpectedsalarybonus.Usualincomeismeasuredinthesurveyafteractual incomehasbeenreported,whenrespondentsaregiventheoptiontoreporttheirusual incomeiftheybelievetheyexperiencedatemporarydeviation.1 Thefractionoffamilieswithactualincomedeviatingfromusualincomevariesoverthe businesscycle,andgroupingfamiliesbyactualincomecanbiasestimatesofchangesin economicoutcomes—suchasnetwealth—acrossgroups,particularlyinvolatileperiods. In2010,25percentoffamiliesreportedthattheiractualincomewastemporarilybelow theirusualincome(figureA).Thefractionreportingunusuallylowincomedroppedto 18percentin2013,fallingfurtherto15percentin2016. FigureA.Familieswithpositiveandnegativeincomeshocks,2010-16surveys Percent 80 2010 2013 2016 70 60 50 40 30 20 10 0 Income below usual Income equal to usual Income above usual (negative shock) (no shock) (positive shock) Thedistinctionbetweenusualandactualincomeisimportant,asmeasuresofaveragenet worth,portfoliocomposition,borrowing,andspendingbehaviorof,forinstance,wealthy familieswithonlytemporarilylowincomesareverydifferentfromfamilieswhoseincomeis usuallylower.Consider,forexample,thelowestquintileoffamiliessortedbyactual income.Thisactualincomegroupincludessomefamilieswhoseincomeisusuallylowand alsosomefamilieswhoseincomeisonlytemporarilylow.In2010,38.8percentoffamilies inthebottomactualincomequintilereportedausualincomethatwouldputthemina highergroup(tableB).Thispercentagewasparticularlyhighin2010;itdecreasedto 31.2percentin2013and30.0percentinthemostrecentsurvey,2016.Generally,when thisfractionishigh,morewealthyfamilieswouldbetemporarilyclassifiedinthelowest incomegroup. Iffamilieshadbeengroupedbyactualincome,insteadofusualincome,estimatesof averagenetworthforthatquintilewouldhavebeenbiased.Amongallfamiliesinthe bottom20percentbyactualincome,averagenetworthdecreasedbetween2010and 2013,from$129,100to$88,800,beforeincreasingonlyslightlyto$89,600in2016.In continuedonnextpage

44 FederalReserveBulletin|September2017 Box 4. Usual versus Actual Income—continued groupingfamiliesbyusualincomeinsteadofactualincome,themeasuresofaveragenet wortharelower,thedeclinebetween2010and2013issmaller,andthegainbetween 2013and2016isgreater.Amongthosefamilieswhoseincomeisusuallyinthebottom 20percent,averagenetworthfellfrom$84,400to$66,600between2010and2013, increasingto$77,500in2016.Groupingfamiliesbyusualincomecanprovideamore accuraterepresentationofthelevelsandchangesinnetworthexperiencedacross incomegroups. TableB.Effectofgroupingbyactualincomeonaveragenetworthforbottom20percent, 2010–16surveys Thousandsof2016dollars,exceptasnoted Usualoractualincomemeasure 2010 2013 2016 Percentoffamiliesin“usuallyhigher”incomegroup 38.8 31.2 30.0 Averagenetworthoffamiliesinthebottom20percent… Byactualincome 129.1 88.8 89.6 Byusualincome 84.4 66.6 77.5 1 Specifically,afterthedataonactualincomeontheyearpriortothesurveyarecollected,respondentsareasked, “Isthisincomeunusuallyhighorlowcomparedtowhatyouwouldexpectina‘normal’year,orisitnormal?”Ifthe respondentanswersthatincomewasunusuallyhighorlow,thefollow-upquestionis,“Aboutwhatwouldyour totalincomehavebeenifithadbeenanormalyear?” From2013to2016,medianandmeannetworthincreasedforalltypesof familiesgrouped byraceorethnicity.Largegainsinmeanandmediannetworthoccurredamongnonwhite andHispanicgroups:blackorAfrican-Americannon-HispanicandHispanicorLatino familiesexperiencedincreasesinmediannetworthof 29percentand46percent,respectively,andincreasesinmeannetworthof 35percentand72percent,respectively.Large gains(19to52percent)alsooccurredforfamiliesidentifiedasotherormultipleraces.21 Whitenon-Hispanicfamiliesalsoexperiencedsizablegainsinmedianandmeannetworth, of 17percentand28percent,respectively.DespitenonwhiteandHispanicgroupsexperiencinglargerproportionalgrowthratesduringthe2013–16period,familiesinnonwhite andHispanicgroupsstillhaveonly10to40percentthelevelof mediannetworthaswhite non-Hispanicfamiliesin2016. Themediannetworthof homeownersincreased15percentbetween2013and2016, whereasthatof rentersorothernon-homeownersfell5percent.Muchof thisdifferential growthisexplainedbygrowinghousepricesoverthe2013–16period,whichimprovesthe balancesheetsof ownerswhosehomesappreciateinvalue.However,meannetworthof bothhomeownersandnon-homeownersrosesubstantiallyoverthisperiod;theincreasein meannetworthfornon-homeownersispartiallyattributabletootherassetpricesrising duringthe2013–16period. Medianandmeannetworthgrewforfamiliesinbothurbanandruralareasbetween2013 and2016.FamilieslivinginMSAsexperienceda13percentincreaseinmediannetworth anda27percentincreaseinmeannetworth,whilefamiliesinotherareasexperienceda 25percentriseinmediannetworthandamodest3percentriseinmeannetworth. Mediannetworthroseforallpercentilegroupsof thedistributionof networth,withthe largestincreasesinproportionaltermsbeingforthesecondquartile(23percent)andthe 21 Seetheappendixformoreontheracial/ethniccategoriesusedinthisarticle.

ChangesinU.S.FamilyFinancesfrom2013to2016 45 Box 5. Saving Behavior Becausesavingoutofcurrentincomeisanimportantdeterminantoffamilynetworth,the SurveyofConsumerFinances(SCF)asksrespondentswhether,overtheprecedingyear, thefamily’sspendingwaslessthan,morethan,oraboutequaltoitsincome.Thoughonly qualitative,theanswersareausefulindicatorofwhetherfamiliesaresaving. Thefractionoffamilieswhoreportedsavinghasslowlyincreasedoverthepastthree surveys(figureA).Between2013and2016,theproportionofallfamiliesthatsaved increasedfrom53.0percentto55.4percent. FigureA.Familiesthatsaved,2010–16surveys Percent 100 2010 2013 2016 80 60 40 20 0 All 0-49.9 50-89.9 90-100 Percentile of usual income Withinagivenyear,thefractionoffamiliesthatsaveincreaseswithusualincome (figureA).1In2016,forexample,thefractionoffamiliesinthetopincomegroupthat savedwas80.2percent,almostdoublethe42.9percentthatsavedfromthelowest incomegroup. Between2013and2016,thefractionoffamiliesthatsavedincreasedinthebottom 50percentandinthenext40percentoftheincomedistribution,andfellslightlyfor familiesinthetop10percent.Theincreaseinreportedsavingforthebottom50percent andthenext40percentisconsistentwithotherSCFdata.Forexample,table3inthemain textshowsanincreaseinthefractionoffamilieswitharetirementaccount—akeyassetfor middle-classfamilies. 1 Foradescriptionoftheusualincomemeasure,seebox4,“UsualversusActualIncome.” topdecile(24percent)of thenetworthdistribution.Forthelowestquartile,mediannet worthwaslessthan$50in2013andabout$200in2016,whilemeannetworthincreased 13percentfromnegative$13,800tonegative$12,100.Thethirdquartilealsoexperienced gainsinmedianandmeannetworth,withbothrising11percentbetween2013and2016. Forthe75thto90thpercentile,mediannetworthrose16percentandmeannetworthrose 17percentovertherecentperiod;meannetworthforthetopdecilerose29percent between2013and2016.Thelevelof medianandmeannetworthforthetopdecileis4to 8timesthelevelof thenexthighestpercentilegroup,furtherevidenceof theconcentration of wealthatthetopof thedistribution.

46 FederalReserveBulletin|September2017 Table3.Holdingandvaluesofassets,2013and2016surveys Thousandsof2016dollars,exceptasnoted Percentholding Conditionalmedianvalue Conditionalmeanvalue Balancesheetitem Percentchange Percentchange 2013 2016 2013 2016 2013 2016 2013–16 2013–16 AnyAsset 97.9 99.4 183.4 189.9 4 658.8 792.0 20 Typesoffinancialasset Anyfinancialasset 94.5 98.5 21.9 23.5 8 278.5 340.0 22 Transactionaccounts 93.2 98.0 4.2 4.5 6 37.4 40.2 7 Certificatesofdeposit 7.8 6.5 16.5 20.0 21 66.5 75.7 14 Savingsbonds 10.0 8.6 1.0 1.0 -3 6.6 9.5 44 Bonds 1.4 1.2 97.5 100.0 3 599.8 771.0 29 Stocks 13.8 13.9 27.8 25.0 -10 303.5 327.8 8 Pooledinvestmentfunds 8.2 10.0 82.5 114.0 38 477.3 776.0 63 Retirementaccounts 49.2 52.1 60.8 60.0 -1 207.5 228.9 10 Cashvaluelifeinsurance 19.2 19.4 8.2 8.5 3 36.4 37.5 3 Othermanagedassets 5.2 5.5 103.1 110.0 7 382.1 473.6 24 Other 6.9 8.1 4.1 5.5 33 56.8 53.7 -6 Typesofnonfinancialasset Anynonfinancialasset 91.0 90.8 153.0 158.9 4 419.8 498.1 19 Vehicles 86.3 85.2 16.3 17.3 6 23.3 25.3 9 Primaryresidence 65.2 63.7 175.3 185.0 6 270.8 301.2 11 Otherresidentialproperty 13.2 13.8 127.6 145.7 14 326.1 358.2 10 Equityinnonresidential property 7.2 6.2 61.9 70.0 13 276.3 475.2 72 Businessequity 11.7 13.0 69.6 79.9 15 1,004.2 1,190.7 19 Other 7.3 6.5 13.4 13.0 -3 74.5 81.4 9 Note:SeetheappendixfordefinitionsofassetcategoriesusedintheSCF. Assets Between2013and2016,ownershipof anytypeof assetroseslightlyfrom97.9percentto 99.4percentin2016(table3).Atthesametime,themixof assetsheldbyfamilieshas changed,withownershipratesonsomecategoriesof assetsfallingandothersrising between2013and2016. Conditionalonholdinganyassets,themedianfamily’stotalassetholdingsrose4percent, from$183,400in2013to$189,900in2016.Theconditionalmeanvalueof totalassetsrose substantially,by20percent.Thelargerincreaseinmean—versusmedian—assetholdings indicatesthatgainsinassetvalueswerespreadunequallyacrossfamiliesandassettypes. Financial Assets Overall,ownershipof anyfinancialassets—whichincludestransactionaccounts,certificatesof deposit,savingsbonds,otherbonds,stocks,pooledinvestmentfunds,retirement accounts,cashvaluelifeinsurance,andothermanagedassets—roseto98.5percentin 2016.22Theconditionalmedianvalueof allfinancialassetsheldbyfamiliesalsorose 8percent,from$21,900in2013to$23,500in2016.Conditionalmeanvaluesrose 22percent,from$278,500to$340,000.Theseincreasesareindicativeof broad-basedgains butalsoindicatethatsomefamiliesexperiencedparticularlylargegainsinthevaluesof theirfinancialassets. 22 SeetheappendixfordetaileddefinitionsofSCFassetandliabilitycategories.

ChangesinU.S.FamilyFinancesfrom2013to2016 47 Transactionaccounts—whichincludechecking,savings,moneymarket,callaccounts,and prepaiddebitcards—remainedthemostcommonlyheldtypeof financialassetin2016, withanownershiprateof 98percent,anincreaseoverthe93.2percentof familiesthatheld atransactionaccountin2013.Theincreaseinownershipwasprimarilyduetotheinclusionof prepaiddebitcardswithtransactionaccounts,whichwerecollectedinthesurvey forthefirsttimein2016.23If thosecardsareexcluded,theownershipof transaction accountswasflatbetween2013and2016.Theconditionalmedianandmeanvaluesof thoseaccountsalsorosebetween2013and2016,by6percentand7percent,respectively.In 2016,mediantransactionaccountholdingswere$4,500,andmeanholdingswere$40,200. If prepaiddebitcardsareexcluded,themedianandmeanholdingsarelittlechanged. Ratesof ownershipof certificatesof depositscontinuedtofallbetween2013and2016,to 6.5percent,followingadeclinesince2007,when16.1percentof familiesheldcertificatesof deposit.Thesedeclinesare,atleastinpart,attributabletothelowinterestrateenvironment,whichhasreducedtheadvantageof certificatesof depositovertransactionaccounts. Conditionalonownership,theamountheldinthoseaccountsrose,however,withthe medianincreasing21percentandthemeanincreasing14percent. Ownershipof savingsbonds,otherbonds,anddirectlyheldstocksgenerallyfellor remainedsimilarbetween2013and2016,althoughnoneof thethreetypesof assetsare commonlyheld,withownershipratesin2016varyingbetween1.2percent(otherbonds) and13.9percent(directlyheldstocks).Theconditionalmedianvalueof mostof these assetsalsoeitherfellorremainedsimilarbetween2013and2016,butmeanvalues increasedforallthreetypesof assets.24 Ownershipratesof pooledinvestmentfundsrosebetween2013and2016,from8.2percent to10percent.Conditionalmedianandmeanvaluesalsorosesubstantially,exhibiting 38percentand63percentgrowthrates,respectively. Ownershipof retirementaccounts—includingindividualretirementaccounts(IRAs), Keoghaccounts,andcertainemployer-sponsoredaccounts,suchas401(k),403(b),and thriftsavingsaccounts—roseto52percentin2016,followingaperiodof declinebetween the2007and2013surveys.Medianvaluesof retirementaccounts,however,werelittle changed,remainingatabout$60,000in2016.Theconditionalmeanvaluerose10percent to$228,900in2016.25 Thepercentof familiesowningtheremainingfinancialassetcategories—cashvalueof life insurance,othermanagedassets,andthecatch-all“other”category—generallyroseor remainedsimilarbetween2013and2016.Themedianandmeanvaluesof thesetypesof assetgenerallyalsorose. Nonfinancial Assets Ownershipof nonfinancialassets—includingvehicles,residentialandnonresidentialproperty,andbusinessequity—remainedhighin2016at90.8percent,fallingonlyslightly from2013.Formostcategoriesof nonfinancialassets(exceptbusinessequityandother residentialproperty),however,ownershipratesfell. 23 In2016,theSCFaddedquestionsabouttheownershipofreloadableprepaiddebitcardsandgovernment benefitcards.Aquestionaboutthecombinedbalanceonthesetypeofcardswasalsoadded.Formoredetails ontheseandothernewquestions,seehttps://www.federalreserve.gov/econres/scfindex.htm. 24 Seebox6,“DirectandIndirectHoldingsofPubliclyTradedStock,”formoredetailsonpatternsinstock holding. 25 Seebox7,“RetirementAccountsandPlanParticipation,”formoredetails.

48 FederalReserveBulletin|September2017 Box 6. Direct and Indirect Holdings of Publicly Traded Stock Familiesmayholdstocksinpubliclytradedcompaniesdirectlyorindirectly,andinformationabouteachoftheseformsofstockholdingiscollectedseparatelyintheSurveyof ConsumerFinances.1Whendirectandindirectformsofstockholdingsarecombined,the 2016datashowareboundinstockownershipoverthemostrecentperiod.In2016, 51.9percentoffamiliesownedstocks,increasingfrom48.8percentin2013andalso exceedingwhatwasseeninthe2010survey(figureA).Groupingfamiliesbytheirlocation intheusualincomedistributionrevealsthatthelowestandupper-middleincomegroups experiencedstrongincreasesinstockownershipfrom2013to2016;stockownershipfor thesetwogroupsisnowabovethelevelinthe2010survey.2Forthetopincomegroup,the rateofownershipincreasedoverthemostrecentperiod,continuingthetrendfromthe 2010survey.Stockownershipforthisgroupwas93.6percentin2016. FigureA.Familieswithdirectandindirectholdingsofstock,2010–16surveys Percent 100 2010 2013 2016 80 60 40 20 0 All 0–49.9 50–89.9 90–100 Percentile of usual income Inadditiontotheincreaseinstockownership,themeanvalueofstockholdingsforfamilieswithholdingsincreaseddramaticallyfrom$278,300in2013to$344,500in2016 (tableB).Acrosstheusualincomedistribution,themeanvalueofstockholdingsincreased from2013to2016fortheupper-middleandtopincomegroups,withthemeanvalue risingsubstantially.Forthelowestincomegroup,themeanvaluein2016wasonlyslightly belowthelevelattainedin2013.Thevalueofstockholdingsvariessubstantiallyacross usualincomegroups,withmeanholdingsforthetopgroupaboutninetimesthesizeof meanholdingsoftheupper-middleincomegroup. TableB.Meanlevelsfordirectandindirectholdingsofstock,2010–16surveys Thousandsof2016dollars Conditionalmeanvalue Familycharacteristic 2010 2013 2016 All 235.4 278.3 344.5 Percentileofusualincome 0–49.9 37.2 55.3 52.3 50–89.9 116.5 136.4 153.0 90–100 913.7 999.4 1,365.5 continuedonnextpage

ChangesinU.S.FamilyFinancesfrom2013to2016 49 Box 6. Direct and Indirect Holdings of Publicly Traded Stock— continued Amongfamiliesthatheldstock,eitherdirectlyorindirectly,in2016,ownershipthrougha tax-deferredretirementaccountwasthemostcommon(87.8percent),followedbydirect stock(26.9percent),directholdingsofpooledinvestmentfunds(18.9percent),and managedinvestmentaccountsoranequityinterestinatrustorannuity(7.3percent).From 2013to2016,ownershipofstockthroughatax-deferredretirementaccountanddirect holdingofpooledinvestmentfundsincreasedslightly,andownershipthroughallother typesdeclined.Thefractionoffamiliesthatownedstockthroughmultipletypesincreased to32.8percentin2016,upfrom31.6percentin2013. 1 Indirectholdingsarethoseinpooledinvestmentfunds,retirementaccounts,andothermanagedassets. 2 Foradescriptionoftheusualincomemeasure,seebox4,“UsualversusActualIncome.” Themostcommonlyheldtypeof nonfinancialassetin2016wasvehicles,averybroad categorythatincludescars,vans,sportutilityvehicles,trucks,motorhomes,recreational vehicles,motorcycles,boats,airplanes,andhelicopters.Between2013and2016,thefractionof familiesowningavehicledeclinedslightlyfrom86.3percentto85.2percent.The medianandmeanvalueof vehiclesownedbyfamiliesrose,however,between2013and 2016.Themedianvaluerosefrom$16,300to$17,300,andthemeanrosefrom$23,300to $25,300between2013and2016.26 Ownershipof primaryresidencesalsofell,from65.2percentof familiesowningaprimary residencein2013to63.7percentin2016.27Thisdecreaserepresentsacontinueddecline sincethe2004SCF,whenthehomeownershipratewas69.1percent.Theconditional medianandmeanvalueof primaryresidencesrose,however,by6percentand11percent, respectively.Amongfamilieswhoarehomeowners,themedianfamily’shomewasworth $185,000in2016,upfrom$175,300in2013.Thisincreasereflectswidespreadincreasesin homepricesbetweenthetwosurveys,althoughthedropinhomeownershipratesindicates fewerfamiliesaresharinginthosehousepricegains.Ownershipratesandmedianand meanvaluesof otherresidentialproperty,whichincludesresidencessuchassecondhomes andtimeshares,rosebetween2013and2016. Ownershipof businessequityincreasedbetween2013and2016,from11.7percentto 13percent,nearlyreboundingtoits2010level(13.3percent).28Themedianfamilywith businessequityalsoexperienceda15percentriseinvalue,withmedianbusinessequity risingfrom$69,600to$79,900between2013and2016.Themeanvalueof businessequity rose19percent. Ownershipof equityinnonresidentialpropertyfellfrom7.2percentto6.2percent,and conditionalmedianandmeanvaluesof equityinnonresidentialpropertyrose13percent and72percent,respectively. 26 Surveyrespondentsareaskedtoprovidetheyear,make,andmodelofeachoftheircars,vans,sportutility vehicles,andtrucks.ThisinformationisusedtoobtainmarketpricesfromdatacollectedbytheNationalAutomobileDealersAssociationandavarietyofothersources.Forothertypesofvehicles,therespondentisasked toprovideabestestimateofthecurrentvalue. 27 Seebox8,“HomeownershipandNetHousingWealth,”formoredetails. 28 Seebox9,“HoldingsofBusinessEquity,”formoredetails.

50 FederalReserveBulletin|September2017 Table4.Holdingandvaluesofdebtitems,2013and2016surveys Thousandsof2016dollars,exceptasnoted Percentholding Conditionalmedianvalue Conditionalmeanvalue Typesofdebts Percentchange Percentchange 2013 2016 2013 2016 2013 2016 2013–16 2013–16 Anydebt 74.5 77.1 62.3 59.8 -4 126.1 123.4 -2 Securedbyresidentialproperty Primaryresidence 42.9 41.9 118.6 111.0 -6 161.6 157.7 -2 Other 5.2 5.6 92.8 100.0 8 160.9 160.6 0 Linesofcreditnotsecuredby residentialproperty 1.9 1.8 4.5 3.0 -33 36.3 55.7 54 Installmentloans Educationloans 20.0 22.4 16.5 19.0 15 29.8 34.2 15 Vehicleloans 30.9 33.8 12.3 12.8 5 15.0 17.2 14 Otherinstallmentloans 10.1 11.2 3.4 3.4 0 16.4 15.4 -6 Creditcardbalances 38.1 43.9 2.4 2.3 -3 5.9 5.7 -3 Other 6.6 5.4 4.1 5.0 21 15.1 26.8 78 Note:SeetheappendixfordefinitionsofliabilitycategoriesusedintheSCF. Debt, Debt Burden, and Credit Market Experiences Thefractionsof familiesholdinganytypeof debtrosebetween2013and2016,from 74.5percentto77.1percent,returningtoalevelsimilarto2007,when77.0percentof familieshadanydebt(table4).29Incontrast,theconditionalmedianandmeanvalueof debtheldfellslightlybetween2013and2016.Theconditionalmedianfell4percent,from $62,300in2013to$59,800in2016.Theconditionalmeanalsofell,from$126,100in 2013to$123,400in2016,adeclineof 2percent. Debt Holdings by Type Between2013and2016,themixof debtheldbyfamilieschanged.Slightlyfewerfamilies helddebtsecuredbyaprimaryresidence,andthosethatdidhavesuchtypesof debtowed smalleramounts.However,morefamiliesheldeducationloansin2016thanin2013,and thosewitheducationloansowedlargeramountsontheloans.Creditcardbalanceshave becometheformof debtmostwidelyheldbyfamilies,edgingoutdebtsecuredbya primaryresidence(hereafter,home-secureddebt)forthefirsttimesincethe1998SCF. Parallelingthedropinhomeownership,ratesof holdingof home-secureddebtfellbetween 2013and2016.Thefractionof familieswithmortgagesandotherhome-secureddebtfell from42.9percentin2013to41.9percentin2016.Thisdeclinewasslightlysmallerthanthe 1.5percentagepointfallinhomeownershipobservedintable3.Home-secureddebt, however,continuedtobeoneof themostcommontypesof debtheldbyfamilies. Theconditionalmedianandmeanvaluesof home-secureddebtalsofellbetween2013and 2016.Theconditionalmedianvalueof home-secureddebtfell6percent,from$118,600to $111,000,andtheconditionalmeanvalueof home-secureddebtfell2percent,from $161,600to$157,700.Thedeclinesinholdingandtheconditionalmeanandmedianvalues of home-secureddebtrepresentedacontinuationof declinesseenbetween2007and 29 SeetheappendixforadetaileddefinitionofSCFliabilitycategories.

ChangesinU.S.FamilyFinancesfrom2013to2016 51 Box 7. Retirement Accounts and Plan Participation Ownershipofretirementaccountsandparticipationinretirementplanscanbothincrease families’networthandprovidesecuritytofamiliesnearingretirementage.Afamilyis consideredaparticipantinretirementplansifithasanyofthefollowing:anindividual retirementaccount(IRA);anaccount-typejobpension(definedcontributionplan,orDC), including401(k)s;oradefinedbenefit(DB)pension.Thefollowingdiscussionfocuseson prime-agefamilies—thosewithaheadbetweenages35and64—asthesefamiliestypicallyhavefinishedtheireducationbuthavenotfullyretired. Groupingfamiliesbyusualincomeindicatesthatthoseinthebottomhalfoftheusual incomedistributionsawincreasesinretirementplanparticipationbetween2013and2016, incontrasttothedeclineobservedbetween2010and2013(figureA).1Thisrecent increaseisacombinationofincreasesinbothIRAandDCcoverage,althoughtherewasa declineinthefractionoffamilieswithaDBplan.Thoseintheupper-middlepartofthe usualincomedistributionalsosawanincreaseinoverallretirementcoveragebetween 2013and2016,continuinggrowthobservedbetween2010and2013.Thisgroupalso experiencedadeclineintheshareoffamilieswithaDBplan,implyingthatoverall,more familiesarerelyingonaccount-typeplansalone.Familiesinthetop10percentoftheusual incomedistributionhadbasicallyunchangedretirementplanparticipation,atalmost 95percentinboth2013and2016.ThisgroupexperiencedincreasesinDBandDC coveragebetween2013and2016,withsmalldeclinesinIRAparticipation. FigureA.Participationinanyretirementplanforfamiliesages35–64,2010–16surveys Percent 100 2010 2013 2016 80 60 40 20 0 All Bottom 50 Next 40 Top 10 Percentile of usual income Formanyfamilies,theamountofassetsheldwithinIRAsandDCplans(typicallyassociatedeitherwithacurrentjoborapastjob)areamongthemostimportantcomponents oftheirbalancesheetsandareasignificantdeterminantoftheirfutureretirementsecurity. Amongfamiliesthathavethoseassets,theaveragecombinedIRAandDCpension accountbalanceincreasedsince2013to$237,600in2016,andthosegainsoccurred throughouttheincomedistribution(tableB).Forfamiliesinthebottomhalfoftheusual incomedistribution,averagebalancesincreasedaboutone-thirdfrom2013,reaching almost$54,000,whichisslightlyabovethepreviouspeakin2007.Thoseinthenext 40percentoftheusualincomedistributionsawasmalleraveragebalanceincreaseof about$4,000,or2.8percent,between2013and2016.Averagebalancesincreased dramaticallyforthoseinthetopoftheusualincomedistribution,reaching$641,400 in2016. continuedonnextpage 2013.30Thesedeclinesoccurredintandemwiththeincreasesinhomevaluesseenbetween 2013and2016(table3).

52 FederalReserveBulletin|September2017 Box 7. Retirement Accounts and Plan Participation—continued TableB.Meanretirementsavingsamongthosewithanindividualretirementaccountoran account-typejobpension,familiesages35–64,2010–16surveys Thousandsof2016dollars Conditionalmeanvalue Familycharacteristic 2010 2013 2016 All 204.6 200.8 237.6 Percentileofusualincome 0–49.9 41.8 40.3 53.5 50–89.9 130.9 151.9 156.9 90–100 556.3 460.0 641.4 1 Foradescriptionoftheusualincomemeasure,seebox4,“UsualversusActualIncome.” Linesof creditnotsecuredbyresidentialpropertywerenotwidelyheldbyfamiliesineither the2013or2016surveys,ataround2percentof families.Theconditionaldebtoutstanding amongthosewithsuchdebtschangedquitesubstantially,withmedianvaluesfallingabout one-thirdandmeanvaluesrisingabout54percentbetween2013and2016. Thefractionof familieswitheducationloans,andtheconditionalmedianandmeanvalue of educationloans,increasedbetween2013and2016,representingacontinuationof the long-termtrendof risingeducationdebt.In2013,20.0percentof familieshadaneducationloan.Thisshareroseto22.4percentof familiesin2016.Theconditionalmedianvalue of educationloansrose15percent,from$16,500in2013to$19,000in2016.Themean alsorose15percent,from$29,800to$34,200.31 Asdiscussedearlier,thefractionof familiesowningavehiclefellslightlybetween2013and 2016,to85.2percent.Atthesametime,thefractionof familieswithvehicleloansincreased from30.9percentin2013to33.8percentin2016.Thisfindingrepresentedacontinuation of thetrendbetween2010and2013,whenthefractionof familieswithavehicleloanrose slightly.Between2013and2016,theconditionalmedianvalueof vehicleloansrose 5percentandtheconditionalmeanrose14percent.Thismovementindicatesthatalthough fewerfamilieshavevehiclesoverall,familiesarecontinuingtoborrowmoreusingloans onvehicles. Otherinstallmentloans,oftenassociatedwithpurchasesof furniture,appliances,andother durablegoods,wereheldby10.1percentof familiesin2013,risingto11.2percentof familiesin2016.Theconditionalmedianbalanceonsuchloanswaseffectivelyunchanged betweenthetwosurveys,andthemeandecreased6percent. Thefractionof familieswithoutstandingbalancesontheircreditcardsrosebetween2013 and2016,makingcreditcarddebttheformof debtmostwidelyheldbyfamilies.This increasereverseddeclinesseenbetween2010and2013.In2013,38.1percentof families heldcreditcarddebt,whilein2016,43.9percentof familiesheldcreditcarddebt.The 30 Between2007and2013,thefractionholdingdebtsecuredbyaprimaryresidencefellfrom48.7percentin 2007to47.0percentin2010and42.9percentin2013.Between2007and2010,theconditionalmedianvalueof home-secureddebtfell2.2percent,andtheconditionalmeanfell1.2percent.Between2010and2013,the conditionalmedianvalueofhome-secureddebtfell2.1percent,andtheconditionalmeanfell5.3percent. 31 Seebox10,“EducationDebt,”formoredetails.

ChangesinU.S.FamilyFinancesfrom2013to2016 53 Box 8. Homeownership and Net Housing Wealth Thepercentageoffamiliesthatownedtheirprimaryresidencefellfrom65.2percentin 2013to63.7percentin2016(figureA).ThelasttimetheSurveyofConsumerFinances recordedahomeownershipratethislowwas1989.1Acrossfamiliesgroupedbypercentile ofusualincome,therearelargedifferencesinhomeownershiprates,whichtendto increasewithusualincome.2Forfamiliesinthebottomhalfoftheincomedistribution,the homeownershipratewas46.9percentin2016,whileforthoseinthetop10percentby income,thehomeownershipratewas91.4percent. Between2013and2016,thehomeownershipratefellacrossallusualincomegroups, representingacontinuationofatrendofdeclininghomeownershipsince2007forthe bottomtwousualincomegroups.Incontrast,forthetopincomegroup,the homeownershiprateroseslightlybetween2010and2013. FigureA.Homeownershiprate,2010–16surveys Percent 100 2010 2013 2016 80 60 40 20 0 All Bottom 50 Next 40 Top 10 Percentile of usual income Forfamiliesthatowntheirprimaryresidence,meannethousingvalue—definedasthe home’svaluelessanydebtsonthehome—increased20percentbetween2013and2016 afterslightlydecliningbetween2010and2013(tableB).3In2016,amonghome-owning families,theaveragenethousingwealthwas$197,500. Acrossusualincomegroups,themeannetvalueofhousingincreasesasusualincome rises.In2016,themeanvalueofnethousingwealthamonghomeownersinthebottom halfoftheincomedistributionwas$107,100.Forthetopdecile,themeannetvalueof housingwasroughlyfivetimeslarger,at$576,400. Between2013and2016,meannethousingvalueincreasedforallthreegroups,butthe magnitudesoftheincreasesdiffered,withhigher-incomefamiliesgainingmore.Forthe bottomincomegroup,nethousingvaluerosetheleast,by13percent,between2013and 2016.Fortheupper-middleincomegroup,meannethousingincreasedmorethan 18percentbetween2013and2016,whilethetopincomegroupsawnethomeownership housingvaluegrow25percent. continuedonnextpage medianfamilywithacreditcardbalancecarried$2,300in2016,down3percentfrom $2,400in2013.Themeanbalancefellfrom$5,900in2013to$5,700in2016,alsoa 3percentdrop. Debt Burden Theabilityof individualfamiliestoservicetheirloansisafunctionof manyfactors, includingthelevelof theirloanpaymentsandtheincomeandassetstheyhaveavailableto

54 FederalReserveBulletin|September2017 Box 8. Homeownership and Net Housing Wealth—continued TableB.Meannethousingvalueforhomeowners,2010–16surveys Thousandsof2016dollars Conditionalmeanvalue Familycharacteristic 2010 2013 2016 All 169.7 164.3 197.5 Percentileofusualincome 0–49.9 107.1 95.2 107.7 50–89.9 130.7 130.0 153.9 90–100 481.6 460.4 576.4 1 Thehomeownershipratein1989was63.9percent.Itrosetoapeakof69.1percentin2004. 2 Foradescriptionoftheusualincomemeasure,seebox4,“UsualversusActualIncome.” 3 SurveyofConsumerFinancesrespondentsareaskedtoreportthevalueoftheirhome.Onlyprimaryresidences areincluded.Debtsonthehomeincludeanymortgagesorhomeequityloansagainsttheprimaryresidence. meetthosepayments.Inplanningtheirborrowing,familiesmakeassumptionsabouttheir futureabilitytorepaytheirloans.Problemsmayoccurwheneventsturnouttobecontrary tothoseassumptions.If suchmisjudgmentsaresufficientlylargeandprevalent,abroad patternof default,restraintinspending,andfinancialdistressinthewidereconomymight ensue(suchaswasseenintheperiodafterthe2007survey). TheSCFdatacanbeusedtoconstructthreemeasuresof debtburdens:leverageratios, debt-to-incomeratios,andpayment-to-incomeratios.Leverageratioscomparedebtsto assets,debt-to-incomeratioscomparetotaldebttoincome,andpayment-to-incomeratios comparetotalpaymentsmadeondebttoincome.Allthreeratioscanbeconstructedeither inaggregateorasamedianfordebtors.32 Leverageratios,debt-to-incomeratios,andpayment-to-incomeratiosallgenerallyrose between2004and2010andthenfellbetween2010and2016(table5).33Theaggregate leverageratio,debt-to-incomeratios,andpayment-to-incomeratiosin2016areallbelow the2004levels. In2016,themedianleverageratiofordebtorswas36.2percent,downfrom38.6percentin 2013.Theratioremainsjusthigherthanthemedianof 34.7percentin2004and 34.8percentin2007.Inaggregate,theleverageratiodeclinedfrom14.6percentin2013to 12.1percentin2016. In2016,themediandebt-to-incomeratiofordebtorswas95.1percent,downfromthelevel seenin2013(107.4percent).Thelevelin2016islowerthanthatwitnessedin2004,and similartrendscanbeseenfortheaggregate. 32 Theaggregateisdefinedasthetotalamountofdebtheld/paymentsdividedbythetotalassetsheldorincome amongallsurveyrespondents.Themedianfordebtorsisdefinedasthemedianofeachindividualfamily’sratio amongthosecarryingdebtonly. 33 Fordefinitionsofthecomponentsoftable5,seetheappendix.

ChangesinU.S.FamilyFinancesfrom2013to2016 55 Table5.Debtburdensandcreditmarketexperiences,2004-16surveys Percentorthousandsof2016dollars Measureofdebtburden/interactionwithcredit 2004 2007 2010 2013 2016 markets Debtburden Leverageratio Aggregate 15.0 14.8 16.4 14.6 12.1 Medianfordebtors 34.7 34.8 41.3 38.6 36.2 Debttoincomeratio Aggregate 111.6 115.2 124.8 104.6 92.6 Medianfordebtors 107.0 111.1 118.8 107.4 95.1 Paymenttoincomeratio Aggregate 14.4 14.6 14.7 12.0 10.8 Medianfordebtors 18.1 18.7 18.2 15.9 14.7 Fractionwithpaymenttoincomeratiogreater than40% 9.4 11.4 10.4 8.2 7.0 Creditmarketexperiences Creditconstrained Turneddownforcredit(pastyear) n.a. n.a. n.a. n.a. 10.8 Didnotapplyforcreditforfearofbeingturned down(pastyear) n.a. n.a. n.a. n.a. 14.4 Eitherturneddownforcreditorfeareddenial (pastyear) n.a. n.a. n.a. n.a. 20.8 Eitherturneddownforcreditorfeareddenial (past5years) 25.6 24.5 28.3 27.6 n.a. Lateonpayments Lateonpayments 16.3 20.8 17.3 14.9 13.5 Lateonpayments60daysormore 6.9 5.5 8.1 6.9 5.8 Tookoutapaydayloaninpastyear n.a. 2.4 3.9 4.2 3.4 Declaredbankruptcyinpast5years 4.4 3.8 3.6 4.1 3.0 Hadforeclosurestartinpast5years n.a. n.a. n.a. n.a. 2.1 Usecreditcardsforconvenienceonly/donotcarrya balance 56.6 56.2 63.0 64.0 57.5 Note:Seetheappendixforadescriptionofmeasuresofdebtburdenandcreditmarketexperiences. n.a.Notavailable(relevantdatanotcollected). Payment-to-incomeratiosforthemediandebtorfellfrom15.9percentto14.7percent between2013and2016.34The2016levelislowerthanatanytimebetween2004and2013. Similartrendsheldfortheaggregatepayment-to-incomeratios. Alimitationof usingmeasuresof debtburdensforthemediandebtoristhattheymaynot beindicativeof distressbecausetheyreflectthesituationof atypicalfamily.Unlesserrors of judgmentbybothfamiliesandlendersarepervasive,onewouldnotexpecttoseesigns of financialdistressatthemedian.Thus,amorecompellingindicatorof distressisthe proportionof familieswithunusuallylargedebtburdens.In2016,7.0percentof debtors hadpayment-to-incomeratiosgreaterthan40percent.Thisvaluerepresentsadecrease from2013,when8.2percentof debtorshadpayment-to-incomeratiosgreaterthan 40percent.Thelevelsin2016arelowerthanthosewitnessedatanytimebetween2004 and2013. 34 Analternativeaggregateversionofpayment-to-incomeratiosisthedebtserviceratio.SeeKarenDynan,KathleenJohnson,andKarenPence(2003),“RecentChangestoaMeasureofU.S.HouseholdDebtService,” FederalReserveBulletin,vol.89(October),pp.417–26,https://www.federalreserve.gov/pubs/bulletin/2003/ 1003lead.pdf.Adiscussionofhowthismeasurecompareswiththeonepresentedherecanbefoundinthe appendix.

56 FederalReserveBulletin|September2017 Box 9. Holdings of Business Equity Thefractionoffamiliesthatownedaprivatelyheldbusinessincreased1.3percentage pointsbetween2013and2016,to13.0percent(figureA).1Thelevelin2016isonlyslightly belowthelevelinthe2010survey,reboundingfromthedeclinebetween2010and2013. Ownershipofbusinessequityalsoincreasedacrossallusualincomegroupsoverthe recentperiod.2Forthetoptwoincomegroups,thelevelsarestillslightlybelowlevelsin the2010survey.Familiesinthetopincomegroupsawthelargestpercentagepoint increaseinbusinessownership,andtheownershiplevelforthisgroup,38.7percent, remainssubstantiallyhigherthanforothergroups. FigureA.Familieswithholdingsofbusinessequity,2010–16surveys Percent 50 2010 2013 2016 40 30 20 10 0 All 0–49.9 50–89.9 90–100 Percentile of usual income Forfamilieswithbusinessequity,themeanvalueincreasedsubstantially,risingfrom $1,004,200in2013to$1,190,700in2016,wellabovethe2010level(tableB).Allusual incomegroupsexperiencedanincreaseinthemeanvalueofbusinessequityoverthe recentperiod,andin2016,themeanvalueofbusinessequitywashigherthanthe2010 valueforallgroups.Thevalueofbusinessequityvariessubstantiallyacrossusualincome groups,withmeanholdingsforthetopgroupabout10timesthesizeofmeanholdings oftheupper-middleincomegroup. TableB.Familyholdingsofbusinessequity,2010–16surveys Thousandsof2016dollars Conditionalmeanvalue Familycharacteristic 2010 2013 2016 All 871.3 1,004.2 1,190.7 Percentileofusualincome 0–49.9 204.2 157.5 208.0 50–89.9 285.5 283.2 330.2 90–100 2,265.0 2,685.0 3,307.0 1 Theformsofbusinessinthiscategoryaresoleproprietorships,limitedpartnerships,othertypesofpartnerships, subchapterScorporationsandothertypesofcorporationsthatarenotpubliclytraded,limitedliabilitycompanies, andothertypesofprivatebusinesses.Ifthefamilysurveyedlivedonafarmorranchthatwasusedatleastinpart foragriculturalbusiness,thevalueofthatpart,netofthecorrespondingshareofassociateddebts,isincludedwith otherbusinessassets. 2 Foradescriptionoftheusualincomemeasure,seebox4,“UsualversusActualIncome.”

ChangesinU.S.FamilyFinancesfrom2013to2016 57 Box 10. Education Debt Educationloandebtisthelargestsource,indollarterms,ofnonmortgagedebtowedby familiesinthe2016SurveyofConsumerFinances(SCF)(seetable4inthemaintext).The analysispresentedherewillfocusonthegrowthofeducationloansbetweenthe2013 and2016surveysbyincomefor“youngfamilies,”definedasthosewithaheadofhouseholdyoungerthanage40atthetimeofthesurvey.1 Thefractionofyoungfamilieswitheducationdebtincreasedfrom38.8percentto 43.3percentbetween2013and2016(tableA).Conditionalonhavingeducationdebt,the meanandmedianlevelsofeducationdebtalsoincreasedbetween2013and2016. TableA.Educationdebtoutstandingamongyoungfamilies,2013and2016surveys Thousandsof2016dollars,exceptasnoted Measureofeducationdebt 2013 2016 Percentwitheducationdebt 38.8 43.3 Meaneducationdebt 30.7 33.3 Medianeducationdebt 17.3 19.0 Similartothe2013SCF,about50percentoftheeducationdebtofyoung2016SCFfamilieswasowedbyfamiliesearningmorethan$60,000(figureB).Between2013and2016, theshareofeducationdebtheldbyfamilieswithincomeslessthan$30,000declined: About18percentofyoungfamilies’educationdebtisowedbythosemakinglessthan $30,000,about5percentagepointslessthanin2013.2Thisindicatesmoreeducationdebt isheldbyfamilieswhoarelikelytohaveincomelevelsthatcansupporttheirloan payments. FigureB.Shareofyoungfamilies’educationloandebt,byincomegroup,2013and2016surveys Percent 60 2013 2016 50 40 30 20 10 0 Less than $30,000 $30,000 to $60,000 More than $60,000 Level of usual income 1 NotethattheSCFdoesnotsampleinstitutionalpopulations,suchascollegedorms.Thestatisticsreportedhere alsodonotincludeeducationdebtheldbyindividualsinthehouseholdwhoarenotmembersoftheprimary economicunitandsolelyresponsiblefortheeducationdebt(suchasfinanciallyindependentroommatesandadult childrenlivingwithaparent). 2 Youngfamilieswitheducationdebtinthisincomegroupgenerallyhavenocollegedegree,thoughabout one-fourthofthesefamiliesheldabachelor’sdegreeorhigherinboththe2013and2016SCF. Credit Market Experiences TheSCFalsocollectsvariousmeasuresof respondents’recentexperienceswithcredit markets,suchasinformationoncreditapplicationsandpaymentbehavior.Overall,SCF

58 FederalReserveBulletin|September2017 families’capacitytostaycurrentontheirfinancialobligationsincreasedbetween2013and 2016.Thefractionof familieswhowerelateonpaymentsandthefractionwhotookouta paydayloanbothfell. TheSCFaskstwoquestionsintendedtocapturewhetherfamiliesarelikelycredit constrained:first,if thefamilywasturneddownforcreditoverthepast12months,and, second,if thefamilydecidednottoapplyforcreditduringthepast12monthsforfearof beingturneddown.35In2016,20.8percentof familiesresponded“yes”tooneorbothof thesequestions. TheSCFalsocollectsinformationonfamilies’debtpaymentbehavior.Familiesthathave anydebtatthetimeof theirinterviewareaskedwhethertheywerebehindonanyof their loanpaymentsintheprecedingyear.In2016,13.5percentof familiesreportedbeinglate onpayments,alowerfractionthanatanytimebetween2004and2013.Thepercentof familieswhoreportedbeinglateonpayments60ormoredaysdeclinedfrom6.9percentin 2013to5.8percentin2016,substantiallybelowtherecentpeakof 8.1percentin2010. TheSCFasksrespondentsif theyhavetakenoutapaydayloaninthepastyear.Payday loansareunsecuredloansthataretypicallysmallandshort-term.Becausetheseloans generallycarryinterestratesthatfarexceedthoseforconventionalformsof credit,usageof paydayloansisoftenasignalthatanindividualcannotobtaincreditbyothermeans.36In 2016,3.4percentof familiesreportedtakingoutapaydayloan,downfrom4.2percentin 2013and3.9percentin2010. Anadditionalmeasureof financialdistressandproblemsmanagingdebtisbankruptcy. TheSCFasksrespondentsif theyhavedeclaredbankruptcyinthepastfiveyears.In2016, 3.0percentof familiesreportedhavingdeclaredbankruptcyinthepastfiveyears,down from4.1percentin2013andlowerthanallyearssince2004. Inthe2016survey,theSCFbegancollectinginformationaboutanothermeasureof financialdistress,families’experienceswithforeclosures.37In2016,2.1percentof families reportedhavingforeclosureproceedingsbroughtagainstpropertiestheyownedinthepast fiveyears.Of thesefamilies,68percenteventuallylosttheirpropertyasaresultof theforeclosureprocess. Afinalmeasureof debtpaymentbehaviorcoveredintheSCFiswhetherafamilyuses creditcardsforconvenienceonlyorcarriesabalancemonthtomonth.In2016,58percent of familiesreportedusingcreditcardsforconvenienceonly(notcarryingabalance), downfrom64percentin2013and63percentin2010. 35 This12-monthtimeframeisdifferentfromanalogousquestionsinearliersurveys,whichhadaskedfamilies abouttheirexperienceswithcreditconstraintsoverthepast5years.Consequently,table5doesnotreport historicaldataonthecurrentquestionsoncreditconstraintsinthepast12months. 36 Researchindicatespaydayborrowersapplyforpaydayloanswhentheyhavelimitedaccesstomainstream credit.SeeNeilBhutta,PaigeMartaSkiba,andJeremyTobacman(2015),“PaydayLoanChoicesandConsequences,”JournalofMoney,Credit,andBanking,vol.47(March–April),pp.223–60. 37 Seebox2,“NewQuestionsfromthe2016SurveyofConsumerFinancesRedesign,”andtheappendixformore onchangestothe2016survey.

ChangesinU.S.FamilyFinancesfrom2013to2016 59 Appendix: Survey Procedures and Statistical Measures The2016datausedherearederivedfromthefinalinternalversionof thesurveyinformation.Datafromthissurvey,suitablyalteredtoprotecttheprivacyof respondents,along withadditionaltabulationsof datafromthesurveysbeginningwith1989,areexpectedto beavailableinSeptember2017ontheFederalReserveBoard’swebsite.38 Aspartof thegeneralreconciliationsrequiredforthisarticle,thesurveydatawere comparedwithmanyexternalestimates.Oneparticularlyimportantcomparisonisbetween theSurveyof ConsumerFinances(SCF)andtheFederalReserve’sStatisticalReleaseZ.1, FinancialAccountsof theUnitedStates,forthehouseholdsector.39Thiscomparison suggeststhatwhenthedefinitionsof thevariablesinthetwosourcesareadjustedtoa commonconceptualbasis,theestimatesof totalsinthetwosystemstendtobeclose.The dataseriesintheSCFandinStatisticalReleaseZ.1usuallyshowverysimilargrowth rates.40Ingeneral,theincomeandnetworthdatafromtheSCFcanbecomparedwith thoseof otherhouseholdsurveysonlyintermsof themediansbecauseof thespecial designof theSCFsample.41 Adjustment for Inflation Inthisarticle,alldollaramountsfromtheSCFareadjustedto2016dollarsusingthe “currentmethods”versionof theconsumerpriceindex(CPI)forallurbanconsumers.In anongoingefforttoimproveaccuracy,theBureauof LaborStatisticshasintroduced severalrevisionstoitsCPImethodology.Thecurrent-methodsindexattemptstoextend thesechangestoearlieryearstoobtainaseriesasconsistentaspossiblewithcurrentpracticesintheofficialCPI.42Toadjustassetsandliabilitiesto2016dollarsandtoadjust 38 Datafromthe2016SCFaswellaslinkstothedatausedinthisarticleforearlierperiodsandlinkstoworking papersdescribingstatisticalmethodologiesareavailableontheBoard’spublicwebsiteathttps://www .federalreserve.gov/econresdata/scf/scfindex.htm.Resultsreportedinthisarticleforearliersurveysmaydiffer fromtheresultsreportedinearlierarticlesbecauseofadditionalstatisticalprocessing,correctionofdataerrors, revisionstothesurveyweights,conceptualchangesinthedefinitionsofvariablesusedinthearticles,and adjustmentsforinflation. 39 SeeBoardofGovernorsoftheFederalReserveSystem(2017),StatisticalReleaseZ.1,“FinancialAccountsof theUnitedStates”(June8),https://www.federalreserve.gov/releases/z1. 40 Fordetailsonhowthesecomparisonsarestructuredandtheresultsofcomparisonsforearliersurveys,see AliceM.Henriques,andJoanneW.Hsu(2013),“AnalysisofWealthUsingMicroandMacroData:A ComparisonoftheSurveyofConsumerFinancesandFlowofFundsAccounts,”FinanceandEconomics DiscussionSeries2013-46(Washington:BoardofGovernorsoftheFederalReserveSystem,May),https:// www.federalreserve.gov/pubs/feds/2013/201346/201346pap.pdf,andLisaJ.Dettling,SebastianJ.Devlin-Foltz, JacobKrimmel,SarahJ.Pack,andJeffreyP.Thompson(2015),“ComparingMicroandMacroSourcesfor HouseholdAccountsintheUnitedStates:EvidencefromtheSurveyofConsumerFinances,”Financeand EconomicsDiscussionSeries2015-086(Washington:BoardofGovernorsoftheFederalReserveSystem, June),http://dx.doi.org/10.17016/FEDS.2015.086. 41 FamilyincomesareagoodexampleofissuesthatarisewhencomparingSCFmeansandmediansagainstother surveyestimates.Overthe2013–16period,estimatesofinflation-adjustedhouseholdincomefortheprevious yearfromtheCurrentPopulationSurvey(CPS)oftheU.S.CensusBureaushowanincreaseinboththe median(7.8percent)andthemean(7.6percent).Thechangesinboththemedianandthemeanareslightly smallerinabsolutetermsthanthecorrespondingincreasesintheSCF.Themediansfor2016aresimilarinthe SCF($52,700)andtheCPS($56,700).Typically,theSCFshowsahigherlevelofmeanincomethandoesthe CPS;for2016,theSCFyieldsanestimateof$102,700,whiletheCPSyieldsanestimateof$74,500.Thetwo surveysdifferintheirdefinitionsoftheunitsofobservationandinotheraspectsoftheirmethodologies.Most relevantisthefactthataCPShouseholdcancontainmorepeoplethanacorrespondingSCFfamily.Ifthe SCFmeasureisexpandedtoincludetheincomeofhouseholdmembersnotincludedintheSCFdefinitionofa family,themedianrises10.2percentovertheperiod(from$51,500in2013to$56,700in2016),whilethemean rises14.4percent(from$92,600in2013to$105,900in2016).Thesubstantialdifferenceinmeanlevelsislikely theresultofthetruncationoflargevaluesintheCPSdataaboveacertainamount,whichisdonewiththe intentofminimizingthepossibilitythatparticipantsinthatsurveymightbeidentifiable. 42 Fortechnicalinformationabouttheconstructionofthisindex,seeKennethJ.StewartandStephenB.Reed (1999),“ConsumerPriceIndexResearchSeriesUsingCurrentMethods,1978–98,”MonthlyLaborReview, vol.122(June),pp.29–38.

60 FederalReserveBulletin|September2017 familyincomefortheprecedingcalendaryearto2016,thefiguresgiveninthefollowing tablewereapplied: Adjustmentfactorforassetsanddebtsinthe Adjustmentfactorforincomeinthecalendaryear Surveyyear surveyyear beforethesurveyyear 2004 1.2718 1.3061 2007 1.1580 1.1909 2010 1.1053 1.1232 2013 1.0311 1.0461 2016 1.0000 1.0126 Definition of “Family” in the Survey of Consumer Finances Thedefinitionof “family”usedthroughoutthisarticlediffersfromthattypicallyusedin othergovernmentstudies.IntheSCF,ahouseholdunitisdividedintoaprimaryeconomic unit(PEU)—thefamily—andeveryoneelseinthehousehold.ThePEUisintendedtobe theeconomicallydominantsinglepersonorcouple(whethermarriedorlivingtogetheras partners)andallotherpersonsinthehouseholdwhoarefinanciallyinterdependentwith thateconomicallydominantpersonorcouple. Thisreportalsodesignatesaheadof thePEU,nottoconveyajudgmentabouthowan individualfamilyisstructuredbutasameansof organizingthedataconsistently.If a coupleiseconomicallydominantinthePEU,theheadisthemaleinamixed-sexcoupleor theolderpersoninasame-sexcouple.If asinglepersoniseconomicallydominant,that personisdesignatedasthefamilyheadinthisreport. Asset and Liability Categories in the Survey of Consumer Finances Thespecificconceptsof assetandliabilitycategoriesintheSCFarenecessarilytiedtothe surveyquestionwordingandassociatedfieldinterviewerinstructions,bothof whichcanbe foundintheSCFcodebookfortheyear(s)inquestion.43Whatfollowsisageneralexpositionof theassetandliabilitycategoriesreportedinthetables. Transactionaccountsincludechecking,savings,andmoneymarketdepositaccounts; moneymarketfunds;andcallorcashaccountsatbrokeragesandprepaiddebitcards.Call accountsincludethosethatholdmoneyreceivedfromthesaleof securitiesuntilthemoney isreinvested.Thesavingsaccountcategoryincludesarelativelysmallnumberof tax-preferredaccountssuchasmedicalorhealthsavingsaccountsandCoverdellor529 educationaccounts.Prepaiddebitcardsincludereloadableprepaiddebitcardsandgovernmentbenefitcards,andwerecollectedintheSCFforthefirsttimein2016. Certificatesof depositareaccountsthatareheldforasetperiodof timethatmustbe cashedorrenewedatthematuritydate.SavingsbondsincludeonlyU.S.governmentissues; recentseriesincludeEE,HH,andI,andolderbondsmaybeseriesEandH.Otherbonds includeonlythosehelddirectly(notpartof amanagedinvestmentaccountorbond fund)andincludecorporateandmortgage-backedbonds;federal,state,andlocalgovernmentbonds;andforeignbonds.Stocksincludepubliclytradedstocksthataredirectly held—thatis,corporateequitiesnotheldaspartof amanagedinvestmentaccountor mutualfund. Pooledinvestmentfundsincludestockfunds,tax-freebondfunds,governmentbondfunds, otherbondfunds,andanycombinationsthereof,butexcludemoneymarketfundsand 43 CodebooksforeachSCFwavecanbefoundathttps://www.federalreserve.gov/econresdata/scf/scfindex.htm.

ChangesinU.S.FamilyFinancesfrom2013to2016 61 indirectlyheldmutualfunds.Thesefundsincludeallothertypesof directlyheldpooled investments,suchastraditionalopen-endandclosed-endmutualfunds,exchange-traded funds(ETFs),realestateinvestmenttrusts,andhedgefunds. Retirementaccountsincludeindividualretirementaccounts(IRAs),Keoghaccounts,and certainemployer-sponsoredaccounts,suchas401(k),403(b),andthriftsavingsaccounts fromcurrentorpastjobs;othercurrentjobplansfromwhichloansorwithdrawalscanbe made;andaccountsfrompastjobsfromwhichthefamilyexpectstoreceivetheaccount balanceinthefuture.Thisdefinitionof employer-sponsoredplansisintendedtoconfine theanalysistoaccountsthatareportableacrossjobsandforwhichfamilieswillultimately havetheoptiontowithdrawthebalance.Usually,suchaccountsmaybeinvestedinvirtuallyanyasset,includingstocks,bonds,pooledinvestmentfunds,options,andrealestate.In principle,employer-sponsoredplansmaybeinvestedinasimilarlybroadway,but,in practice,aperson’schoicesforinvestmentaresometimeslimitedtoanarrowerset of assets.44 Cashvaluelifeinsuranceisthecurrent(nonzero)valueof anylifeinsurancepolicieswitha cashvaluethatcanbewithdrawn.Thesurveymeasuresthevalueof suchpoliciesaccording totheircurrentcashvalue,nottheirdeathbenefit.Inthisarticle,thecashvalueisincluded asanassetonlywhenthecashvalueatthetimeof theinterviewwasnonzero.Thisdesignationexcludestermlifeinsurancepolicies,whichonlyprovideadeathbenefit. Othermanagedassetsincludepersonalannuitiesandtrustswithanequityinterestand managedinvestmentaccounts.Annuitiesmaybethoseinwhichthefamilyhasanequity interestintheassetorinwhichthefamilypossessesanentitlementonlytoastreamof income.Thewealthfiguresinthisarticleincludeonlytheannuitiesinwhichthefamilyhas anequityinterest.45Thetrustsormanagedinvestmentaccountsincludedinothermanaged assetsarethoseinwhichfamilieshaveanequityinterestandforwhichcomponentswere notseparatelyreported.Typically,suchaccountsarethoseinwhichtheownershipis complicatedorthemanagementisundertakenbyaprofessional.46 Otherfinancialassetsincludeoilandgasleases,futurescontracts,royalties,proceedsfrom lawsuitsorestatesinsettlement,andloansmadetoothers.Onespecificfinancialasset excludedfromthiscategoryandanyotherisemployment-relatedstockoptions.Because suchoptionsaretypicallynotpubliclytraded,ortheirexecutionisotherwiseconstrained, 44 Althoughtax-deferredretirementassetsareclearlyanimportantelementinretirementplanning,familiesmay holdavarietyofotherassetsthatareintended,atleastinpart,tofinanceretirement.Twocommonandoften particularlyimportanttypesofretirementplansarenotincludedintheassetsdescribedinthissection:Social Security(thefederallyfundedOld-AgeandSurvivors’Insuranceprogram(OASI))andemployer-sponsored defined-benefitplans.OASIiswelldescribedelsewhere,anditcoversthegreatmajorityofthepopulation.(See SocialSecurityAdministration,“OnlineSocialSecurityHandbook:YourBasicGuidetotheSocialSecurity Programs,”Publication65-008,https://www.ssa.gov/OP_Home/handbook/handbook.html.)Theretirement incomeprovidedbydefined-benefitplansistypicallybasedonworkers’salariesandyearsofworkwithan employer,agroupofemployers,oraunion.Unfortunately,futureincomestreamsfromOASIanddefinedbenefitplanscannotbetranslateddirectlyintoacurrentvaluebecausevaluationdependscriticallyonassumptionsaboutfutureeventsandconditions—workdecisions,earnings,inflationrates,discountrates,mortality, andsoon—andnowidelyagreed-uponstandardsexistformakingtheseassumptions. 45 In2016,5.3percentoffamiliesreportedhavinganytypeofannuity,andofthesefamilies,75percentreported havinganequityinterest. 46 In2016,87.3percentoffamilieswithtrustsormanagedinvestmentaccountshadanequityinterestinsuchan account.Thesurveyencouragesrespondentswhohavetrustsormanagedinvestmentaccountsthatareheldin relativelycommoninvestmentstoreportthecomponentsseparately.Ofthe4.2percentoffamiliesthatreported havinganykindoftrustormanagedinvestmentaccountin2016,53.3percentofthemreportedatleastoneof thecomponentassetsseparately.Offamiliesthatdetailedthecomponentsin2016,86.9percentreportedsome typeoffinancialasset,15.4percentreportedaprimaryresidence,16.0percentreportedotherrealestate, 5.6percentreportedabusiness,and1.2percentreportedanothertypeofasset.

62 FederalReserveBulletin|September2017 theirvalueisuncertainuntiltheexercisedate;untilthen,meaningfulvaluationwould requirecomplexassumptionsaboutthefuturebehaviorof stockprices. Vehiclesincludecars,vans,sportutilityvehicles,trucks,motorhomes,recreationalvehicles, motorcycles,boats,airplanes,andhelicopters.47Primaryresidencesincludemobilehomes andtheirsites,thepartsof farmsandranchesnotusedforfarmingorranchingbusiness, condominiums,cooperatives,townhouses,othersingle-familyhomes,andotherpermanent dwellings.Otherresidentialpropertyincludessecondhomes,time-shares,one-tofourfamilyrentalproperties,andothertypesof residentialproperties.Italsoincludes outstandingbalancesonloansthatthefamilymayhavemadetofinancethesaleof propertiestheypreviouslyownedandwhicharestillowedtothefamily. Nonresidentialrealestateincludesthefollowingtypesof propertiesunlesstheyareowned throughabusiness:commercialproperty,rentalpropertywithfiveormoreunits,farmand ranchland,undevelopedland,andallothertypesof nonresidentialrealestate.Most often,nonresidentialrealestatepropertiesarefunctionallymorelikeabusinessthanaresidentialproperty.Theymayhaveseveralowners,theyaretypicallyworthaconsiderable amount,andtheyoftencarrylargemortgages,whichappeartobepaidfromtherevenues fromtheproperty,notthefamily’sotherincome.Asinthecaseof privatelyownedbusinesses,thevalueof thepropertyinthisanalysisistakentobethenetvalue. Businessequityincludesnetworthinthefollowingformsof business:soleproprietorships, limitedpartnerships,othertypesof partnerships,Scorporationsandothertypesof corporationsthatarenotpubliclytraded,limitedliabilitycompanies,andothertypesof privatebusinesses.If thefamilylivedonafarmorranchthatwasusedatleastinpartfor agriculturalbusiness,thevalueof thatpart,netof thecorrespondingshareof associated debts,isincludedwithotherbusinessassets.Inthesurvey,self-employmentstatusandbusinessownershipareindependentlydetermined.48 Debtsecuredbyresidentialpropertyconsistsof first-lienandjunior-lienmortgagesand homeequitylinesof credit(HELOCs)securedbytheprimaryresidence.Forpurposesof thisarticle,first-andjunior-lienmortgagesconsistonlyof closed-endloans—thatis,loans typicallywithaone-timeextensionof credit,asetfrequencyof repayments,anda requiredrepaymentsizethatmaybefixedorvaryovertimeinaccordancewitha pre-specifiedagreementorwithchangesinagivenmarketinterestrate.49Asatypeof open-endedcredit,HELOCstypicallyallowcreditextensionsattheborrower’sdiscretion subjecttoaprearrangedlimitandallowrepaymentsattheborrower’sdiscretionsubjectto aprearrangedminimumsizeandfrequency. Linesof creditnotsecuredbyresidentialpropertyareanylinesof creditexceptHELOCs andborrowingoncreditcards. Theterm“installmentloan”describesclosed-endconsumerloans—thatis,loansthattypicallyhavefixedpaymentsandafixedterm.Themostcommonexamplesareeducation loans;automobileloans;andloansforfurniture,appliances,andotherdurablegoods. Otherinstallmentloansincludeallclosed-endconsumerloansthatarenotforeducationor 47 Offamiliesowninganytypeofvehiclein2016,99.7percenthadacar,van,sportutilityvehicle,motorcycle,or truck.Theremainingtypesofvehicleswereheldby12.8percentoffamilies. 48 Amongthe13.0percentoffamilieswithabusinessin2016,66.0percenthadafamilyheadorthespouseor partneroftheheadwhowasself-employed;amongthe12.4percentoffamiliesinwhicheithertheheadorthe spouseorpartneroftheheadwasself-employed,68.8percentownedabusiness. 49 Ofallfamilies,39.4percenthadafirst-lienmortgagein2016(41.0percentin2013),2.3percenthadajuniorlienmortgage(2.7percentin2013),6.7percenthadahomeequitylineofcredit(7.5percentin2013),and 4.4percenthadahomeequitylineofcreditwithanoutstandingbalance(5.0percentin2013).

ChangesinU.S.FamilyFinancesfrom2013to2016 63 avehicle—thatis,loansthattypicallyhavefixedpaymentsandafixedterm.Examples includeloansforfurniture,appliances,andotherdurablegoods. Creditcardbalancesconsistof balancesonbank-typecards(suchasVisa,MasterCard, andDiscoveraswellasOptimaandotherAmericanExpresscardsthatroutinelyallow holderstocarryabalance),storecardsorchargeaccounts,gasolinecompanycards, so-calledtravelandentertainmentcards(suchasAmericanExpresscardsthatdonot routinelyallowholderstocarryabalanceandDinersClub),othercreditcards,and revolvingstoreaccountsthatarenottiedtoacreditcard.Balancesexcludepurchasesmade afterthemostrecentbillwaspaid. The“other”debtcategorycomprisesloansoncashvaluelifeinsurancepolicies,loans againstpensionaccounts,borrowingonmarginaccounts,andamiscellaneouscategory largelycomprisingpersonalloansnotexplicitlycategorizedelsewhere. Finally,theSCFmeasureof liabilitiesexcludesdebtowedbyfamily-ownedbusinessesand debtowedonnonresidentialrealestate;inthisarticle,suchdebtisnettedagainstthecorrespondingassets. Measures of Debt Burden and Credit Market Experiences in the Survey of Consumer Finances TheSCFincludesseveralquestionsdesignedtocaptureinformationaboutrespondents’ debtburdensandinteractionswithcreditmarkets.Thespecificconceptsaddressedinthe SCFarenecessarilytiedtothesurveyquestionwordingandassociatedfieldinterviewer instructions,whichcanbefoundintheSCFcodebookfortheyear(s)inquestion.50What followsisageneralexpositionof thedebtburdenandcreditmarketexperiencemeasures reportedinthetables. Leverageratioscomparethetotalof alldebtstothetotalof allassets.Theaggregate versionof thismeasureisthesumof alldebtsforallSCFrespondents,dividedbythe sumof allassetsforSCFrespondents.Themedianfordebtorsisthemedianof each individualfamily’sleverageratioandiscalculatedforthosewithpositivevaluesof total debtonly. Theaggregatedebt-to-incomeratioisthesumof liabilitiesforallSCFrespondents,divided bythetotalincomeforallSCFrespondents.Themedianfordebtorsisthe50thpercentile of anindividualfamily’sdebt-to-incomeratiosandiscalculatedforthosewithpositive valuesof totaldebtonly. Payment-to-incomeratiosmeasuretotaldebtpaymentsrelativetototalincome.51The aggregateversionof thismeasureisthesumof alldebtpaymentsforallSCFrespondents, dividedbytotalincomeforallSCFrespondents.Themedianfordebtorsisthe50thpercentileof anindividualfamily’spayment-to-incomeratiosandiscalculatedforthosewith positivevaluesof totaldebtonly. Itshouldberecognizedthattheaggregatemeasureof payment-to-incomeratiosthatis referencedinthisarticlecandifferfromaggregatemeasuresconstructedfromothersources 50 CodebooksforeachSCFwavecanbefoundathttps://www.federalreserve.gov/econresdata/scf/scfindex.htm. 51 ThedefinitionofdebtpaymentsintheSCFdoesnotincludepaymentsonleasesorrentalpayments.The surveycollectsinformationonvehicleleasepaymentsandrentonprimaryresidences,and,thus,inprinciplea broadermeasureofdebtpaymentscouldbeconstructed,onethatwouldbesimilartothe“financialobligations ratio”estimatedbytheFederalReservestaff.

64 FederalReserveBulletin|September2017 suchasthedebtserviceratio.52Thesurveymeasureof paymentsrelativetoincomecan differfromtheaggregate-levelmeasureforseveralreasons.First,thedebtpayments includedineachmeasurearedifferent.Theaggregate-levelmeasureincludesonlydebts originatedbydepositories,financecompanies,andotherfinancialinstitutions,whereasthe surveyincludes,inprinciple,debtsfromallsources.Second,theaggregate-levelmeasure usesanestimateof disposablepersonalincomefromthenationalincomeandproduct accountsfortheperiodconcurrentwiththeestimatedpaymentsasthedenominatorof the ratio,whereasthesurveymeasureusestotalbefore-taxincomereportedbysurveyfamilies fortheprecedingyear;thedifferencesinthesetwoincomemeasuresarecomplex.Third, thepaymentsintheaggregate-levelmeasureareestimatedusingaformulathatentails manyassumptionsaboutminimumpaymentsandthedistributionof loantermsatany giventime;thesurveymeasureof paymentsisdirectlyaskedof thesurveyrespondentsbut mayalsoincludepaymentsof taxesandinsuranceonrealestateloans.Fourth,becausethe surveymeasuresof paymentsandincomearebasedontheresponsesof asampleof respondents,theymaybeaffectedbothbysamplingerrorandbyvarioustypesof response errors.Asmentionedearlierinthisarticle,thesurveyincomemeasuretracksthemost comparablemeasureof incomeintheCensusBureau’sCurrentPopulationSurvey(CPS). TheSCFaskstwoquestionsthatareintendedtocapturewhetherfamiliesarecredit constrained,whichisbroadlydefinedashavingdifficultyaccessingcredit.Thefirstquestionaskstherespondentif thefamilywasturneddownforcreditatanypointinthepast year.Thesecondasksif thefamilydecidednottoapplyforcreditatsometimewithinthe pastyearforfearof beingturneddown.53Acombinationof thesetwoquestionsisusedto measureoverallcreditconstraints. Delinquencyondebtobligationsiscapturedbyaskingfamiliesthathaveanydebtatthe timeof theirinterviewwhethertheyhavebeenbehindinanyof theirloanpaymentsinthe precedingyear.Thesurveyasksif respondentshavebeenbehindatallandif theyhave beenbehindinpaymentsfor60ormoredays. Paydayloansaredefinedasloansthataremeanttoberepaidinfulloutof therespondent’snextpaycheck;theyareunsecuredloansthataretypicallysmall,short-term,and carryabove-averageinterestrates. Bankruptcybehaviorisaretrospectivequestioninwhichtherespondentreportswhetherhe haddeclaredbankruptcyatanytimeinthepastfiveyears. Foreclosureexperienceisaretrospectivequestioninwhichtherespondentreportswhether hehashadforeclosureproceedingsbroughtagainstapropertyownedbythefamilyatany timeinthepastfiveyears. Finally,convenienceuseof creditcardsisdeterminedusingquestionsonwhetherarespondenthadpositivebalancesafterthemostrecentpaymentforbank-typecards(suchas Visa,MasterCard,andDiscoveraswellasOptimaandotherAmericanExpresscardsthat routinelyallowholderstocarryabalance),storecards,gasolinecompanycards,andother creditcards. 52 SeeKarenDynan,KathleenJohnson,andKarenPence(2003),“RecentChangestoaMeasureofU.S.HouseholdDebtService,”FederalReserveBulletin,vol.89(October),pp.417–26,https://www.federalreserve.gov/pubs /bulletin/2003/1003lead.pdf. 53 Thetimeframeforthetwoquestionsisdifferentthananalogousquestionsfromearliersurveys,whichhad askedfamiliesabouttheirexperienceswithcreditconstraintsoverthepastfiveyears.

ChangesinU.S.FamilyFinancesfrom2013to2016 65 Percentiles of the Distributions of Income and Net Worth Throughoutthisarticle,referencesaremadetovariouspercentilegroupsof thedistributionsof incomeornetworth.Foragivencharacteristic,apercentilecanbeusedtodefinea family’srankrelativetootherfamilies.Forexample,the10thpercentileof thedistribution of usualincomeistheamountof incomereceivedbyafamilyforwhomlessthan 10percentof otherfamilieshavelowerincomesand90percenthavehigherincomes. Thepercentilesof thedistributionsof incomeandnetworthusedtodefinetheincomeand networthgroupsintables1and2inthearticlearegiveninthefollowingtable: Surveyyear FamilyCharacteristic 2004 2007 2010 2013 2016 Percentileofusualincome 20 26,600 26,000 27,000 24,100 25,300 40 45,700 44,700 44,900 41,800 43,500 60 71,800 71,500 69,600 65,100 69,500 80 116,200 113,700 112,300 107,700 111,400 90 169,800 160,800 168,500 159,400 177,100 Percentileofnetworth 25 16,900 16,400 9,200 9,000 10,300 50 118,400 139,700 85,400 83,700 97,300 75 418,600 431,700 333,500 327,100 369,100 90 1,060,600 1,054,200 1,052,800 971,000 1,186,300 Thegroupsthatarecreatedwhenadistributionisdividedatevery10thpercentileare commonlyreferredtoasdeciles.Similarly,whenadistributionisdividedatevery20th (25th)percentile,thegroupsareknownasquintiles(quartiles).Familiesinthefirstincome decile,forexample,arethosewithincomebelowthe10thpercentile. Racial and Ethnic Identification Inthisarticle,theraceandethnicityof afamilyintheSCFareclassifiedaccordingtothe self-identificationof thatfamily’soriginalrespondenttotheSCFinterview.Forgreater comparabilitywithearlierSCFdata,thedatareportedinthisarticlegrouprespondents intofourclassificationsbasedontheirresponsestotheracialidentificationquestion:white non-Hispanic,blackorAfrican-Americannon-Hispanic,HispanicorLatino,andotheror multiplerace.The“otherormultiplerace”classificationincludesrespondentsidentifying asAsian,AmericanIndian,AlaskaNative,NativeHawaiian,PacificIslander,otherrace, andallrespondentsreportingmorethanoneracialidentification.54 Thequestionsunderlyingthemethodof classificationusedinthesurveywerechangedin both1998and2004.Startingin1998,SCFrespondentswereallowedtoreportmorethan oneracialidentification;insurveysbeforethen,onlyoneresponsewasrecorded.For maximumcomparabilitywithearlierdata,respondentsreportingmultipleracialidentificationswereaskedtoreporttheirstrongestracialidentificationfirst.Indatareportedinthis article,respondentsreportingmultipleracialidentificationsinthesurveysstartingwith 1998areclassifiedas“otherormultiplerace.”Inthe2016SCF,6.4percentof respondents reportedmorethanoneracialidentification,upfrom6.1percentin2013,5.4percentin 54 ArticlesforearlieryearsoftheSCFreporteddatathatclassifiedallfamiliesintotwogroups:white non-HispanicandnonwhiteorHispanic.Thedefinitionforwhitenon-Hispanicinthisarticleisconsistentwith thatusedinearlieryears,whilethenonwhiteorHispanicgrouphasbeensplitintothreeclassifications(black orAfrican-Americannon-Hispanic,HispanicorLatino,andotherormultiplerace)indatareportedinthis article.

66 FederalReserveBulletin|September2017 2007,and2.3percentin2004.Thepublicreleasedatasetincludestheethnicidentification andracialidentificationvariables,enablingtheconstructionof alternativeclassifications. Beginningwiththe2004survey,thequestiononracialidentificationisprecededbyaquestiononwhetherrespondentsconsiderthemselvestobeHispanicorLatinoincultureor origin;previously,suchethnicidentificationwascapturedonlytotheextentthatitwas reportedasaresponsetothequestiononracialidentification.Theclassificationsinthis articleignoretheinformationonethnicidentificationavailableinthesurveyssince2004, againforgreatercomparabilitywithearlierSCFdata.Of thosewhorespondedaffirmativelytothequestiononHispanicorLatinoidentificationin2016,91.6percentalso reported“HispanicorLatino”asoneof theirracialidentifications,and82.5percent reporteditastheirprimaryracialidentification.BecausethequestiononHispanicor Latinoethnicityprecedestheoneonracialidentificationinthesurveysfrom2004through 2016,theanswertothesecondof thesetwoquestionsmayhavebeeninfluencedbythe answertothefirst.55 Classifications of Educational Attainment Inthisarticle,theeducationalattainmentof afamilyreferstothehighestdegreeobtained bythehouseholdhead.Thegroupsareasfollows:nohighschooldiploma,highschool diploma(includesindividualswithahighschooldiplomaorGEDorotherequivalency program),somecollege(includesindividualswithsomecollegebutnodegreeoranassociate'sdegree),andcollegedegree(includesindividualswithabachelor'sdegreeorhigher). Beginningwiththe2016survey,theSCFmodifieditseducationalattainmentquestionto morecloselyaligntheSCFwithotherhouseholdsurveys,includingtheCensusandCPS. Forsurveysbefore2016,respondentswereaskedtolistthehighestgradeof schooloryear of collegecompleted,andfollow-upquestionsaskedtherespondentaboutthetypeof degreeobtained.Startingwiththe2016survey,thefirsteducationalattainmentquestion asksaboutthehighestdegreeobtained,andfollow-upquestionsaskrespondentswho reportahighschooldiplomawhetheritwasobtainedbygettingaGEDorotherequivalencyprogram,andrespondentswhoreportsomecollegethenumberof yearsof college.It ispossiblethischangemayhavepromptedchangesinreporting,althoughtheeducational attainmentof SCFfamilieswassimilartoCPSfamiliesinboth2013and2016.56Adifferencebetweenthewaythedataarereportedinthisarticlecomparedwithprevious versionsof thisarticleisthatfamilieswherethehouseholdheadhasanassociate'sdegree couldhavebeenclassifiedinthecollegedegreegroup,whereasin2016thosefamiliesareall classifiedinthesomecollegegroup. The Sampling Techniques Thesurveyisexpectedtoprovideacoresetof dataonfamilyincome,assets,andliabilities. Themajoraspectsof thesampledesignthataddressthisrequirementhavebeenlargely constantsince1989.TheSCFcombinestwotechniquesforrandomsampling.First,astandardmultistagearea-probabilitysample(ageographicallybasedrandomsample)isselected 55 Foracomprehensivediscussionofstandardsfordefiningraceandethnicity,seeExecutiveOfficeofthePresident,OfficeofManagementandBudget(2002),“ProvisionalGuidanceontheImplementationofthe1997 StandardsforFederalDataonRaceAndEthnicity,”guidancedocument(Washington:ExecutiveOfficeofthe President,December15). 56 In2013,theeducationalattainmentofSCF(CPS)householdheadswasthefollowing:11percent(11.3percent) hadnohighschooldiploma,31.3percent(27.9percent)hadahighschooldiploma,25.7percent(29percent) hadsomecollege,and32percent(31.8percent)hadacollegedegree.In2016,theeducationalattainmentof SCF(CPS)householdheadswasthefollowing:12.7percent(10.4percent)hadnohighschooldiploma, 26percent(27.2percent)hadahighschooldiploma,27.3percent(28.9percent)hadsomecollege,and 34percent(33.5percent)hadacollegedegree.

ChangesinU.S.FamilyFinancesfrom2013to2016 67 toprovidegoodcoverageof characteristics,suchashomeownership,thatarebroadly distributedinthepopulation. Second,asupplementalsampleisselectedtodisproportionatelyincludewealthyfamilies, whichholdarelativelylargeshareof suchthinlyheldassetsasnoncorporatebusinesses andtax-exemptbonds.Calledthe“listsample,”thisgroupisdrawnfromalistof statistical recordsderivedfromtaxreturns.Theserecordsareusedunderstrictrulesgoverning confidentiality,therightsof potentialrespondentstorefuseparticipationinthesurvey,and thetypesof informationthatcanbemadeavailable.PersonslistedbyForbesmagazineas beingamongthewealthiest400peopleintheUnitedStatesareexcludedfromsampling. Of the6,254interviewscompletedforthe2016SCF,4,754werefromthearea-probability sample,and1,500werefromthelistsample;for2013,4,568werefromthearea-probability sample,and1,458werefromthelistsample.Thenumberof familiesrepresentedinthe surveysconsideredinthisarticleisgivenbythefollowingtable: Numberoffamiliesrepresented Year (millions) 2001 106.5 2004 112.1 2007 116.1 2010 117.6 2013 122.5 2016 126.0 Overallpopulationgrowthbetween2013and2016was2.7percent,accordingtofigures fromtheCensusBureau,upslightlyfromthe2.2percentgrowthratebetween2010and 2013.AlsoaccordingtoCensusBureauestimates,thenumberof householdsincreased 2.7percentbetween2013and2016—wellbelowtherateof householdformationbetween 2010and2013,whichwas4.2percent.Withthepopulationgrowingatacomparablerate tohouseholdformation,theaveragenumberof personsperhouseholdbarelychanged, from2.54peoplein2013to2.53in2016. The Interviews Althoughquestionshavebeenmodifiedandnewquestionsaddedovertime,thecoreof the surveyquestionnairehaschangedinonlyminorwayssince1989.Changestothequestionnairegenerallyincludeinstancesinwhichthestructurewasalteredtoaccommodate changesinfinancialbehaviors,intypesof financialarrangementsavailabletofamilies includingthosewithbusinessesthatarenotpubliclytraded,andinregulationscovering datacollection.In2016,interviewsectionsoneducationalattainment,educationloans, paymentmethods,andfinancialinstitutionswererevised,andadditionalquestions addressingfinancialliteracyamongrespondents,parentaleducationalattainment,and decisionsunderhypotheticalfinancialsituationshavealsobeenincluded(seebox2,“New Questionsfromthe2016Surveyof ConsumerFinancesRedesign”).57Forallchanges, everyefforthasbeenmadetoensurethemaximumdegreeof comparabilityof thedata overtime.Exceptwherenotedinthearticle,thedataarehighlycomparableovertime. Thegenerosityof familiesingivingtheirtimeforinterviewshasbeencrucialtotheongoing successof theSCF.Inthe2016SCF,themedianinterviewlengthwasabout90minutes. However,insomeparticularlycomplicatedcases,theamountof timeneededwassubstan- 57 Foradetailedlistofallchangestothequestionnairein2016,seehttps://www.federalreserve.gov/econres/ scfindex.htm.

68 FederalReserveBulletin|September2017 tiallymorethanthreehours.Theroleof theinterviewersinthiseffortisalsocritical. Withouttheirdedicationandperseverance,thesurveywouldnotbepossible. TheSCFinterviewswereconductedlargelybetweenthemonthsof MayandDecemberin eachsurveyyearbyNORC,asocialscienceandsurveyresearchorganizationatthe Universityof Chicago.Themajorityof interviewswereobtainedinperson,althoughinterviewerswereallowedtoconducttelephoneinterviewsif thatwasmoreconvenientforthe respondent.Eachinterviewerusedaprogramrunningonalaptopcomputertoadminister thesurveyandcollectthedata. Theuseof computer-assistedpersonalinterviewinghasthegreatadvantageof enforcing systematiccollectionof dataacrossallcases.Thecomputerprogramdevelopedtocollect thedatafortheSCFwastailoredtoallowthecollectionof partialinformationintheform of rangeswheneverarespondenteitherdidnotknowordidnotwanttorevealanexact dollarfigure. Theresponserateinthearea-probabilitysampleismorethandoublethatinthelistsample. Inboth2013and2016,about65percentof householdsselectedforthearea-probability sampleactuallycompletedinterviews.Theoverallresponserateinthelistsamplewasabout one-third;inthepartof thelistsamplelikelycontainingthewealthiestfamilies,the responseratewasonlyaboutone-half thatlevel. Weighting Toprovideameasureof thefrequencywithwhichfamiliessimilartothesamplefamilies couldbeexpectedtobefoundinthepopulationof allfamilies,ananalysisweightis computedforeachcase,accountingbothforthesystematicpropertiesof thesampledesign andfordifferentialpatternsof nonresponse.TheSCFresponseratesarelowbythestandardsof someothermajorgovernmentsurveys,andanalysisof thedataconfirmsthatthe tendencytorefuseparticipationishighlycorrelatedwithnetworth.However,unlikeother surveys,whichalmostcertainlyalsohavedifferentialnonresponsebywealthyhouseholds, theSCFhasthemeanstoadjustforsuchnonresponse.Amajorpartof SCFresearchis devotedtotheevaluationof nonresponseandadjustmentsfornonresponseintheanalysis weightsof thesurvey.58 Sources of Error Errorsmaybeintroducedintosurveyresultsatmanystages.Samplingerror—thevariabilityexpectedinestimatesbasedonasampleinsteadof acensus—isaparticularly importantsourceof error.Sucherrorcanbereducedeitherbyincreasingthesizeof a sampleor,asisdoneintheSCF,bydesigningthesampletoreduceimportantsourcesof variability.Samplingerrorcanbeestimated,andforthisarticleweusereplicationmethods todoso. Replicationmethodsdrawsamples,calledreplicates,fromthesetof actualrespondents inawaythatincorporatestheimportantdimensionsof theoriginalsampledesign.Inthe SCF,weightswerecomputedforallof thecasesineachof thereplicates.59Everyvaluefor whichstandarderrorsarereportedinthisarticleisaweightedstatisticestimatedusingthe 58 Theweightsusedinthisarticleareadjustedfordifferentialratesofnonresponseacrossgroups.SeeArthurB. Kennickell(1999),“RevisionstotheSCFWeightingMethodology:AccountingforRace/Ethnicityand Homeownership”(Washington:BoardofGovernorsoftheFederalReserveSystem,January),https://www .federalreserve.gov/econresdata/scf/scf_workingpapers.htm. 59 SeeArthurB.Kennickell(2000),“RevisionstotheVarianceEstimationProcedurefortheSCF”(Washington:

ChangesinU.S.FamilyFinancesfrom2013to2016 69 replicatesamples.Toestimatetheoverallstandarderror,ameasureof thevariabilityof theseestimatesiscombinedwithameasureof thevariabilitybecauseof imputationfor missingdata. Othererrorsincludethosethatinterviewersmayintroducebyfailingtofollowthesurvey protocolormisunderstandingarespondent’sanswers.SCFinterviewersaregivenlengthy, project-specifictrainingandongoingcoachingtominimizesuchproblems.Respondents mayintroduceerrorbyinterpretingaquestioninasensedifferentfromthatintendedby thesurvey.FortheSCF,extensivepretestingof questionsandthoroughreviewof thedata tendtoreducethissourceof error. Nonresponse—eithercompletenonresponsetothesurveyornonresponsetoselecteditems withinthesurvey—maybeanotherimportantsourceof error.Asnotedinmoredetail previously,theSCFusesweightingtoadjustfordifferentialnonresponsetothesurvey.To addressmissinginformationonindividualquestionswithintheinterview,theSCFuses statisticalmethodstoimputemissingdata;thetechniquemakesmultipleestimatesof missingdatatoallowforanestimateof theuncertaintyattributabletothistype of nonresponse. BoardofGovernorsoftheFederalReserveSystem,October),https://www.federalreserve.gov/econresdata/scf/ scf_workingpapers.htm.

70 FederalReserveBulletin|September2017 Errata TheauthorsrevisedthisarticleonOctober10,2017,tocorrectthefollowing: ‰ Onp.3,inthefinalbulletpoint,theshareof familiesthat“wereconsideredcredit constrained”in2016wascorrectedto20.8percent. ‰ Onp.27,intable5,the2016valuefortherowlabel“Didnotapplyforcreditforfearof beingturneddown(pastyear)”wascorrectedto14.4percent. ‰ Onp.27,intable5,the2016valuefortherowlabel“Eitherturneddownforcreditor feareddenial(pastyear)”wascorrectedto20.8percent. ‰ Onp.30,inthefinalsentenceof thefirstfullparagraph,theshareof familiesthat “responded‘yes’tooneorbothof thesequestions”in2016wascorrectedto 20.8percent.

71 Federal Reserve BULLETIN February 2017 Vol. 103, No. 1 Legal Developments: Fourth Quarter, 2016 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act BNC Bancorp High Point, North Carolina OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2016–12(October14,2016) BNCBancorp(“BNC”),HighPoint,NorthCarolina,abankholdingcompany,has requestedtheBoard’sapprovalundersection3of theBankHoldingCompanyActof 1956,asamended(“BHCAct”),1tomergewithHighPointBankCorporation(“HPBC”), andtherebyindirectlyacquireHighPointBankandTrustCompany(“HighPoint Bank”),bothof HighPoint,NorthCarolina.Followingtheproposedacquisition,High PointBankwouldbemergedintoBNC’ssolesubsidiarystate-charteredbank,Bankof NorthCarolina(“BNCBank”),Thomasville,NorthCarolina.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister44610(July8,2016)).3Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. BNC,withconsolidatedassetsof approximately$6.5billion,isthe176thlargestinsured depositoryorganizationintheUnitedStates,4controllingapproximately$5.4billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.5BNCcontrolsBNCBank,which operatesinNorthCarolina,SouthCarolina,andVirginia.BNCBankisthe10thlargest insureddepositoryinstitutioninNorthCarolina,controllingapproximately$3.0billionin deposits,whichrepresentlessthan1percentof thetotaldepositsof insureddepository institutionsinthatstate. HPBC,withconsolidatedassetsof approximately$779.6million,isthe951stlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $634.0millioninconsolidateddeposits,whichrepresentlessthan1percentof nationwide 1 12U.S.C.§1842. 2 ThemergerofHighPointBankintoBNCBankissubjecttotheapprovaloftheFederalDepositInsuranceCorporation(“FDIC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct(“BankMergerAct”).12U.S.C. §1828(c).TheFDICapprovedthebankmergeronSeptember30,2016. 3 12CFR262.3(b). 4 Nationalassetdata,marketshare,andrankingdataareasJune30,2016,unlessotherwisenoted.Stateassetdata, marketshare,andrankingdataareasofJune30,2015,unlessotherwisenoted. 5 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavingsbanks.

72 FederalReserveBulletin|February2017 deposits.HPBCcontrolsHighPointBank,whichoperatesonlyinNorthCarolina.High PointBankisthe29thlargestinsureddepositoryinstitutioninNorthCarolina,controlling depositsof approximately$646.2million,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,BNCwouldbecomethe167thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$7.3billion,which representlessthan1percentof thetotalassetsof insureddepositoryorganizationsinthe UnitedStates.BNCwouldcontrolconsolidateddepositsof approximately$6.0billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.InNorthCarolina,BNCBankwouldbecomethe7th largestdepositoryinstitution,controllingdepositsof approximately$3.6billion,which representapproximately1percentof thetotaldepositsof insureddepositoryinstitutionsin thatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.6TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.7 BNCandHPBChavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Greensboro-HighPoint,NorthCarolinabankingmarket(“Greensboromarket”)andthe Winston-Salem,NorthCarolinabankingmarket(“Winston-Salemmarket”).8TheBoard hasconsideredthecompetitiveeffectsof theproposalineachof therelevantmarketsin lightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthemarkets;therelativesharesof totaldepositsin insureddepositoryinstitutionsinthemarkets(“marketdeposits”)thatwouldbecontrolled byBNC;9theconcentrationlevelsof marketdepositsandtheincreaseintheselevels,as measuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof Justice BankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);10and othercharacteristicsof themarkets. 6 12U.S.C.§1842(c)(1). 7 12U.S.C.§1842(c)(1)(B). 8 TheGreensboromarketisdefinedasDavidson,Guilford,Randolph,andRockinghamCounties,allofNorth Carolina.TheWinston-SalemmarketisdefinedasDavie,Forsyth,Stokes,andYadkinCounties,allofNorth Carolina. 9 LocaldepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 10 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:FourthQuarter,2016 73 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheGreensboroandWinston-Salem markets.Onconsummationof theproposal,theGreensboromarketwouldremainmoderatelyconcentrated,asmeasuredbytheHHI.TheHHIinthismarketwouldincrease101 points,from1050to1151,andnumerouscompetitorswouldremaininthemarket.11On consummationof theproposal,theWinston-Salemmarketwouldremainhighlyconcentrated,asmeasuredbytheHHI;however,marketconcentrationwouldincreasebylessthan onepointasmeasuredbytheHHI.Numerouscompetitorswouldalsoremaininthe market.12 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheGreensboroandWinston-Salemmarketsorinanyotherrelevant bankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsare consistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.13Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof the organizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformation regardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’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. 11 BNCoperatesthe3rdlargestdepositoryinstitutionintheGreensboromarket,controllingapproximately $1.7billionindeposits,whichrepresentapproximately11.7percentofmarketdeposits.HPBCoperatesthe8th largestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$623.4million,which represent4.3percentofmarketdeposits.Onconsummationoftheproposedtransaction,BNCwouldbecome the2ndlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$2.3billion,which wouldrepresentapproximately16.0percentofmarketdeposits.Twenty-oneothercompetitorswouldremain inthemarket. 12 BNCoperatesthe9thlargestdepositoryinstitutionintheWinston-Salemmarket,controllingapproximately $124millionindeposits,whichrepresentapproximately0.4percentofmarketdeposits.HPBCoperatesthe 15thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$22.9million, whichrepresent0.07percentofmarketdeposits.Onconsummationoftheproposedtransaction,BNCwould remainthe9thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $146.9million,whichwouldrepresentapproximately0.5percentofmarketdeposits.TheHHIfortheWinston- Salemmarketwouldincreasebylessthan1pointto6740onconsummation,and17othercompetitorswould remaininthemarket. 13 12U.S.C.§1842(c)(2),(5),and(6).

74 FederalReserveBulletin|February2017 BNCandHPBCarebothwellcapitalizedandthecombinedentitywouldremainsoon consummationof theproposedtransaction.Theproposedtransactionisabankholding companymergerthatisstructuredasacashandstockpurchase,withasubsequentmerger of thesubsidiarydepositoryinstitutions.14Theassetquality,earnings,andliquidityof BNCBankandHighPointBankareconsistentwithapproval,andBNCappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof the institutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BNC,HPBC,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof their management,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyBNC;theBoard’ssupervisoryexperienceswithBNC andHPBCandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations; andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws;aswellasinformationprovidedbythecommenter. BNCanditssubsidiarydepositoryinstitutionarebothconsideredtobewellmanaged. BNChasarecordof successfullyintegratingorganizationsintoitsoperationsandriskmanagementsystemsafteracquisitions.BNC’sdirectorsandseniorexecutiveofficershave substantialknowledgeof andexperienceinthebankingandfinancialservicessectors,and itsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionary proposal. TheBoardalsohasconsideredBNC’splansforimplementingtheproposal.BNChas conductedcomprehensiveduediligenceandisdevotingsufficientfinancialandother resourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal. BNCwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,BNC’smanagementhastheexperienceandresourcestoensurethatthe combinedorganizationoperatesinasafeandsoundmanner,andBNCplanstointegrate HPBC’sexistingmanagementandpersonnelinamannerthataugmentsBNC’smanagement.15 Basedonallthefactsof record,includingBNC’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andthecommentsreceivedontheproposal,theBoardconcludesthatconsiderations relatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof BNCandHPBCin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.16Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe 14 Toeffecttheholdingcompanymerger,eachshareofHPBCcommonstockwouldbeconvertedintoarightto receiveBNCcommonstockandcash,basedonacertainexchangeratio.BNChasthefinancialresourcesto fundthetransaction. 15 Onconsummationoftheproposal,oneofHighPointBank’sdirectorswillbeaddedtotheboardsofdirectors ofBNCandBNCBank. 16 12U.S.C.§1842(c)(2).

LegalDevelopments:FourthQuarter,2016 75 served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,17andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.18 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,information providedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomay considertheapplicantinstitution’sbusinessmodel,itsmarketingandoutreachplans,the organization’splansafterconsummation,andanyotherinformationtheBoarddeems relevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof BNCBank andHighPointBank;thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theFederalDepositInsuranceCorporation(“FDIC”),confidentialsupervisoryinformation,informationprovidedbyBNC,andthepubliccommentsreceivedon theproposal. PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromacommenterwhoobjectedtotheproposal onthebasisof allegeddisparitiesbyBNCBankinthenumberof conventionalhome purchaseloansmadetoAfricanAmericansandHispanics,ascomparedtowhites,byBNC BankintheCharleston-NorthCharleston-Summerville,SouthCarolina(“Charleston”) MetropolitanStatisticalArea(“MSA”),thenumberof refinanceloansmadetoAfrican Americans,ascomparedtowhites,intheCharlestonMSA,asreflectedindatareported undertheHomeMortgageDisclosureAct(“HMDA”)19for2014,andthenumberof conventionalhomepurchaseloansmadetoAfricanAmericans,comparedtowhites,inthe CharlestonMSA,asreportedunderHMDAfor2015.Thecommenteralsoobjectedto theproposalonthebasisof allegeddisparitiesinthenumberof conventionalhome purchaseloansmadetoAfricanAmericansandHispanics,ascomparedtowhites,andthe numberof refinanceloansandhomeimprovementloansmadetoAfricanAmericans,as comparedtowhites,byHighPointBankintheGreensboro-HighPoint,NorthCarolina MSA(“GreensboroMSA”),asreportedunderHMDAfor2014.Inaddition,the commenterallegeddisparitiesinthenumberof homepurchaseloansmadetoAfrican Americans,ascomparedtowhites,byHighPointBankintheWinston-Salem,NorthCarolinaMSA(“Winston-SalemMSA”).ThecommenteralsocriticizedtherateatwhichBNC BankdeniedrefinanceloanapplicationsfromAfricanAmericans,ascomparedtowhites, intheCharlestonMSA,andtherateatwhichHighPointBankdeniedrefinanceloan 17 12U.S.C.§2901(b). 18 12U.S.C.§2903. 19 12U.S.C.§2801etseq.

76 FederalReserveBulletin|February2017 applicationsfromAfricanAmericans,ascomparedtowhites,intheGreensboroMSA,as reportedunderHMDAfor2014. Businessesof theInvolvedInstitutionsandResponsetotheComments BNCBankisastate-charteredcommercialbank,headquarteredinThomasville,North Carolina.Itoffersafullrangeof bankingandfinancialservices,includingdeposit accounts;commercial,realestate,andconsumerloanproducts;mortgagebrokerage services;andafulllineof commercialandconsumerinsuranceandinvestmentproducts andservices.Thebank’smainloanfocusissmallandmedium-sizedbusinesses. HighPointBankisastate-charteredcommercialbankthatoffersabroadrangeof consumerandcommercialbankingproductsandservicesthroughitsbranchnetworkin NorthCarolinaanditswholly-ownedsubsidiaries.Theproductsandservicesthatitoffers includechecking,savings,moneymarket,andcertificateof depositaccounts;andmortgages,consumerinstallment,andloanproducts.Inaddition,HighPointBankoffersthe followingservicesthroughitswholly-ownedsubsidiaries:home,health,life,automotive, andotherinsuranceproducts;trustandestateplanning;investmentmanagement;and retirementservices. BNCassertedthatBNCBank’slendingrecordtominoritiesintheCharlestonMSA,as reflectedin2014HMDAdata,wasattributabletothebank’srecententryintotheMSAin mid-2012.BNCrepresentedthatalthoughthebankdidnotreceivemanymortgageapplicationsintheCharlestonMSA,thebank’sapprovalratesforminoritieswereveryfavorable.BNCalsoassertedthatBNCBankhasincreaseditslendingtoAfricanAmericans andHispanicssinceitsentryintotheCharlestonMSA,asreflectedinthebank’sHMDA lendingdatareportedin2014,ascomparedtoits2013HMDAlendingdata.Also,BNC assertedthattheCharlestonMSAisaverycompetitivemarket,andthebankismaking progressinexpandingitsCharlestonbranchnetwork.BNCexpectsthatthelargerbranch networkwillallowBNCBanktobetterservethecommunity. BNCmaintainedthatHighPointBankapprovedallhomepurchaseapplicationsreceived fromAfricanAmericansintheGreensboroandWinston-SalemMSAs.BNCattributesthe lowapprovalratebyHighPointBankforhomerefinanceloanstoAfricanAmericansto thelowvolumeof applicationsreceivedfromAfricanAmericansbyHighPointBank. BNCassertedthatHighPointBank’slowmortgageapplicationvolumewasattributableto thehighlycompetitivebankingmarkets,thebank’slimitednumberof locations,the bank’ssmalloverallstaffinglevels,andthebank’srecententryandlackof namerecognitionintheGreensboroandWinston-SalemMSAs. BNCpointedtothe“Satisfactory”CRAperformanceratingsof BNCBankandHigh PointBankasanindicationthatthesebanksaremeetingthecreditneedsof theircommunities.BNCfurtherassertedthatBNCBankiscommittedtoensuringthatthecredit needsof itscommunitiesarebeingmetandisdevelopinginitiativesandprogramsfocused onlending,investment,andserviceactivitiesinitscommunities,withemphasisondevelopingprogramsforLMIindividuals. Recordsof PerformanceUndertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews

LegalDevelopments:FourthQuarter,2016 77 providedbytheappropriatefederalsupervisors.20Inthiscase,theBoardconsideredthe supervisoryviewsof andinformationprovidedbytheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.21Aninstitution’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,includingforhomemortgageloans,thenumber andamountsof loanstolow-,moderate-,middle-,andupperincomeindividuals;22(4)the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloans,andtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.23 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. 20 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 21 12U.S.C.§2906. 22 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloansmadetobusinesses andfarmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamount atorigination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals. See,e.g.,12CFR228.22(b)(3). 23 Otherdatarelevanttocreditdecisionscouldincludecredithistoryproblems,debt-to-incomeratios,andloanto-valueratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditional informationbeforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

78 FederalReserveBulletin|February2017 CRAPerformanceof BNCBank BNCBankwasassignedanoverall“Satisfactory”ratingbytheFDICatitsmostrecent CRAperformanceevaluation(“BNCBankEvaluation”),asof April28,2014.24BNC Bankreceiveda“HighSatisfactory”ratingforboththeLendingTestandtheServiceTest, anda“LowSatisfactory”ratingfortheInvestmentTest.25TheBoardhasconsultedwith theFDICregardingtheBNCBankEvaluation. Examinersfoundthatthebank’soveralllendingactivityreflectedgoodresponsivenessto theassessmentareas’creditneeds.Examinersnotedthatthebankoriginatedasignificant majorityof homemortgageloansandsmallbusinessloanswithinitscombinedassessment areas,andthegeographicdistributionof loansreflectedgoodpenetrationthroughoutthe assessmentareas.Examinersalsonotedthatthebankoriginatedarelativelyhighlevelof communitydevelopmentloansinitsassessmentareasandmadegooduseof flexible lendingpracticesinordertoservetheassessmentareas’creditneeds.BNCBankisqualifiedasaU.S.SmallBusinessAdministration(“SBA”)lender,andexaminershighlighted thatthebankwasoneof themostactiveSBAlendersinNorthCarolinaovertheevaluationperiodandthatitrankedamongthetoptenof alllenders,withthebanksranked aheadof BNCBankhavinglargerassetsizesandnationalorregionalpresences.Thebank alsoofferedflexiblemortgageloanproductsthroughtheFederalHousingAdministration,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,scholarshipsforLMIstudents,andbasichumanservicesto LMIindividuals. Examinersnotedthatthebank’soverall“HighSatisfactory”ratingundertheServiceTest wasbasedprimarilyonthecommunitydevelopmentservices,butexaminersalsoconsid- 24 TheBNCBankEvaluationwasconductedusingtheCRALargeBankExaminationProceduresandcovered thetimeperiodfromJune27,2011,toApril28,2014.FortheLendingTest,theevaluationincludedareviewof loansreportableunderHMDAandCRAdatacollectionrequirementsfor2012and2013,focusingonhome purchaseandhomerefinanceloansonly.FortheInvestmentandServiceTests,theevaluationalsocoveredthe periodfromJune27,2011,toApril28,2014.TheInvestmentTestalsoincludedinvestmentspriortoJune27, 2011,thatwerestilloutstandingasofApril28,2014. 25 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.

LegalDevelopments:FourthQuarter,2016 79 eredthebank’sretailaccountservices.ExaminershighlightedthatBNCBank’smanagement,directorate,andotherpersonnelprovidedarelativelyhighlevelof communitydevelopmentservicesinthebank’sassessmentareas.Examinersalsonotedthatthebankoffered afullarrayof financialservicesthroughoutitsassessmentareastoensurethattheneedsof thecommunitiesweremetthroughseveraldeliverymethodsandthatthebank’sdelivery systemswerereasonablyaccessibletoessentiallyallportionsof theinstitution’sassessment areas.Inaddition,examinersnotedthatthequantity,quality,andaccessibilityof servicedeliverysystemstoallsegmentsof itsassessmentareassupporteda“HighSatisfactory” rating. Examinersnotedthatthebank’s“LowSatisfactory”ratingundertheInvestmentTestwas basedprimarilyonthedollaramountof thebank’squalifiedinvestments.Examinersalso notedthatthebankrarelyusedinnovativeand/orcomplexinvestmentstosupportcommunitydevelopmentinitiatives.However,examinersfoundthatthebankhadanadequatelevel of qualifiedcommunitydevelopmentinvestmentsandgrants,andthebankexhibited adequateresponsivenesstocreditandcommunityeconomicdevelopmentneedsthroughits investmentsandcontributions. BNCBank’seffortssincetheBNCBankEvaluation BNCassertsthat,sincetheBNCBankEvaluation,BNCBankhasinitiatedanumberof effortstoenhanceitssupportof allof thecommunitiesinwhichthebankoperates.For example,BNCrepresentsthatBNCBankhascreatedtwonewproductsthatshouldallow thebanktobetterservetheneedsof theunbankedandunderbankedinthecommunities servedbythebank.Thefirstnewproductisadepositaccounttitled“BNCBeginnings,” whichistargetedtoindividualsworkingtoestablishorreestablishabankingrelationship withtheinstitution.BNCbelievesthatthisproductwillbeparticularlybeneficialorattractivetoyoungerindividualsaswellastheunbankedorunderbankedpopulationsinthe communitiesthatthebankserves.Thesecondnewproductisanaffordablemortgage productthatisdesignedforpotentialhomeownerswithincomeof 80percentorlessof the area’smedianincome.BNCBankassertsthatthefeaturesandbenefitsof thisproductare veryattractivetothemarketandthebankhasreceivedtremendousinterestacrossits footprint. BNCrepresentsthatBNCBankisdevelopinginitiativestoexpandoutreachandincrease lendingactivities,focusingonLMIindividualswithinitscommunities.BNCfurtherrepresentsthatthebankhasformedaFairBankingTeam,responsibleforcompliancewithfair lending,CRA,HMDA,andUnfair,Deceptive,AbusiveActsandPracticeslaws.Additionally,thebankhasformedaCRAcommittee,whichconsistsof anumberof seniorofficers of thebank,includingthedirectorof mortgagebanking,chief creditofficer,andthe bank’sCRAofficer.BNCalsorepresentsthatthebankhashiredadirectorof community relationswhoisdirectlyresponsibleforhelpingtoincreaseinteractionwiththecommunitiesthebankserves. CRAPerformanceof HighPointBank HighPointBankwasassignedanoverall“Satisfactory”ratingbytheFDICatitsmost recentCRAperformanceevaluation(“HighPointBankEvaluation”),asof September8, 2014.26HighPointBankreceiveda“Satisfactory”ratingforboththeLendingTest27and theCommunityDevelopmentTest. 26 TheHighPointBankEvaluationwasconductedbytheFDICusingtheIntermediateSmallBankCRAExaminationProcedures,whichincludetheLendingandCommunityDevelopmentTests.UndertheLendingTest, examinersevaluatedthebank’shomemortgageloansandsmallbusinessloansfrom2012and2013.Aspartof

80 FederalReserveBulletin|February2017 ExaminersfoundthatHighPointBank’sloan-to-depositratiowasreasonable,giventhe institution’ssizeandfinancialconditionandthecreditneedsof itsassessmentareas. Examinersnotedthatamajorityof thebank’sloanswereoriginatedwithinitsassessment areas.Examinersalsofoundthatthebankhadanexcellentdistributionof loansamong geographiesof differentincomelevelswithinitsassessmentareas.Examinersnotedthatthe bankhadareasonableborrowerdistributionamongbusinessesof differentsizesandindividualsof differentincomelevels. Examinersfoundthatthebank’scommunitydevelopmentperformancedemonstratedan adequateresponsivenesstothecommunitydevelopmentneedsof thebank’sassessment areasthroughcommunitydevelopmentloans,qualifiedinvestments,andcommunitydevelopmentservicesconsideringthebank’scapacityandtheneedandavailabilityof such opportunitiesforcommunitydevelopmentinthebank’sassessmentareas. Viewsof OtherRegulator,andFDICApprovalof BankMerger TheBoardhasconsultedwiththeFDIC,theprimaryfederalsupervisorof bothBNC BankandHighPointBank,regardingtheFDIC’sreviewof theproposedmergerof these twoinstitutions.Afterafullreviewof theproposal,includingreviewof theHMDAdata citedbythecommenterinthepubliccommentsopposingtheapplicationbeforetheBoard, theFDICdeterminedthattheproposalmetthestandardsof theBankMergerActand approvedtheproposalwithoutconditions.Inaddition,theFDIChasindicatedits non-objectiontoapprovalof thisapplication. ThecommenterfiledsimilarCRAandfairlendingcommentswithrespecttoBNCBank’s lendingintheCharlestonMSAashadbeenpreviouslyfiledinconnectionwithBNC’s acquisitionof SouthcoastFinancialCorporation,MountPleasant,SouthCarolina,which wasapprovedinJune2016.28Inthatcase,theBoardnotedthatBNCBankwaspreviouslyrequiredbytheFDICtodevelopandsubmitasupplementtoitsexistingcompliance plantostrengthenthebank’sfairlendingcomplianceprogram.TheFDIChasindicated thatBNCBankhasdevelopedanacceptablesupplementalplanandcontinuestooperatein accordancewithitscomplianceplanandthesupplementtothatplan. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.BNCrepresentsthat,uponconsummationof the proposal,customerswillfindenhancedconveniencewithalarger,morerobustbranch networkwithintheGreensboroandWinston-SalemMSAs.BNCalsoassertsthatthe convenienceandneedsof thecommunitiesinwhichHighPointBankcurrentlyoperates willbebetterservedbyincreasedaccesstocapitalandtheeconomiesof scaleHighPoint Bankwillhaveasaresultof beingapartof theresultinginstitution.Moreover,BNC maintainsthatitstwonewproductofferings,the“NewBeginnings”depositaccountand theCommunityDevelopmentTest,qualifiedcommunitydevelopmentloans,investments,andservicesfrom October3,2011,toSeptember8,2014,werereviewed.TheHighPointBankEvaluationincludedfull-scope evaluationsofGuilfordandRandolphCountiesintheGreensboroMSAandForsytheCountyintheWinston- SalemMSA. 27 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). 28 SeeBNCBancorp,FRBOrder2016-06(June2,2016).

LegalDevelopments:FourthQuarter,2016 81 theaffordablemortgageproduct,shouldallowBNCBanktobetterservetheneedsof the unbankedandunderbankedinthecommunitiesservedbythecombinedbank.Finally, BNCBanknotesthatthebank’sstaff iscurrentlyworkingwiththeCityof HighPointto build,remodel,andresellhomesincertainstrugglingneighborhoodscurrentlyservedby HighPointBank. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved;theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws;consultationswiththeFDIC,includingregarding BNCBank’sprogressinimplementingitscomplianceplanandthesupplementtothat plan;confidentialsupervisoryinformation;informationprovidedbyBNC;thepublic commentsontheproposal;andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthat theconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsideraproposal’s“riskto thestabilityof theUnitedStatesbankingorfinancialsystem.”29 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.30These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.31 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,BNCwouldhaveapproximately $7.3billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,BNCwouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthata mergerthatinvolvesanacquisitionof lessthan$2billioninassets,orthatresultsinafirm withlessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothe financialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultin asignificantincreaseininterconnectedness,complexity,cross-borderactivities,orother riskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. 29 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601,codifiedat12U.S.C. §1842(c)(7). 30 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 31 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

82 FederalReserveBulletin|February2017 Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.32Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct.Approvalof thisproposalisspecificallyconditionedoncompliancebyBNC withalltheconditionssetforthinthisOrder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeproposal. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditions imposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,as such,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Richmond,actingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveOctober14,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 32 ThecommenterrequestedthattheBoardholdapublichearingormeetingontheproposal.Section3(b)ofthe BHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application.12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfromtheappropriate supervisoryauthorities.Underitsrules,theBoardalsomay,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswould notadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefacts ofrecord.IntheBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposal and,infact,submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.The commenter’srequestdidnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionthat wouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywrittencommentsdo notpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbenecessaryor appropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublic hearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingor meetingontheproposalisdenied.Thecommenteralsorequestedanextensionofthecommentperiod.The Boardprovidesapubliccommentperiodforanapplicationtoprovideinterestedpersonstheopportunityto submitinformationandviewsrelatedtothestatutoryfactorsitmustconsiderundertheBHCAct.TheBoard’s rulescontemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.Thecommenter’srequestforadditionaltimeto commentdoesnotidentifycircumstancesthatwouldwarrantanextensionofthepubliccommentperiodfor thisproposal.Accordingly,theBoardhasdeterminednottoextendthecommentperiod.

LegalDevelopments:FourthQuarter,2016 83 River Holding Company Stoddard, Wisconsin OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2016–16(October24,2016) RiverHoldingCompany(“RHC”),Stoddard,Wisconsin,abankholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2tomergewithSpartaUnion Bancshares,Inc.(“Sparta”),andtherebyacquireitssubsidiarybank,UnionNationalBank &TrustCompany(“UnionBank”),bothof Sparta,Wisconsin. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister54,085(2016)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. RHC,withconsolidatedassetsof approximately$556.1million,isthe1,281stlargest depositoryorganizationintheUnitedStates,controllingdepositsof approximately $469.3million,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.4RHCcontrolsRiverBankand WisconsinRiverBank,bothof whichoperateonlyinWisconsin.RHCisthe40thlargest insureddepositoryorganizationinWisconsin,controllingdepositsof approximately $460.5million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.5 Sparta,withconsolidatedassetsof approximately$119.1million,isthe4,089thlargest depositoryorganizationintheUnitedStates.SpartacontrolsUnionBank,anationalbank thatoperatesonlyinWisconsin.Spartaisthe172ndlargestinsureddepositoryorganizationinWisconsin,controllingapproximately$96.9millionindeposits,whichrepresentless than1percentof thetotaldepositsheldbyinsureddepositoryinstitutionsinWisconsin. Onconsummationof thisproposal,RHCwouldbecomethe1,078thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately $675.2million,whichrepresentlessthan1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.RHCwouldcontroldepositsof approximately $568.8million,whichrepresentlessthan1percentof thetotalamountof depositsin insureddepositoryinstitutionsintheUnitedStates.InWisconsin,RHCwouldbecomethe 34thlargestdepositoryinstitution,controllingdepositsof approximately$557.4million, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12CFR262.3(b). 4 Nationwidedeposit,asset,andrankingdataareasofJune30,2016.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,savingsassociations,andnondeposittrustcompanies. 5 Statedeposit,marketshare,andrankingdataareasofJune30,2015.

84 FederalReserveBulletin|February2017 bankinginanyrelevantmarket.6TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.7 RHCandSpartahavesubsidiarydepositoryinstitutionsthatcompetedirectlyintheBlack RiverFalls,Wisconsin,bankingmarket(the“BlackRiverFallsmarket”).8TheBoardhas consideredthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthe factsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthemarket;therelativeshareof thetotaldepositsininsureddepository institutionsinthemarket(“marketdeposits”)thatRHCwouldcontrol;9theconcentration levelof marketdepositsandtheincreaseinthatlevelasmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”);10andothercharacteristicsof the market. Usingtheinitialcompetitivescreeningdata,intheBlackRiverFallsmarket,RHCisthe fourthlargestdepositoryorganization,controllingdepositsof approximately$54.3million, whichrepresentapproximately10.5percentof marketdeposits.Spartaisthesecondlargest depositoryorganizationinthemarket,controllingdepositsof approximately$96.9million, whichrepresentapproximately18.7percentof marketdeposits.Onconsummationof the proposal,thecombinedentitywouldbethesecondlargestdepositoryorganizationinthe BlackRiverFallsmarket,controllingdepositsof approximately$151.2million,which wouldrepresentapproximately29.1percentof marketdeposits.TheHHIinthemarket wouldincreaseby390points,from1801to2191. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheBlackRiverFallsmarket.11FactorsindicatethattheincreaseinconcentrationintheBlackRiverFallsmarket,asmeasuredbytheaboveHHIandmarketshare, overstatesthepotentialcompetitiveeffectsof theproposalinthemarket.Inparticular,two communitycreditunionsexertacompetitiveinfluenceintheBlackRiverFallsmarket. Theinstitutionsofferawiderangeof consumerbankingproducts,operatestreet-level branches,andhavebroadmembershipcriteriathatincludealmostallof theresidentsinthe 6 12U.S.C.§1842(c)(1)(A). 7 12U.S.C.§§1842(c)(1)(B). 8 TheBlackRiverFallsmarketisdefinedasWesternMonroeCounty,Wisconsin,andCityPoint,BearBluff, Knapp,Komensky,Millston,Brockaway,Manchester,Adams,Hixton,Albion,andIrvingtownshipsin JacksonCounty,Wisconsin. 9 DepositandmarketsharedataareasofJune30,2015,andarebasedondatareportedbyinsureddepository institutionsintheFederalDepositInsuranceCorporation’sSummaryofDepositsdata. 10 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthattheDOJBankMergerGuidelines,whichwereissuedin1995, werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010)www.justice.gov/opa/pr/2010/August /10-at-938.html. 11 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorp.,84 FederalReserveBulletin129(1998).

LegalDevelopments:FourthQuarter,2016 85 relevantbankingmarket.12TheBoardfindsthatthesecircumstanceswarrantincludingthe depositsof thesecreditunionsata50percentweightinestimatingmarketinfluence.This weightingtakesintoaccountthelimitedlendingdonebythesecreditunionstosmallbusinessesrelativetocommercialbanks’lendinglevels. Thisadjustmentsuggeststhattheresultingmarketconcentrationof theproposedtransactionintheBlackRiverFallsmarketislesssignificantthanwouldappearfromtheinitial competitivescreeningdata,whichfocusedoncommercialbankcompetitors.Afterconsummation,adjustingtoreflectcompetitionbythecreditunions,themarketconcentration levelintheBlackRiverFallsmarketasmeasuredbytheHHIwouldincreaseby309,from alevelof 1492to1801,andthemarketshareof RHCresultingfromthetransactionwould be25.9percent.Afterconsummationof theproposal,elevendepositoryinstitutionswould remainintheBlackRiverFallsmarket,includingonedepositoryinstitutionwithahigher marketsharethanRHC’smarketshare.Thisdepositoryinstitutionwouldcontrol 28.1percentof marketdeposits.Thepresenceof theseviablecompetitorssuggeststhat RHCwouldhavelimitedabilitytounilaterallyofferlessattractivetermstoconsumersand thatthesecompetitorsareabletoexertcompetitivepressureonRHCintheBlackRiver Fallsmarket. TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe BlackRiverFallsmarket.Inaddition,theappropriatebankingagencieshavebeenafforded anopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheBlackRiverFallsmarketorinanyotherrelevantbankingmarket. Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwith approval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.13Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof the organizationsinvolved,aswellasinformationregardingthefinancialconditionof the subsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapital adequacy,assetquality,andearningsperformance.TheBoardevaluatesthefinancial conditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompletetheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The 12 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, 92FederalReserveBulletinC175(2006);andWachoviaCorporation,92FederalReserveBulletinC183(2006). 13 12U.S.C.§§1842(c)(2),(5),and(6).

86 FederalReserveBulletin|February2017 Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. RiverBank,WisconsinRiverBank,andUnionBankareallwellcapitalizedandwould remainsoonconsummationof theproposedtransaction.Theproposedtransactionisa bankholdingcompanymergerthatisstructuredasanexchangeof cashforshares.14The assetquality,earnings,andliquidityof RHCandSpartaareconsistentwithapproval,and RHCappearstohaveadequateresourcestoabsorbthecostsof theproposalandto completetheintegrationof theinstitutions’operations.Inaddition,futureprospectsare consideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of RHC,Sparta,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyRHC;theBoard’ssupervisoryexperiencesandthose of otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’ recordsof compliancewithapplicablebanking,consumerprotection,andanti-moneylaunderinglaws. RHCanditssubsidiarydepositoryinstitutionsareconsideredtobewellmanaged.RHC’s directorsandseniorexecutiveofficershavesubstantialknowledgeof andexperiencein thebankingandfinancialservicessectors,andRHC’srisk-managementprogramappears consistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredRHC’splansforimplementingtheproposal.RHChas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.RHC wouldoperateUnionBankasastandalonedepositoryinstitutionfollowingconsummation of theproposal.RHChasrepresentedthatUnionBankhasadequaterisk-management systemsthatwillremaininplacefollowingconsummationof theproposal,pending ongoingreviewandanalysisof whereimprovementsandefficienciescanbegained.These risk-managementsystemsareconsideredtobeacceptablefromasupervisoryperspective. Inaddition,RHC’smanagementhastheexperienceandresourcestoensurethatthe combinedorganizationoperatesinasafeandsoundmanner,andRHCplanstointegrate UnionBank’sexistingmanagementandpersonnelinamannerthataugmentsRHC’s management.15 Basedonallthefactsof record,includingRHC’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof RHCandSpartaincombattingmoney-launderingactivities,are consistentwithapproval. 14 Toeffecttheholdingcompanymerger,alloutstandingsharesofSpartawillbeconvertedintotherightto receivecashfromRHC.RHCexpectstofundtheexchangebyadividendfromRiverBanktoRHCand throughfinancingfromRHC’spresidentandchairmanandfromathird-partylender.RHChasthefinancial resourcestosupportthisobligation. 15 Onconsummation,theexistingseniormanagementofUnionBankisexpectedtoremainunchanged.Inaddition,threeexistingmembersofUnionBank’sboardofdirectorswillcontinuetoserveontheboardof UnionBankfollowingthetransaction.ThepresidentandchairmanofRHCandthevicepresidentofRHC willalsoserveontheboardofUnionBank.

LegalDevelopments:FourthQuarter,2016 87 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.16Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,17andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.18 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 followingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof River Bank,WisconsinRiverBank,andUnionBank;thefairlendingandcompliancerecordsof eachof theinvolvedbanks;thesupervisoryviewsof theFederalDepositInsurance Corporation(“FDIC”)andtheOfficeof theComptrollerof theCurrency(“OCC”);confidentialsupervisoryinformation;andinformationprovidedbyRHC. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardevaluates aninstitution’sperformanceinlightof examinationsandothersupervisoryinformation, aswellasinformationandviewsprovidedbytheappropriatefederalsupervisors.19 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.20Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. 16 12U.S.C.§1842(c)(2). 17 12U.S.C.§2901(b). 18 12U.S.C.§2903. 19 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48,506,48,548 (July25,2016). 20 12U.S.C.§2906.

88 FederalReserveBulletin|February2017 Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailableHomeMortgageDisclosureAct(“HMDA”)data,automatedloan reports,andotherreportsgeneratedbytheinstitutioninordertoassesstheinstitution’s lendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.The institution’slendingperformanceisbasedonits(1)loan-to-depositratio,(2)loanoriginationsforsaletothesecondarymarket,(3)lending-relatedactivitiesinitsassessmentareas, (4)recordof engaginginlending-relatedactivitiesforborrowersof differentincomelevels andbusinessesandfarmsof differentsizes,(5)geographicdistributionof loans,and (6)recordof takingactioninresponsetowrittencomplaintsaboutitsperformance.In additiontothelendingtest,intermediatesmallinstitutionssuchasRiverBankaresubject toacommunitydevelopmenttestthatevaluatesthenumberandamountof theinstitution’scommunitydevelopmentloansandqualifiedinvestments,theextenttowhichthe institutionprovidescommunitydevelopmentservices,andtheinstitution’sresponsiveness throughsuchactivitiestocommunitydevelopmentlending,investment,andservice needs.21 CRAPerformanceof RiverBankandWisconsinRiverBank RiverBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFDIC,asof June8,2015(“RiverBankEvaluation”).22River Bankreceived“Satisfactory”ratingsforboththelendingtestandthecommunitydevelopmenttest.23 Examinersdeterminedthatthebank’sloan-to-depositratiowasreasonablegiventhe bank’ssize,financialcondition,andassessmentareacreditneeds.Examinersalsonoted thatamajorityof RiverBank’sloansandotherlending-relatedactivitieswereinitsassessmentareas.Althoughexaminersfoundthatthegeographicdistributionof RiverBank’s residentialrealestateloansreflectedexcellentdispersionthroughoutLaCrosseCounty,the bank’sgeographicdistributionof loanswasotherwisefoundtobepoor.Examinersnoted thatRiverBank’sdistributionof borrowersreflectedreasonablepenetrationamongindividualsof differentincomelevels(includingLMIindividuals)andbusinessesof different sizes. ExaminersfoundthatRiverBank’scommunitydevelopmentperformancedemonstrated anadequatelevelof responsivenesstothecommunitydevelopmentneedsof itsassessment areasthroughcommunitydevelopmentloans,qualifiedinvestments,andcommunity developmentservices,asappropriate,consideringthebank’scapacityandtheavailabilityof opportunitiesforcommunitydevelopmentwithinthebank’sassessmentarea. 21 See12CFR228.26. 22 TheRiverBankEvaluationwasconductedusingIntermediateSmall-BankCRAExaminationProcedures, consistingofthelendingandcommunitydevelopmenttestsdescribedabove.TheRiverBankEvaluation reviewedasampleofsmallbusinessloansoriginatedduringtheperiodfromJuly1,2014throughDecember31, 2014,andallhomemortgageloansreportedonthebank’s2013and2014HMDALoanApplicationRegisters. Examinersreviewedcommunitydevelopmentloans,qualifiedinvestments,andcommunitydevelopment servicessinceFebruary25,2013. 23 TheRiverBankEvaluationreviewedthebank’sactivitiesinLaCrosseCounty,Wisconsinandportionsof Crawford,Monroe,Trempealeau,andVernonCounties,Wisconsin.

LegalDevelopments:FourthQuarter,2016 89 RiverBank’sEffortsSincetheRiverBankEvaluation RHCrepresentsthat,sincetheRiverBankEvaluation,RiverBankhasmadeanumberof communitydevelopmentloanstosupportitsassessmentareas.RHCrepresentsthatthese haveincludedloanstolocalsmallbusinessesandtoorganizationsdevotedtoassisting low-incomefamilies.RHCalsorepresentsthatRiverBank’semployeeshavecontinuedto engageincommunitydevelopmentservicestosupportthecommunitiesinwhichthebank operates.RHCrepresentsthatRiverBankhasmaintaineditsexistingcommunitydevelopmentinvestmentssincetheRiverBankEvaluationandcontinuestoseekadditional communitydevelopmentinvestmentopportunities. CRAPerformanceof WisconsinRiverBank WisconsinRiverBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceexaminationbytheFDIC,asof September3,2013(“WisconsinRiverBank Evaluation”).24Examinersfoundthatthebank’saverageloan-to-depositratiowasreasonablegivenitssize,financialcondition,andassessmentareacreditneeds.Examinersnoted thatamajorityof thebank’sresidential,smallbusiness,andsmallfarmloanswereinits assessmentareas,bothbynumberanddollarvolume.Examinersalsonotedthatthebank’s distributionof borrowersreflectedreasonablepenetrationamongbusinessesandfarmsof differentsizesandamongindividualsof differentincomelevels(includingLMIindividuals).Examinersalsofoundthatthegeographicdistributionof thebank’sloans reflectedreasonabledispersionthroughoutitsassessmentareas. WisconsinRiverBank’sEffortsSincetheWisconsinRiverBankEvaluation RHCrepresentsthatWisconsinRiverBankcontinuestohelpmeetthecreditneedsof its localcommunitiesbyofferingloanproductsfromtheWisconsinHousingandEconomic DevelopmentAuthorityandtheUnitedStatedDepartmentof Agriculture’sRuralDevelopmentProgramtoborrowerswhomaynotqualifyfortraditionalbankfinancing.RHC alsorepresentsthatWisconsinRiverBankhasengagedinlendingtosupportlocalbusiness projects. CRAPerformanceof UnionBank UnionBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheOCC,asof May19,2014(“UnionBankEvaluation”).25Examinersfoundthatthebank’sloan-to-depositratiowasreasonableandcomparabletosimilarlysituatedbanks.Examinersnotedthatasubstantialmajorityof thebank’sloanswere originatedinitsassessmentareaandthatitsdistributionof borrowersreflectedreasonable penetrationamongindividualsof differentincomelevels(includingLMIindividuals)and businessesof differentsizes. 24 TheWisconsinRiverBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures, consistingofthelendingtestdescribedabove.TheWisconsinRiverBankEvaluationreviewed(1)asampleof smallbusinessandsmallfarmlendingduring2012and2013and(2)thebank’sHMDA-reportableresidential mortgageloansfromJanuary1,2011,thoughJune30,2013.TheWisconsinRiverBankEvaluationincluded reviewsofthebank’sactivitiesinninecensustractsinDaneandColumbiaCounties,Wisconsin,andeight non-MetropolitanStatisticalAreacensustractsinSaukCounty,Wisconsin. 25 TheUnionBankEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures,consistingof thelendingtestdescribedabove.TheUnionBankEvaluationreviewedthebank’scommercialandresidential realestateloansfromJanuary20,2009,throughMay19,2014.TheUnionBankEvaluationincludedreviews ofthebank’sactivitiesinfivecontiguouscensustractsinMonroeCounty,Wisconsin.

90 FederalReserveBulletin|February2017 AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.RHCrepresentsthatitwouldimproveUnionBank customers’accesstoloansinexcessof thebank’slegallendinglimitbyprovidingexisting andfuturecustomersof UnionBankwiththeadditionallendingresourcesof RiverBank andWisconsinRiverBank.RHCalsorepresentsthatcustomersof UnionBankmay gainaccesstonondepositinvestmentproductsthroughRHCanditsaffiliates.RHC representsthatitdoesnotplantoreduceoreliminateanyservicescurrentlyofferedby UnionBank. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyRHC,andotherpotentialeffectsof theproposalonthe convenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.27These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.28 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,RHCwouldhaveapproximately $675.2millioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize,wouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthata proposalthatinvolvesanacquisitionof lessthan$2billioninassets,orresultsinafirm 26 Dodd-FrankAct§§604(d)and(f),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C. §1842(c)(7). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:FourthQuarter,2016 91 withlessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothe 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.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyRHCwithalltheconditionssetforthinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheproposal.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardorbytheFederalReserveBankof Chicagoactingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveOctober24,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

92 FederalReserveBulletin|February2017 Wintrust Financial Corporation Rosemont, Illinois OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2016–17(October28,2016) WintrustFinancialCorporation(“Wintrust”),Rosemont,Illinois,afinancialholding companywithinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1 hasrequestedtheBoard’sapprovalundersection3of theBHCAct2tomergewithFirst CommunityFinancialCorporation(“FirstCommunity”),andtherebyindirectlyacquire FirstCommunityBank(“FirstCommunityBank”),bothof Elgin,Illinois. Inaddition,Wintrust’ssubsidiarystatememberbank,St.CharlesBank&TrustCompany (“St.CharlesBank”),St.Charles,Illinois,hasrequestedtheBoard’sapprovalunder section18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewith FirstCommunityBank,withSt.CharlesBankasthesurvivingentity.3St.CharlesBank alsohasappliedundersection9of theFederalReserveAct(“FRA”)toestablishand operateabranchatthemainofficeandatabranchof FirstCommunityBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister473940-47395(July21,2016)).5Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandall commentsreceivedinlightof thefactorssetforthinsection3of theBHCAct,theBank MergerAct,andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,anda copyof therequesthasbeenprovidedtotheFederalDepositInsuranceCorporation (“FDIC”). Wintrust,withconsolidatedassetsof approximately$24.4billion,isthe68thlargest insureddepositoryorganizationintheUnitedStates.6Wintrustcontrolsapproximately $20.3billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Wintrust controls15insureddepositoryinstitutions,whichoperateinIllinois,Indiana,and Wisconsin.Wintrustisthe5thlargestinsureddepositoryorganizationinIllinois,controllingdepositsof $16.0billion,whichrepresent3.46percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.7 FirstCommunity,withconsolidatedassetsof approximately$179.8million,isthe3,246th largestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $153.7millioninconsolidateddeposits,whichrepresentlessthan1percentof nationwide deposits.FirstCommunitycontrolsFirstCommunityBank,whichoperatesonlyinIllinois. FirstCommunityisthe246thlargestinsureddepositoryorganizationinIllinois,control- 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.Theselocationsarelistedintheappendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasJune30,2016,unlessotherwisenoted.Stateasset data,marketshare,andrankingdataareasofJune30,2015,unlessotherwisenoted.Stateasset,marketshare, andrankingdatadoesnotincludeacquisitionsmadebyWintrustsinceJune30,2016. 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsassociations,andsavings banks.

LegalDevelopments:FourthQuarter,2016 93 lingdepositsof approximately$141.0million,whichrepresentlessthan1percentof the totaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Wintrustwouldremainthe68thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$24.6billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryorganizationsintheUnitedStates.Wintrustwouldcontrolconsolidateddepositsof approximately $20.4billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.InIllinois,Wintrustwouldremainthe5th largestdepositoryorganization,controllingdepositsof approximately$16.2billion,which representapproximately3.49percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.8Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.9 WintrustandFirstCommunityhavesubsidiarydepositoryinstitutionsthatcompete directlyintheChicago,Illinoisbankingmarket(“Chicagomarket”).10TheBoardhas consideredthecompetitiveeffectsof theproposalinthisbankingmarketinlightof allthe factsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthemarket;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatwouldbecontrolledbyWintrust;11the concentrationlevelsof marketdepositsandtheincreaseintheselevels,asmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”);12andothercharacteristicsof themarket. 8 12U.S.C.§§1842(c)(1)and1828(c)(5). 9 12U.S.C.§§1842(c)(1)(B)and1828(c)(5)(B). 10 TheChicagomarketconsistsofCookCounty,DuPageCounty,LakeCounty,WillCounty,KaneCounty, McHenryCounty,KendallCounty,DeKalbCounty,GrundyCounty,KankakeeCounty,plusMilksGrove, Chebanse,Papineau,Beaverville,Ashkum,Martinton,andBeavertownshipsofIroquoisCounty;plusRoger, Mona,Pella,andBrentontownshipsinFordCounty,allinIllinois;andPleasantPrairie,Bristol,Salem,and RandalltownshipsinKenoshaCounty,Wisconsin. 11 LocaldepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 12 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.

94 FederalReserveBulletin|February2017 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheChicagomarket.Onconsummation of theproposal,theChicagomarketwouldremainunconcentrated,asmeasuredbythe HHI.TheHHIinthismarketwouldincreasebylessthan1pointtoremainat985,and numerouscompetitorswouldremaininthemarket.13 TheDOJhasconductedareviewof thepotentialcompetitiveeffectsof theproposaland hasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingtheChicago market.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunity tocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheChicagomarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders thefinancialandmanagerialresourcesandthefutureprospectsof theinstitutions involved.14Initsevaluationof financialfactors,theBoardreviewsinformationregarding thefinancialconditionof theorganizationsinvolvedonbothparent-onlyandconsolidated bases,aswellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy,asset quality,andearningsperformance,aswellaspubliccommentsontheproposal.TheBoard evaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfunding of thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthe costsof theproposalandtocompletetheproposedintegrationof theoperationsof the institutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobe especiallyimportant.TheBoardconsidersthefutureprospectsof theorganizations involvedintheproposalinlightof theirfinancialandmanagerialresourcesandthe proposedbusinessplan. WintrustandFirstCommunityarebothwellcapitalized,andthecombinedentitywould remainsoonconsummationof theproposedtransaction.Theproposedtransactionisa bankholdingcompanymergerthatisstructuredasacashpurchase,withasubsequent mergerof St.CharlesBankandFirstCommunityBank.15Theassetquality,earnings,and liquidityof St.CharlesBankandFirstCommunityBankareconsistentwithapproval,and Wintrustappearstohaveadequateresourcestoabsorbthecostsof theproposalandto 13 Wintrustoperatesthe5thlargestdepositoryinstitutionintheChicagobankingmarket,controllingapproximately$16.9billionindeposits,whichrepresentapproximately4.55percentofmarketdeposits.FirstCommunityoperatesthe104thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately $141.0million,whichrepresent0.04percentofmarketdeposits.Onconsummationoftheproposedtransaction,Wintrustwouldremainthe5thlargestdepositoryorganizationinthemarket,controllingdepositsof approximately$17.1billion,whichrepresentapproximately4.59percentofmarketdeposits.TheHHIforthe Chicagomarketwouldremain985,and186othercompetitorswouldremaininthemarket. 14 12U.S.C.§§1842(c)(2),(5),and(6),and1828(c)(5)and(11).5 15 Toeffecttheholdingcompanymerger,eachshareofFirstCommunitycommonstockwouldbeconvertedinto arighttoreceivecash,basedonacertainexchangeratio.Wintrusthasthefinancialresourcestofundthe transaction.

LegalDevelopments:FourthQuarter,2016 95 completeintegrationof theinstitutions’operations.Inaddition,futureprospectsare consideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Wintrust,FirstCommunity,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyWintrust;theBoard’ssupervisoryexperienceswithWintrustandFirstCommunityandthoseof otherrelevantbanksupervisory agencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws;aswellasinformationprovidedbythecommenter. Wintrustanditssubsidiarydepositoryinstitutions,includingSt.CharlesBank,areconsideredtobewellmanaged.Wintrusthasarecordof successfullyintegratingorganizations intoitsoperationsandrisk-managementsystemsafteracquisitions.Wintrust’sdirectors andseniorexecutiveofficershavesubstantialknowledgeof andexperienceinthebanking andfinancialservicessectors,anditsrisk-managementprogramappearsconsistentwith approvalof thisexpansionaryproposal. TheBoardalsohasconsideredWintrust’splansforimplementingtheproposal.Wintrust hasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.Wintrust wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,Wintrust’smanagementhastheexperienceandresourcestoensurethatthecombined organizationoperatesinasafeandsoundmanner. Basedonallthefactsof record,includingWintrust’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andthecommentreceivedontheproposal,theBoardconcludesthatconsiderations relatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof WintrustandFirst Communityincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.16 Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelping tomeetthecreditneedsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).TheCRArequiresthefederal financialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation,17andrequirestheappropriatefederalfinancialsupervisoryagencyto assessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentire 16 12U.S.C.§§1842(c)(2)and1828(c)(5). 17 12U.S.C.§2901(b).

96 FederalReserveBulletin|February2017 community,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluating bankexpansionaryproposals.18 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors;thesupervisoryviewsof examiners;othersupervisoryinformation;information providedbytheapplicant;andcommentsreceivedontheproposal.TheBoardalsomay considertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof First CommunityBankandSt.CharlesBank;thefairlendingcompliancerecordsof both banks;thesupervisoryviewsof examiners;confidentialsupervisoryinformation;informationprovidedbyWintrust;andthepubliccommentreceivedontheproposal.19TheBoard alsoconsideredthereportsof examinationof theCRAperformanceandfairlending compliancerecordsof Wintrust’s14otherinsureddepositoryinstitutions. Businessesof InvolvedInstitutions St.CharlesBankisastate-chartered,commercialbank,headquarteredinSt.Charles,Illinois.Itoffersabroadrangeof bankingandfinancialservices,includingdepositaccounts; checkingaccounts;certificatesof deposits;andcommercial,realestate,andconsumerloan products.Thebank’smainloanfocusissmallandmedium-sizedbusinessesandloans securedbycommercialrealestate. FirstCommunityBankisastate-chartered,commercialbankthatoffersabroadrangeof consumerandcommercialbankingproductsandservices,includingchecking,savings, moneymarket,andcertificateof depositaccounts;mortgages,consumerinstallmentloans, andloanproducts;andretirementservices.Thebank’sprimaryloanfocusiscommercial andcommercialrealestatelending. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsestocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the 18 12U.S.C.§2903. 19 OnecommunityorganizationassertedthattheproposalshouldnotbeapprovedunlessWintrustdevelopsand agreestoaCommunityReinvestmentActPlan(“Plan”)andsuchPlanisincludedasaconditionoftheBoard’s approval.Inresponsetothecomment,Wintrustassertsthatitisinagreementwiththeprinciplesraisedbythe commenter,suchasthevalueofcommunityengagement,theimportanceoftheCRA,andtheimportanceof meetingcommunityneeds.WintrustassertsthatSt.CharlesBankhasastrongrecordofmeetingthecreditand otherbankingneedsofLMIindividualsandroutinelyevaluatesthecreditanddepositneedsofunbankedand underbankedindividuals.WintrustfurtherrepresentsthatitisstronglycommittedtocompliancewiththeCRA andthatithasahistoryofstrongCRAperformancethroughouttheorganization. TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,HuntingtonBancsharesIncorporated,FRBOrderNo.2016-13at32n.50(July29,2016);CIT Group,Inc.,FRBOrderNo.2015-20at24n.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485 (2002);FifthThirdBancorp,80FederalReserveBulletin838,841(1994).Initsevaluation,theBoardreviewsthe existingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethe creditneedsofitsCRAassessmentareas.

LegalDevelopments:FourthQuarter,2016 97 CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.20Inthiscase,theBoardconsideredthe supervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserveBank of Chicago(“ReserveBank”). TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.21Aninstitution’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’sdatareportedundertheHomeMortgageDisclosureAct(“HMDA”),in additiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollected andreportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonavarietyof factors,including(1)thenumberandamountsof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof theinstitution’slending, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountsof loansinlow-,moderate-,middle-,andupper-income geographies;(3)thedistributionof loansbasedonborrowercharacteristics,includingfor homemortgageloans,thenumberandamountsof loanstolow-,moderate-,middle-,and upper-incomeindividuals;22(4)theinstitution’scommunitydevelopmentlending,including thenumberandamountsof communitydevelopmentloans,andtheircomplexityand innovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof St.CharlesBank St.CharlesBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheReserveBank,asof April22,2013(“St.CharlesBank Evaluation”).23St.CharlesBankreceiveda“LowSatisfactory”ratingfortheLendingTest anda“HighSatisfactory”ratingforboththeServiceTestandtheInvestmentTest.24 20 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 21 12U.S.C.§2906. 22 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloansmadetobusinesses andfarmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamount atorigination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals. See,e.g.,12CFR228.22(b)(3). 23 TheSt.CharlesBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.ExaminersreviewedHMDA-reportableloansandsmallbusinesslendingfromJanuary1,2009,toDecember31, 2012.Theevaluationperiodforallqualifiedcommunitydevelopmentactivities,includingcommunitydevelopmentloans,investmentsanddonations,andserviceswasApril20,2009,throughApril22,2013. 24 TheSt.CharlesBankEvaluationincludedafull-scopeevaluationofKaneCounty,thebank’sonlyassessment area.InSeptember2011,thebank’sassessmentareawasexpandedtoincludeallofKaneCounty,Illinois,to reflecttheacquisitionofElginStateBank.TheassessmentareaislocatedentirelywithintheChicago-Joliet- Naperville,Illinois-Indiana-WisconsinMetropolitanStatisticalArea(“ChicagoMSA”).

98 FederalReserveBulletin|February2017 ExaminersfoundthatSt.CharlesBank’soveralllendinglevelsreflectedadequateresponsivenesstocreditneedsintheassessmentarea.Examinersnotedthatthebankoriginateda majorityof homemortgageloansandsmallbusinessloanswithinitsassessmentarea25and thatthegeographicdistributionof loansreflectedadequatepenetrationthroughoutthe assessmentarea.Inparticular,examinersfoundthatSt.CharlesBankdisplayedadequate penetrationamongcustomersof differentincomelevelsandgoodpenetrationamongbusinessesof differentsizes.Examinersalsonotedthat,overall,thebankoriginatedarelativelyhighlevelof communitydevelopmentloansinitsassessmentareaandthatthebank madeuseof innovativeandflexiblelendingpracticesinordertoservetheassessmentarea’s creditneeds. ExaminersfoundthatSt.CharlesBankhadasignificantlevelof qualifiedcommunity developmentinvestmentsandgrantsandthatthebankoccasionallyactedinaleadership positionforsuchinvestmentsmadethroughoutitsassessmentarea.Examinersnotedthat St.CharlesBankexhibitedgoodresponsivenesstothecreditneedsof theassessmentarea. Examinershighlightedthebank’sparticipationinaninnovativeinvestmentthatfundedthe acquisitionandrehabilitationof propertiesinLMIareasandextendedmortgagesto qualifiedLMIindividualsforthepurchaseof thoseproperties.Examinersnotedthatthe bankmadequalifiedcommunitydevelopmentgrantsanddonationstoorganizations providinghomeconstructionandhomerepairs,transitionalandemergencyhousing, affordablemedicalcare,andyouthprogramstoLMIindividuals.Likewise,examiners notedthatqualifiedinvestmentsweredistributedforaffordablehousing,community services,andeconomicdevelopmentpurposes. ExaminershighlightedthatSt.CharlesBank’sofficersandstaff providedarelativelyhigh levelof communitydevelopmentservicesinthebank’sassessmentarea.Examinersalso consideredSt.CharlesBank’sretailservices.ExaminersnotedthatSt.CharlesBank’s deliverysystemswereaccessibletogeographiesandindividualsof differentincomelevelsin theassessmentareaandthatthebankofferedservicesthroughseveraldeliverychannels, includingautomatedtellermachines,onlinebankingservices,branches,andatelebanking service.Inaddition,examinersnotedthatSt.CharlesBank’scustomershadaccesstoautomatedtellermachinesoperatedbyanyof Wintrust’sothersubsidiarydepositoryinstitutionswithoutincurringatransactionfee. St.CharlesBank’sEffortsSincetheSt.CharlesBankEvaluation Wintrustassertsthat,sincetheSt.CharlesBankEvaluation,St.CharlesBankhasinitiated anumberof effortstoenhanceitssupportof allof thecommunitiesinwhichthebank operates.Wintrustalsoassertsthatthebankhascontinuedtoprovideavarietyof financial productsandservicesdesignedtomeetthecreditandbankingneedsof LMIindividuals. Additionally,Wintrustrepresentsthatthebankopenedabranchinamoderate-income communityinrecognitionof theadditionalneedinthatcommunity.Wintrustalsorepresentsthatthebankhasservedinaleadershiproleinsupportinganumberof community developmentorganizations.AccordingtoWintrust,St.CharlesBankhasprovidedmore than3,300communityservicehourssincetheSt.CharlesBankEvaluation. Wintrustfurtherrepresentsthatthebankhascontinueditsinitiativesandprograms focusedonlending,investment,andserviceactivitiesinitscommunities,withemphasison smallbusinesslendingandaffordablehousingandonofferingproductsandservices aimedatmeetingtheneedsof unbankedandunderbankedresidents.Inparticular, 25 St.CharlesBankistreated,forCRApurposes,asoriginatingsomeoftheloansofitsaffiliate,WintrustMortgageCo.,Rosemont,Illinois,asubsidiaryofBarringtonBank&TrustCompany,NationalAssociation, Barrington,Illinois,indeterminingthelevelofloansoriginatedinitsassessmentarea.

LegalDevelopments:FourthQuarter,2016 99 Wintruststatesthatthebankofferscheckingandsavingsaccountproductsthatdonot requireminimumbalances,aswellasapersonalloanproductthatisanaffordable,safe, andaccessiblealternativetoapaydayloan.Additionally,thebankparticipatesinanumber of programsaimedatfirst-timehomebuyersandLMIhomebuyers.Accordingto Wintrust,thebankhasmadeanumberof communitydevelopmentloanssincetheSt. CharlesBankEvaluation,withafocusonaffordablehousing.Further,Wintrustrepresents thatSt.CharlesBankhasestablishedaCRACommitteeconsistingof St.CharlesBank executivesthatmeetsmonthlytooverseeCRA-relatedinitiatives,products,andservices. CRAPerformanceof OtherWintrustSubsidiaryBanks InadditiontoSt.CharlesBank,Wintrustistheparentcompanyof 14otherinsured depositoryinstitutions.Sevenof Wintrust’s14otherwhollyowneddepositoryinstitutions received“Outstanding”CRAperformanceratingsontheirmostrecentCRAexaminations, withtheotherseveninstitutionsreceiving“Satisfactory”CRAratings.Wintrustfurther representsthatfiveof itssubsidiarybanksimprovedtheircomponentCRAperformance ratingsfrom“Satisfactory”toeither“HighSatisfactory”or“Outstanding”intheirsubsequentCRAperformanceexams.Thelargestof thesedepositoryinstitutions,LakeForest Bank&TrustCompany,LakeForest,Illinois,wasamongthedepositoryinstitutionsthat receivedan“Outstanding”CRAperformanceratingbytheReserveBankatitsmostrecent CRAperformanceevaluation,datedFebruary29,2016.Thisratingincluded “Outstanding”ratingsoneachof theLending,Service,andInvestmentTests.Wintrust furtherrepresentsthatithassetanumberof CRAgoals,includingagoalthateachsubsidiarybankstrivetoattainan“Outstanding”CRAperformanceratingandthatlendingbe alignedwithmeetingorexceedingpeerlendingpercentages. CRAPerformanceof FirstCommunityBank FirstCommunityBankwasassignedanoverall“Satisfactory”ratingbytheFDICatits mostrecentCRAperformanceevaluation(“FirstCommunityBankEvaluation”),asof February11,2013.26 ExaminersfoundthatFirstCommunityBank’sloan-to-depositratiowasreasonable,given theinstitution’ssize,financialcondition,andassessmentarea’screditneeds.Examiners notedthatamajorityof thebank’sloansandotherlending-relatedactivitiesweremade withinitsassessmentarea.Examinersalsofoundthatthegeographicdistributionof loans reflectedreasonabledispersionthroughouttheassessmentarea.Examinersnotedthatthe bank’sborrowerdistributionreflectedreasonablepenetrationamongbusinessof different sizesandindividualsof differentincomelevels. ExaminersalsonotedthatFirstCommunityBankwasanactivesmallbusinesslenderand thatthedistributionof thebank’ssmallbusinessloanswasreasonable.Further,examinersnotedthatwhiletheseloanswouldnotbeconsideredcommunitydevelopmentinitia- 26 TheFirstCommunityBankEvaluationwasconductedbytheFDICusingtheInteragencyEvaluationProceduresforSmallInstitutions.Theexaminationproceduresapplicabletosmallbanksspecificallyevaluate(1)the institution’sloan-to-depositratioandotherlending-relatedactivities,suchasloanoriginationsforsaletothe secondarymarkets,communitydevelopmentloans,orqualifiedinvestments;(2)thepercentageofloansand otherlending-relatedactivitieslocatedinthebank’sassessmentareas;(3)thebank’srecordoflendingtoand engaginginotherlending-relatedactivitiesforborrowersofdifferentincomelevelsandbusinessesandfarmsof differentsizes;(4)thegeographicdistributionofthebank’sloans;and(5)thebank’srecordoftakingactionin responsetowrittencomplaintsaboutitsperformanceinhelpingtomeetcreditneedsinitsassessmentareas. See,e.g.,12CFR228.26(b).IntheFirstCommunityBankExamination,examinersevaluatedthebank’shome mortgageloansandsmallbusinessloansin2011and2012.TheFirstCommunityEvaluationincludedafullscopeevaluationofthebank’sonlyassessmentarea,whichiscomposedofgeographiesinKaneandCook CountiesinIllinois.TheassessmentareaislocatedentirelyintheChicagoMSA.

100 FederalReserveBulletin|February2017 tives,theysupportedcreditavailabilityforsmallbusinessesinthebank’sassessmentarea. Examinersalsonotedthatbank’sdistributionof homemortgageloansreflectedreasonable penetrationamongindividualsof differentincomelevels. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Wintrustrepresentsthatonconsummationof the proposal,existingcustomersof FirstCommunityBankwillfindenhancedconvenience throughgreateraccesstocapital,awiderrangeof productsandservices,andalarger networkof automatedtellermachinesintheChicagoMSA.Wintrusthasalsoindicated thatcustomersof FirstCommunityBankwouldhaveaccesstoproductscurrentlyoffered atSt.CharlesBankthatservetheneedsof theunbankedandunderbankedinthe communitieswithinthebank’sassessmentarea.Wintrustrepresentsthattherewillbeno substantivechangeinbankingoperationsandnosignificantchangesinproductofferings, interestrates,fees,orpricingasaresultof theproposal.WintrustassertsthatSt.Charles Bankhassetanumberof CRAgoals,includingagoalforcommunitydevelopmentlending tobe20percentof tier1capitalandagoalforsmallbusinesslendingtoexceedpeer-institutionpercentagesforsmallbusinesslendinginthebank’sassessmentarea. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved;theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws;confidentialsupervisoryinformation;information providedbyWintrust;thepubliccommentontheproposal;andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’s“risktothestabilityof theUnitedStatesbankingorfinancial system.”27 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.28These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial 27 Section604(d)and(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601-1602,codifiedat 12U.S.C.§§1842(c)(7)and1828(c)(5). 28 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

LegalDevelopments:FourthQuarter,2016 101 institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.29 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,Wintrustwouldhaveapproximately$24.6billioninconsolidatedassetsand,byanyof anumberof alternativemeasures of firmsize,Wintrustwouldnotbelikelytoposesystemicrisks.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. Establishmentof Branches St.CharlesBankhasappliedundersection9of theFRAtoestablishbranchesatcurrent locationsof FirstCommunityBank.30TheBoardhasassessedthefactorsitisrequiredto considerwhenreviewinganapplicationunderthatsection.31Specifically,theBoardhas consideredSt.CharlesBank’sfinancialcondition,management,capital,actionsinmeeting theconvenienceandneedsof thecommunitiestobeserved,CRAperformance,and investmentsinbankpremises.32Forthereasonsdiscussedinthisorder,theBoardfinds thosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredall thefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCAct, theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof thisproposalis specificallyconditionedoncompliancebyWintrustwithalltheconditionssetforthinthis Order,includingreceiptof allrequiredregulatoryapprovals,andonthecommitments madetotheBoardinconnectionwiththeproposal.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardin connectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. 29 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 30 12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebranchesonthe sametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthatwasabranchofanybankparticipatinginthe mergerpriortoFebruary25,1927,orunderstatelaw,maybeestablishedasanewbranchoftheresultingbank orretainedasanexistingbranchoftheresultingbank.See12U.S.C.§§36(b)(2)and(c).Onconsummation,all ofSt.CharlesBank’sbrancheswouldbepermissibleunderapplicablestatelaw.See205Ill.Comp.Stat.Ann. 5/1etseq. 31 12U.S.C.§322;12CFR208.6. 32 Onconsummationoftheproposedtransaction,St.CharlesBank’sinvestmentsinbankpremiseswouldremain withinlegalrequirementsunder12CFR208.21.

102 FederalReserveBulletin|February2017 Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardortheReserveBankactingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveOctober28,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. RobertdeV.Frierson Secretaryof theBoard Appendix BranchestoBeAcquiredbySt.CharlesBank 1. 50TylerCreekPlaza,Elgin,Illinois60123 2. 165SouthRandallRoad,Elgin,Illinois60123

LegalDevelopments:FourthQuarter,2016 103 First Midwest Bancorp, Inc. Itasca, Illinois OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2016–18(November10,2016) FirstMidwestBancorp,Inc.(“FirstMidwest”),Itasca,Illinois,abankholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2tomergewithStandard Bancshares,Inc.(“Standard”),andtherebyindirectlyacquireStandardBankandTrust Company(“SB&T”),bothof HickoryHills,Illinois. Inaddition,FirstMidwest’ssubsidiarystatememberbank,FirstMidwestBank,Itasca, Illinois,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDeposit InsuranceAct(“BankMergerAct”)tomergewithSB&T,withFirstMidwestBankasthe survivingentity.3FirstMidwestBankalsohasappliedundersection9of theFederal ReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeandbranchesof SB&T.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister54577(August16,2016)).5Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). FirstMidwest,withconsolidatedassetsof approximately$11.0billion,isthe115thlargest insureddepositoryorganizationintheUnitedStates.6FirstMidwestcontrolsapproximately$9.0billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.FirstMidwest controlsFirstMidwestBank,whichoperatesinIllinois,Indiana,andIowa.FirstMidwest isthe13thlargestinsureddepositoryinstitutioninIllinois,controllingdepositsof approximately$7.4billion,whichrepresent1.6percentof thetotaldepositsof insureddepository institutionsinthatstate.FirstMidwestisthe25thlargestinsureddepositoryinstitutionin Indiana,controllingdepositsof approximately$803.6million,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Standard,withconsolidatedassetsof approximately$2.5billion,isthe350thlargest insureddepositoryorganizationintheUnitedStates.Standardcontrolsapproximately $2.2billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Standard controlsSB&T,whichoperatesinIllinoisandIndiana.Standardisthe26thlargestinsured depositoryinstitutioninIllinois,controllingdepositsof approximately$1.9billion,which 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedintheAppendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofJune30,2016,unlessotherwisenoted.Stateasset data,marketshare,andrankingdataareasofJune30,2015,unlessotherwisenoted.Inthiscontext,insured depositoryinstitutionsincludecommercialbanks,savingsandloanassociations,andsavingsbanks.

104 FederalReserveBulletin|February2017 representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state.Standardisthe62ndlargestinsureddepositoryinstitutioninIndiana,controlling depositsof approximately$241.2million,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,FirstMidwestwouldbecomethe101stlargestinsured depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $13.4billion,whichrepresentlessthan1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.FirstMidwestwouldcontrolconsolidateddepositsof approximately$11.2billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryorganizationsintheUnitedStates.FirstMidwestwould remainthe13thlargestinsureddepositoryorganizationinIllinois,controllingdepositsof approximately$9.4billion,whichrepresent2percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.FirstMidwestwouldbecomethe23rdlargestinsured depositoryorganizationinIndiana,controllingdepositsof approximately$1.0billion, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. 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 bothFirstMidwestandSB&TisIllinois.11SB&TalsoislocatedinIndiana.FirstMidwestiswellcapitalizedandwellmanaged, andFirstMidwestBankhasan“Outstanding”CommunityReinvestmentActof 1977 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,thehomestateofbothFirstMidwest BankandSB&TisIllinois.12U.S.C.§1828(c)(13)(C)(ii)(II).Accordingly,thedepositcaprequirementofthe BankMergerActdoesnotapplytotheproposedbankmerger. 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.

LegalDevelopments:FourthQuarter,2016 105 (“CRA”)12rating.Therearenominimumagerequirementsunderthelawsof Indianathat wouldapplytoFirstMidwest’sacquisitionof Standard,andSB&Thasbeeninexistence formorethanfiveyears.13 Onconsummationof theproposedtransaction,FirstMidwestwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Illinoisimposesa30percentlimitonthetotalamountof in-state depositsthatasinglebankingorganizationmaycontrol.14Thecombinedorganization wouldcontrolapproximately2percentof thetotalamountof depositsof insureddepositoryinstitutionsinIllinois,andapproximately1percentof thetotalamountof depositsof insureddepositoryinstitutionsinIndiana,theonlystatesinwhichFirstMidwestandStandardhaveoverlappingbankingoperations.TheBoardhasconsideredallotherrequirementsundersection3(d)of theBHCAct,includingFirstMidwest’srecordof meetingthe creditneedsof thecommunitiesitserves.Inlightof allthefactsof record,theBoardmay approvetheproposalundersection3(d)of theBHCAct.15 CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.16Bothstatutesalsoprohibit theBoardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.17 FirstMidwestandStandardhavesubsidiarydepositoryinstitutionsthatcompetedirectly intheChicago,Illinois,bankingmarket(“Chicagomarket”)andtheGary-Hammond, Indiana,bankingmarket(“Gary-Hammondmarket”).18TheBoardhasconsideredthe competitiveeffectsof theproposalinthesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwould remaininthemarkets;therelativesharesof totaldepositsininsureddepositoryinstitutions inthemarkets(“marketdeposits”)thatFirstMidwestwouldcontrol;19theconcentration levelsof marketdepositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive 12 12U.S.C.§2901etseq. 13 SeeInd.Code§28-2-17. 14 205Ill.Comp.Stat.5/21.3(a).Indianadoesnotimposealimitonthetotalamountofin-statedepositsthata singlebankingorganizationmaycontrol. 15 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).ThehomestateofbothFirstMidwestBankandSB&TisIllinois;therefore, section102oftheRiegle-NealActdoesnotapplytotheproposedbankmerger.Id. 16 12U.S.C.§§1842(c)(1)and1828(c)(5). 17 12U.S.C.§§1842(c)(1)(B)and1828(c)(5)(B). 18 TheChicagomarketisdefinedasCook,DuPage,Lake,Will,Kane,McHenry,Kendall,DeKalb,Grundy,and Kankakeecounties;theMilksGrove,Chebanse,Papineau,Beaverville,Ashkum,Martinton,andBeavertownshipsinIroquoisCounty;Roger,Mona,Pella,andBrentontownshipsinFordCounty,allinIllinois;andthe PleasantPrairie,Bristol,Salem,andRandalltownshipsinKenoshaCounty,Wisconsin.TheGary-Hammond marketisdefinedasLake,Porter,LaPorte,Newton,andJaspercounties,allinIndiana;andtheCenter, Jackson,California(minusthecityofBassLake),Wayne,andRailroadtownshipsinStarkeCounty,Indiana. 19 LocaldepositandmarketsharedataareasofJune2015,andarebasedoncalculationsinwhichthedepositsof thriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshave become,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,MidwestFinan-

106 FederalReserveBulletin|February2017 Reviewguidelines(“DOJBankMergerGuidelines”);20andothercharacteristicsof the markets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheChicagoandGary-Hammond markets.Onconsummationof theproposal,theChicagoandGary-Hammondmarkets wouldremainunconcentrated.ThechangeintheHHIinthesemarketswouldbesmall, andnumerouscompetitorswouldremaininthemarkets.21 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe ChicagoandGary-Hammondmarkets.Inaddition,theappropriatebankingagencieshave beenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheChicagoorGary-Hammondbankingmarketsorinanyother relevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders thefinancialandmanagerialresourcesandthefutureprospectsof theinstitutions involved.22Initsevaluationof thefinancialfactors,theBoardreviewsinformation regardingthefinancialconditionof theorganizationsinvolvedonbothparent-onlyand consolidatedbases,aswellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.In thisevaluation,theBoardconsidersavarietyof information,includingcapitaladequacy, assetquality,andearningsperformance,aswellaspubliccommentsontheproposal.The cialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70FederalReserveBulletin 743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 20 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. 21 FirstMidwestoperatesthe12thlargestdepositoryinstitutionintheChicagomarket,controllingapproximately $7.4billionindeposits,whichrepresentapproximately2percentofmarketdeposits.Standardoperatesthe20th largestdepositoryinstitutioninthemarket,controllingapproximately$1.9billionindeposits,whichrepresent lessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,FirstMidwestwould remainthe12thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$9.3billion, whichrepresentapproximately2.5percentofmarketdeposits.TheHHIfortheChicagomarketwouldincrease by2pointsto987,and186competitorswouldremaininthemarket.FirstMidwestoperatesthe6thlargest depositoryinstitutionintheGary-Hammondmarket,controllingapproximately$803.6millionindeposits, whichrepresentapproximately6percentofmarketdeposits.Standardoperatesthe13thlargestdepository institutioninthemarket,controllingapproximately$241.2millionindeposits,whichrepresentapproximately 1.8percentofmarketdeposits.Onconsummationoftheproposedtransaction,FirstMidwestwouldbecome the4thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$1billion,which representapproximately7.8percentofmarketdeposits.TheHHIfortheGary-Hammondmarketwould increaseby21pointsto955,and30competitorswouldremaininthemarket. 22 12U.S.C.§§1842(c)(2),(5),and(6),and1828(c)(5)and(11).

LegalDevelopments:FourthQuarter,2016 107 Boardevaluatesthefinancialconditionof thecombinedorganization,includingitscapital position,assetquality,liquidity,earningsprospects,andtheimpactof theproposed fundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationto absorbthecostsof theproposalandtocompletetheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapital adequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesand theproposedbusinessplan. FirstMidwestandFirstMidwestBankarebothwellcapitalized,andthecombinedentity wouldremainsoonconsummationof theproposal.Theproposedtransactionisabank holdingcompanymergerthatisstructuredasashareexchange,withasubsequentmerger of thesubsidiarydepositoryinstitutions.23Theassetquality,earnings,andliquidityof FirstMidwestBankandSB&Tareconsistentwithapproval,andFirstMidwestappearsto haveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FirstMidwest,Standard,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyFirstMidwest;theBoard’ssupervisoryexperienceswithFirstMidwestandStandardandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewith applicablebanking,consumerprotection,andanti-money-launderinglaws. FirstMidwest,Standard,andtheirsubsidiarydepositoryinstitutionsareconsideredtobe wellmanaged.FirstMidwesthasarecordof successfullyintegratingorganizationsintoits operationsandrisk-managementsystemsafteracquisitions.FirstMidwest’sexistingriskmanagementprogramanditsdirectorateandseniormanagementareconsideredsatisfactory.Thedirectorsandseniorexecutiveofficersof FirstMidwesthavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors.FirstMidwest’sriskmanagementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredFirstMidwest’splansforimplementingtheproposal.First Midwesthasconductedcomprehensiveduediligenceandisdevotingsignificantfinancial andotherresourcestoaddressallaspectsof thepost-integrationprocessforthisproposal. FirstMidwestwouldimplementitsrisk-managementpolicies,procedures,andcontrolsat thecombinedorganization,andtheseareconsideredacceptablefromasupervisory perspective.Inaddition,FirstMidwest’smanagementhastheexperienceandresourcesto ensurethatthecombinedorganizationoperatesinasafeandsoundmanner,andFirst 23 Toeffecttheholdingcompanymerger,BenjaminAcquisitionCorporation,awhollyownedsubsidiaryofFirst Midwestrecentlyformedtofacilitatethetransaction,wouldmergewithStandard,withStandardasthe survivingentity(“AcquisitionMerger”),andimmediatelythereafter,StandardwouldmergewithFirst Midwest,withFirstMidwestasthesurvivingentity.UponconsummationoftheAcquisitionMerger,each shareofStandardcommonstockwouldbeconvertedintotherighttoreceiveFirstMidwestcommonstock basedonanexchangeratio.Followingtheholdingcompanymergers,SB&TwouldmergewithandintoFirst MidwestBank,withFirstMidwestBankastheresultingentity.

108 FederalReserveBulletin|February2017 MidwestplanstointegrateStandard’sexistingmanagementandpersonnelinamanner thataugmentsFirstMidwest’smanagement.24 Basedonallthefactsof record,includingFirstMidwest’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,inadditiontothecommentreceivedontheproposal,theBoardconcludesthat considerationsrelatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellastherecordsof effectivenessof First MidwestandStandardincombattingmoney-launderingactivities,areconsistentwith approval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.25 Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelping tomeetthecreditneedsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutionsundertheCRA.TheCRArequiresthefederalfinancialsupervisoryagenciesto encourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,26andrequires theappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’s recordof helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.27 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 First MidwestBankandSB&T;thefairlendingandcompliancerecordsof bothbanks;the supervisoryviewsof theFDIC;confidentialsupervisoryinformation;information providedbyFirstMidwest;andthecommentreceivedontheproposal.28 24 Onconsummation,threeindividualsservingasseniormanagementofficialsatStandardorSB&Twillserveas seniormanagementofficialsattheFirstMidwestbankingorganization.TheseindividualsincludeStandard’s chiefexecutiveofficer,whowillserveasFirstMidwest’smarketpresidentoftheSouthMetroChicagoregion andisexpectedtobeappointedasamemberoftheboardofdirectorsofFirstMidwestBank. 25 12U.S.C.§§1842(c)(2)and1828(c)(5). 26 12U.S.C.§2901(b). 27 12U.S.C.§2903. 28 AcommunityorganizationrequestedthattheBoardconditionitsapprovaloftheproposaluponFirstMidwest creatingaCRAplanwithinputfromthepublic.FirstMidwesthasrespondedthatithasahistoryofstrong CRAperformancethatreflectstheeffectivenessandconsistencyofitsCRA-relatedactivities,strategies,and communityoutreach.TheBoardconsistentlyhasfoundthatneithertheCRAnorthefederalbankingagencies’ CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreements withanyorganizations.See,e.g.,HuntingtonBancsharesInc.,FRBOrderNo.2016-13at32n.50(July29, 2016);CITGroup,Inc.,FRBOrderNo.2015-20at24n.54(July19,2015);CitigroupInc.,88FederalReserve

LegalDevelopments:FourthQuarter,2016 109 Businessesof theInvolvedInstitutions FirstMidwestBankoffersabroadrangeof retailandcommercialbankingproductsand servicestoconsumersandbusinesses.Throughitsnetworkof approximately110branches locatedinIllinois,Indiana,andIowa,FirstMidwestBankoffersavarietyof banking products,includingcommercial,residential,agricultural,andconsumerloans;personal checkingandsavingsaccounts;moneymarketaccounts;certificatesof deposit;andcapital marketandtreasurymanagementservices. SB&Toffersamorelimitedrangeof retailandcommercialproductsthrough35branches locatedinIllinoisandIndiana.Itsproductsincludepersonalcheckingandsavings accounts,debitandcreditcards,andcertificatesof deposit,aswellascommercial,real estate,andconsumerloans.SB&Talsoofferstrustandwealthmanagementservices. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformation.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.29Inthiscase,theBoardconsideredthe supervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserveBank of Chicago(“ReserveBank”)andtheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity,includingLMIneighborhoods.30Aninstitution’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’sdatareportedundertheHomeMortgageDisclosureAct(“HMDA”),in additiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollected andreportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonavarietyof factors,including(1)thenumberandamountsof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof theinstitution’slending, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountsof loansinlow-,moderate-,middle-,andupper-income geographies;(3)thedistributionof loansbasedonborrowercharacteristics,including,for homemortgageloans,thenumberandamountsof loanstolow-,moderate-,middle-, Bulletin485(2002);FifthThirdBancorp,80FederalReserveBulletin838,841(1994).Initsevaluation,the BoardreviewstheexistingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasin placetoservethecreditneedsofitsCRAassessmentareas. 29 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 30 12U.S.C.§2906.

110 FederalReserveBulletin|February2017 andupper-incomeindividuals;31(4)theinstitution’scommunitydevelopmentlending, includingthenumberandamountsof communitydevelopmentloansandtheircomplexity andinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpractices toaddressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof FirstMidwestBank FirstMidwestBankwasassignedanoverallratingof “Outstanding”atitsmostrecent CRAperformanceevaluationbytheReserveBank,asof March2,2015(“FirstMidwest BankEvaluation”).32Thebankreceived“Outstanding”ratingsforeachof theLending Test,theInvestmentTest,andtheServiceTest.33 Examinersconcludedthatthebank’soveralllendinglevelsreflectedgoodresponsivenessto creditneedsinitsassessmentareas.Examinersnotedthatasubstantialmajorityof the bank’sloansweremadetoborrowerswithinitsassessmentareas.Overall,examinersfound thatthegeographicdistributionof thebank’sloansreflectedexcellentpenetration throughoutitsassessmentareas.Examinersalsofoundthat,giventheproductlinesoffered bythebank,thedistributionof itsborrowersreflectedexcellentpenetrationamong borrowersof differentincomelevelsandbusinessesandfarmsof differentsizes. ExaminersalsodeterminedthatFirstMidwestBankexhibitedanexcellentrecordof servingthecreditneedsof low-incomeindividualsandareasandof verysmallbusinesses andfarms.Thebankwasfoundtohavemadeextensiveuseof innovativeandflexible lendingpractices,suchasproductsdesignedtoimproveborrowers’credithistories,loan modificationsforLMIborrowersandbusinesses,andlendingthroughfederalandstate programsthatsupportsmallbusinessesandhomeownership.Inaddition,examinersnoted thatFirstMidwestBankwasaleaderinmakingcommunitydevelopmentloans,particularlyintheChicagomarket.Examinersfoundthatthebankoriginatedloansthatresulted inameaningfulimpactinitsassessmentareasandactivelysoughtcommunitydevelopment lendingopportunities. ExaminersfoundFirstMidwestBank’sdeliverysystemstobereadilyaccessibletoall sectionsof thebank’sassessmentareas,includingtoindividualsof differentincomelevels. Examinersnotedthatthebank’sbusinesshoursandservicesdidnotvaryinawaythat inconveniencedanyportionof itsassessmentareas.Examinersalsonotedthatthebank wasaleaderinprovidingcommunitydevelopmentservicesandthatitconductedavariety of financialliteracyandtechnicalassistanceprogramsinitsassessmentareas. FirstMidwestBank’sEffortssincetheFirstMidwestBankEvaluation FirstMidwestrepresentsthat,sincetheFirstMidwestBankEvaluation,FirstMidwest BankhasremainedactiveinmarketingproductsandservicesspecificallydesignedforLMI individualsandthatitregularlyparticipatesinfederalandstateloanprogramsthatare 31 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 32 TheFirstMidwestBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. Examinersreviewedloansreported,pursuanttoHMDAandCRAdatacollectionrequirements(geographic distributionandborrowerdistribution)in2012and2013.Theevaluationperiodforcommunitydevelopment lending,investments,andserviceswasAugust27,2012,throughMarch2,2015. 33 TheFirstMidwestBankEvaluationincludedfull-scopeevaluationsoftheChicago-Joliet-Naperville,Illinois- Indiana-WisconsinMultistateMetropolitanStatisticalArea(“MSA”);theDavenport-Moline-RockIsland, Iowa-IllinoisMSA;andNon-MetropolitanIllinois(consistingofKnoxandLaSallecounties).Limited-scope evaluationswereperformedintheChampaign-Urbana,Illinois,MSAandtheDanville,Illinois,MSA.

LegalDevelopments:FourthQuarter,2016 111 structuredtoaccommodatecommunitycreditneeds.Sinceitslastevaluation,First MidwestBankhasmadeasignificantamountof communitydevelopmentloansand substantialqualifiedcommunitydevelopmentinvestments.FirstMidwestrepresentsthat thebankhasprovidedfinancialeducationalresourcessuchasclassesanddirectcounseling toindividualswithinitsassessmentareas,manyof whomhavelimitedfinancialliteracyor creditimpediments.FirstMidwestalsorepresentsthatthebankhascollaboratedwith communityorganizationsthatpromoteinitiativessuchashomeownershipandfinancial literacy. CRAPerformanceof SB&T SB&Treceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformance evaluationbytheFDIC,asof October27,2014(“SB&TBankEvaluation”),34witha ratingof “HighSatisfactory”fortheLendingTest,“LowSatisfactory”fortheInvestment Test,and“Outstanding”fortheServiceTest.35 ExaminersconcludedthatSB&T’soveralllendinglevelsreflectedgoodresponsivenessto creditneedsinitsassessmentarea.Examinersnotedthatasubstantialmajorityof the bank’ssmallbusinessandhomemortgageloansweremadeinitsassessmentarea.Examinersfoundthat,giventheproductsofferedbythebank,itsdistributionof borrowers reflectedgoodpenetrationamongbusinessesof differentsizesandretailcustomersof differentincomelevels.Examinersalsofoundthatthegeographicdistributionof thebank’s loansreflectedadequatepenetrationthroughoutitsassessmentarea.Inaddition,examinersnotedthatthebankmadeuseof flexiblelendingproducts,includinghomemortgage loanproductsdesignedforLMIindividuals.Examinersalsonotedthatthebankmadea relativelyhighlevelof communitydevelopmentloans.Accordingtoexaminers,bank employeesandmanagementmaintainedcontactwithavarietyof community-basedorganizations,whichfacilitatedthebank’sawarenessof communitydevelopmentopportunities. ExaminersfoundthatSB&Tmadeareasonableamountof communitydevelopment investmentsbasedonthebank’scapacityandthecommunitydevelopmentneedspresentin itsassessmentarea.ExaminersalsofoundthatSB&Twasaleaderinprovidingcommunitydevelopmentservices,particularlyinsupportof financialliteracyinitiativestoLMI individuals.Inaddition,examinersfoundthebank’sdeliverysystemstobereasonably accessibletoessentiallyallportionsof theinstitution’sassessmentareas.Examinersalso foundthatthebank’sservices,includingitsbusinesshours,didnotvaryinawaythat inconveniencedanyportionsof itsassessmentarea. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.FirstMidwestrepresentsthatitplanstocontinue itscurrentofferingof productsandservicesuponconsummationof theproposal.First Midwestrepresentsthatcustomersof Standardwouldhaveaccesstoacomplementof productsandservicesthataremoreexpansivethanthosecurrentlyavailabletoStandard customers,includingbroadertypesof commercialandconsumerbankingproductsand services,andamorerobustonlineandmobilebankingservicesplatform.FirstMidwest 34 TheSB&TBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedloansreportedpursuanttoHMDAandCRAdatacollectionrequirements(geographicdistribution andborrowerdistribution)fromJanuary1,2012,throughJune30,2014.Theevaluationperiodforcommunity developmentloans,investments,andserviceswasfromAugust29,2011,throughOctober27,2014. 35 TheSB&TBankEvaluationincludedfull-scopeevaluationsofDuPage,Grundy,andWillcountiesinthe Chicago-Joliet-Naperville,Illinois,MetropolitanDivision;andLakeandPortercountiesintheGary,Indiana, MetropolitanDivision.

112 FederalReserveBulletin|February2017 representsthatcustomersof Standardwouldgainaccesstocapitalmarketandtreasury managementservices.Inaddition,FirstMidwestassertsthatcustomersof bothinstitutions wouldbenefitfromamoreexpansivebranchnetwork.Followingtheproposedtransaction,FirstMidwestrepresentsthatitwillcontinueitsexistingCRAprogramsandinitiativesandexpandthoseprogramsandinitiativestomarketscurrentlyservedbySB&T.First Midwestalsorepresentsthatitplanstofurthersupporttheavailabilityof residentialloans toLMIindividualsbyhiringatleastfiveadditionalcommunitydevelopmentlending officerswhowilloperatethroughoutFirstMidwestBank’sassessmentareas. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyFirstMidwest,andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthat theconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’s“risktothestabilityof theUnitedStatesbankingorfinancial system.”36 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.37These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.38 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,FirstMidwestwouldhaveapproximately$13.4billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize,FirstMidwestwouldnotbelikelytoposesystemicrisks.TheBoard generallypresumesthataproposalthatresultsinafirmwithlessthan$25billionin consolidatedassetswillnotposesignificantriskstothefinancialstabilityof theUnited Statesabsentevidencethatthetransactionwouldresultinasignificantincreasein 36 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). 37 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012).

LegalDevelopments:FourthQuarter,2016 113 interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches FirstMidwestBankhasappliedundersection9of theFRAtoestablishbranchesatthe currentlocationsof SB&T.39TheBoardhasassessedthefactorsitisrequiredtoconsider whenreviewinganapplicationunderthatsection.40Specifically,theBoardhasconsidered FirstMidwestBank’sfinancialcondition,management,capital,actionsinmeetingthe convenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussedinthisorder,theBoardfindsthose factorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredall thefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHCAct, theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof thisproposalis specificallyconditionedoncompliancebyFirstMidwestwithalltheconditionssetforth inthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof thisaction,the conditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoard inconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBankactingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveNovember10,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard 39 See12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebrancheson thesametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthatwasabranchofanybankparticipatinginthe mergerpriortoFebruary25,1927,orunderstatelaw,maybeestablishedasanewbranchoftheresultingbank orretainedasanexistingbranchoftheresultingbank.See12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofFirstMidwestBank’sbrancheswouldbepermissibleunderapplicablestatelaw.See205Ill.Comp. Stat.5/5(15)(a);Ind.Code§28-2-13-19;IowaCodeAnn.§524.1201. 40 12U.S.C.§322;12CFR208.6.

114 FederalReserveBulletin|February2017 Appendix IllinoisBranchestoBeEstablished 1. 7800West95thStreet,HickoryHills,Illinois 2. 282NorthWeberRoad,Bolingbrook,Illinois 3. 1968SibleyBoulevard,CalumetCity,Illinois 4. 10635SouthEwingAvenue,Chicago,Illinois 5. 3747NorthClarkStreet,Chicago,Illinois 6. 836WestIrvingParkRoad,Chicago,Illinois 7. 20SouthKankakeeStreet,CoalCity,Illinois 8. 2400West95thStreet,EvergreenPark,Illinois 9. 128DepotStreet,Gardner,Illinois 10. 19997SouthLaGrangeRoad,Frankfort,Illinois 11. 2398EssingtonRoad,Joliet,Illinois 12. 16545West159thStreet,Lockport,Illinois 13. 8601WestOgdenAvenue,Lyons,Illinois 14. 515U.S.Route6,Minooka,Illinois 15. 1111WestU.S.Route6,Morris,Illinois 16. 1433LisbonStreet,Morris,Illinois 17. 1607NorthAuroraRoad,Naperville,Illinois 18. 456NelsonRoad,NewLenox,Illinois 19. 8380WestCermakRoad,NorthRiverside,Illinois 20. 15901SouthCentralAvenue,OakForest,Illinois 21. 4001West95thStreet,OakLawn,Illinois 22. 4700West111thStreet,OakLawn,Illinois 23. 15900SouthWolf Road,OrlandPark,Illinois 24. 9700West131stStreet,PalosPark,Illinois 25. 11901SouthwestHighway,PalosPark,Illinois 26. 970BrookForestAvenue,Shorewood,Illinois 27. 1WestRooseveltRoad,VillaPark,Illinois 28. 1005SouthWaterStreet,Wilmington,Illinois IndianaBranchestoBeEstablished 1. 755IndianBoundaryRoad,Chesterton,Indiana 2. 4518IndianapolisBoulevard,EastChicago,Indiana 3. 7007CalumetAvenue,Hammond,Indiana 4. 2930RidgeRoad,Highland,Indiana 5. 2090EastCommercialAvenue,Lowell,Indiana 6. 579WestLincolnHighway,Merrillville,Indiana 7. 9321WickerAvenue,SaintJohn,Indiana

LegalDevelopments:FourthQuarter,2016 115 BOK Financial Corporation Tulsa, Oklahoma OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2016–19(November15,2016) BOKFinancialCorporation(“BOK”),Tulsa,Oklahoma,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2toacquireMBT Bancshares,Inc.(“MBT”),andtherebyindirectlyacquireMissouriBankandTrust Companyof KansasCity(“MBTBank”),bothof KansasCity,Missouri.Followingthe proposedacquisition,MBTBankwouldbemergedintoBOK’ssubsidiarybank,BOKF, NationalAssociation(“BOKBank”),Tulsa,Oklahoma.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister25404(April28,2016)).4Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. BOK,withconsolidatedassetsof approximately$32.1billion,isthe55thlargestinsured depositoryorganizationintheUnitedStates.BOKcontrolsapproximately$20.8billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.5BOKcontrolsBOKBank,which operatesinArkansas,Arizona,Colorado,Kansas,Maryland,Missouri,NewMexico, Oklahoma,andTexas.BOKBankisthe303rdlargestinsureddepositoryinstitutionin Missouri,controllingdepositsof approximately$1.3million,whichrepresentlessthan 1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6BOKBank isthe34thlargestinsureddepositoryinstitutioninKansas,controllingdepositsof approximately$419.3million,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. MBT,withconsolidatedassetsof approximately$601.9million,isthe1,203rdlargest insureddepositoryorganizationintheUnitedStates.MBTcontrolsapproximately $555.6millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.MBTcontrols MBTBank,whichoperatesinMissouriandKansas.MBTBankisthe52ndlargestinsured depositoryinstitutioninMissouri,controllingdepositsof approximately$407.9million, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate.MBTBankisthe101stlargestinsureddepositoryinstitutioninKansas, controllingdepositsof approximately$128.5million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,BOKwouldbecomethe54thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$32.7billion, 1 12U.S.C.§1841etseq 2 12U.S.C.§1842. 3 ThemergerofMBTBankintoBOKBankissubjecttotheapprovaloftheOfficeoftheComptrollerofthe Currency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).The OCCapprovedthebankmergeronOctober19,2016. 4 12CFR262.3(b). 5 AssetdataareasofJune30,2016,anddepositdataareasofJune30,2015,unlessotherwisenoted. 6 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsassociations, andsavingsbanks.

116 FederalReserveBulletin|February2017 whichrepresentlessthan1percentof thetotalassetsof insureddepositoryorganizations intheUnitedStates.BOKwouldcontrolconsolidateddepositsof approximately $21.4billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryorganizationsintheUnitedStates.InMissouri,BOKBankwouldbecomethe 52ndlargestdepositoryinstitution,controllingdepositsof approximately$409.2million, whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate.InKansas,BOKBankwouldbecomethe26thlargestdepositoryinstitution, controllingdepositsof approximately$547.9million,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,orincertaincircumstances,thebankholdingcompanywoulduponconsummationcontrol30percentormore of thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateor inanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof BOKisOklahoma,andMBTBank’s homestateisMissouri.10MBTBankalsooperatesinKansas.BOKiswellcapitalizedand wellmanagedunderapplicablelaw,andBOKBankhasan“Outstanding”Community ReinvestmentAct(“CRA”)11rating.MissouriandKansashavefive-yearminimumage requirements,andMBTBankhasbeeninexistenceformorethanfiveyears.12 Onconsummationof theproposedtransaction,BOKwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.Inaddition,thecombinedorganizationwouldcontrollessthan30percentof the totalamountof depositsof insureddepositoryinstitutionsinMissouriandKansas,the onlystatesinwhichBOKandMBThaveoverlappingbankingoperations.Accordingly,in lightof allthefactsof record,theBoardmayapprovetheproposalundersection3(d)of theBHCAct. 7 12U.S.C.§1842(d)(1)(A). 8 12U.S.C.§1842(d)(1)(B). 9 12U.S.C.§1842(d)(2)(A)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 SeeRSMo§362.077(1);K.S.A.9-541(a).

LegalDevelopments:FourthQuarter,2016 117 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.13TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitytobeserved.14 BOKandMBThavesubsidiarydepositoryinstitutionsthatcompetedirectlyintheKansas City,Missouri,bankingmarket(“KansasCitymarket”).15TheBoardhasconsideredthe competitiveeffectsof theproposalinthebankingmarket.Inparticular,theBoardhas consideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)thatBOKwouldcontrol;16theconcentrationlevelsof marketdepositsandthe increaseintheselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”);17andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheKansasCitymarket.Onconsummationof theproposal,theKansasCitymarketwouldremainunconcentrated,asmeasuredbytheHHI,accordingtotheDOJBankMergerGuidelines.ThechangeintheHHI inthismarketwouldbesmall,andnumerouscompetitorswouldremaininthebanking market.18 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the 13 12U.S.C.§1842(c)(1). 14 12U.S.C.§1842(c)(1)(B). 15 TheKansasCitymarketisdefinedasCass,Clay,Jackson,Lafayette,Platte,andRaycounties,allofMissouri, andFranklin,Johnson,Leavenworth,Miami,Wyandotte,andLinn(excludingthetownsofBlueMoundand Prescott)counties,allofKansas.ThemarketalsoincludesselecttownsinClinton,Johnson,andBatescounties,allofMissouri. 16 LocaldepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html. 18 BOKoperatesthe22ndlargestdepositoryinstitutionintheKansasCitymarket,controllingapproximately $420.6millionindeposits,whichrepresent0.9percentofmarketdeposits.MBToperatesthe16thlargest depositoryinstitutioninthesamemarket,controllingdepositsofapproximately$536.4million,whichrepresentabout1.2percentofmarketdeposits.Onconsummationoftheproposedtransaction,BOKwouldbecome the10thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$957.0million, whichrepresentapproximately2.1percentofmarketdeposits.TheHHIfortheKansasCitymarketwould increaseby2pointsto798,and117competitorswouldremaininthemarket.

118 FederalReserveBulletin|February2017 appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheKansasCitymarketorinanyotherrelevantbankingmarket. 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 informationregardingcapitaladequacy,assetquality,andearnings performance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompletetheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. BOKandMBTarebothwellcapitalized,andthecombinedentitywouldremainsoon consummationof theproposedtransaction.Theproposedtransactionisabankholding companyacquisitionthatisstructuredasanexchangeof sharesforcash,withasubsequent mergerof thesubsidiarydepositoryinstitutions.19Theassetquality,earnings,andliquidity of BOKBankandMBTBankareconsistentwithapproval,andBOKappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompleteintegrationof the institutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of BOK,MBT,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof their management,riskmanagementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyBOK;theBoard’ssupervisoryexperienceswithBOK andMBTandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations; andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws. BOK,MBT,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.BOKhasarecordof successfullyintegratingorganizationsintoitsoperations andrisk-managementsystemsafteracquisitions.BOK’sdirectorsandseniorexecutiveofficershavesubstantialknowledgeof andexperienceinthebankingandfinancialservices 19 Toeffectthetransaction,eachshareofMBTcommonstockwouldbeconvertedintoarighttoreceivecash, basedonanexchangeratio.Followingtheacquisitionof100percentoftheMBTshares,BOKwillcauseMBT todissolveandMBTBanktomergewithandintoBOKBank,withBOKBankasthesurvivingentity.BOK hasthefinancialresourcestofundthetransaction.

LegalDevelopments:FourthQuarter,2016 119 sectors,anditsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal.20 TheBoardalsohasconsideredBOK’splansforimplementingtheproposal.BOKhas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.BOK wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,BOK’smanagementhastheexperienceandresourcestoensurethatthecombined organizationoperatesinasafeandsoundmanner,andBOKplanstointegrateMBT’s existingmanagementandpersonnelinamannerthataugmentsBOK’smanagement.21 Basedonallthefactsof record,includingBOK’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof BOKandMBTincombattingmoney-launderingactivities,are consistentwithapproval. 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 operate,consistentwiththeirsafeandsoundoperation,23andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.24 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharac- 20 OnSeptember9,2016,theSecuritiesandExchangeCommission(“SEC”)announcedthatithadsettled chargesagainstBOKregardingallegationsthatBOKBank’sCorporateTrustDepartment,primarilythrougha seniorexecutive,concealedproblemsandredflagsfrominvestorsincertainbondofferingsforwhichBOK Bankservedasindenturetrusteeanddisseminationagentbetween2007and2015.SeeBOKBank,SECOrder InstitutingCease-and-DesistProceedings,FileNo.3-17533(September9,2016)(the“Order”).Accordingto theannouncement,BOKpromptlyterminatedtheresponsibleemployeefollowinganinternalinvestigationand reportedthemattertotheSEC.Further,theOrdernotesthatBOKhascooperatedwiththeSECintheinvestigationandhaspromptlyundertakenanumberofremedialactstoimprovecontrolswithinBOKBank’s CorporateTrustDepartment.TheBoardhasconsultedwiththeOCC,thebank’sprimaryfederalsupervisor, regardingthismatter.TheOCCconsideredthematterinconnectionwithitsreviewoftheproposedmergerof MBTBankintoBOKBank,anddeterminedthattheproposedmergerwillnotimpedeBOKBank’s remediationefforts. 21 Onconsummation,tenindividualscurrentlyservingasseniormanagementofficialsatMBTorMBTBankwill serveasseniormanagementofficialsatBOKBank,includingMBTBank’schiefexecutiveofficer,whowillbe retainedasBOKBank’sChairmanoftheKansasCitymarket. 22 12U.S.C.§1842(c)(2). 23 12U.S.C.§2901(b). 24 12U.S.C.§2903.

120 FederalReserveBulletin|February2017 teristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof BOKBank andMBTBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisory viewsof theOCCandtheConsumerFinancialProtectionBureau(“CFPB”);confidential supervisoryinformation;informationprovidedbyBOK;andthepubliccomment receivedontheproposal. PublicCommentRegardingtheProposal Inthiscase,acommenterobjectedtotheproposalonthebasisof allegeddisparitiesinthe numberof residentialrealestateloansmadetominorityborrowers,ascomparedtowhite borrowers,byBOKBankintheKansasCity,Missouri-Kansas,MetropolitanStatistical Area(“KansasCityMSA”);theHouston,Texas,MSA(“HoustonMSA”);andthe Phoenix,Arizona,MSA(“PhoenixMSA”),asreflectedindatareportedundertheHome MortgageDisclosureAct(“HMDA”)for2014.25ThecommenterfurtherallegedthatBOK BankconfinedAfricanAmericanandHispanicborrowerstogovernmentloanprograms insteadof conventionalloanproductsintheKansasCityMSA.Also,thecommentercriticizedtherateatwhichBOKBankdeniedapplicationsbyAfricanAmericansand/or Hispanics,comparedtotherateof denialsforwhites,forhomerefinanceloansinthe HoustonandPhoenixMSAs,asreportedunderHMDAfor2014.Inaddition,the commentergenerallyallegedthatBOKBankhasaweakrecordof lendingtopeopleof colorandlow-incomeindividualsandaweakrecordof consumercompliance.26 Businessesof theInvolvedInstitutionsandResponsetotheComment BOK,throughBOKBankanditsnonbankingsubsidiaries,providesabroadrangeof financialproductsandservicestoconsumersandbusinesses.Throughseveralgeographic bankingdivisions,BOKservescustomersinArizona,Arkansas,Colorado,Kansas,Maryland,Missouri,NewMexico,Oklahoma,andTexas.Productsandservicesprovidedby BOKincludeavarietyof loananddepositproducts;cashmanagementservices;fiduciary services;commercialrisk-managementproducts;mortgagebanking;brokerageandtrading servicestomiddle-marketbusinesses,financialinstitutions,andconsumers;andinvestmentadvisoryservices. MBTBankoffersabroadrangeof consumerandcommercialbankingproductsand servicesthroughfourlocationsintheKansasCityMSA.Itsproductsandservicesinclude checking,savings,moneymarket,andcertificateof depositaccounts;mortgageandother consumerlendingproducts;businessservicesandlending;andinternationalbanking services. 25 Thecommenter’sconcernsfocusedonthenumberofhomepurchaseloansthatBOKBankofferedtoAfrican AmericansandHispanicscomparedtowhitesintheKansasCityMSA,thenumberofhomerefinanceloans thatBOKBankofferedtoAfricanAmericanscomparedtowhitesintheHoustonMSA,andthenumberof homerefinanceloansofferedtoAfricanAmericansandHispanicscomparedtowhitesinthePhoenixMSA. 26 Thecommenteralsocitedananonymouscustomercomplaintpostedtoapubliconlineforumin2010 regardingallegedproblemsthecustomerhadclosinganaccountatBOKBankandoverdraftfeeschargedby thebankontheaccount.TheOCCreviewedthecommentaspartofitsreviewofBOKBank’sBankMerger Actapplicationbutcouldnotverifythecustomercomplaintduetothelackofinformationcontainedinthe posting.

LegalDevelopments:FourthQuarter,2016 121 Inresponsetothecomment,BOKrepresentsthatBOKBankhasmaintainedanexcellent recordof providingfinancialservicestominorityandLMIindividuals,isstrongly committedtocomplyingwithfairlendinglaws,andactivelyengagesinmonitoring,testing, andmaintaininginternalcontrolstoensurecompliancewithsuchlaws.BOKnotesthatits presenceintheKansasCity,Houston,andPhoenixMSAsislimited;however,BOKasserts thatitsmanagementiscommittedtoensuringfairlendinginallmarketsandisdeploying strategiestoincreaseitslendingtominoritiesandinLMIcommunities. WithrespecttoBOKBank’slendingintheKansasCityMSA,BOKrepresentsthatBOK Bankoutpaced“aggregatepeer”performanceinhome-purchase-applicationratesand originationratesforAfricanAmericanandHispanicborrowers,asreflectedin2014 HMDAdata,andthatBOKBank’sdenialratestosuchborrowerswerecomparableto thoseof itspeers.BOKalsoassertsthatnodisparitieswererevealedthroughitsanalysesto indicatethatAfricanAmericanorHispanicborrowersweresteeredbyBOKBankto governmentloanprogramsinsteadof conventionalloanproducts,asallegedbythe commenter. IntheHoustonMSA,BOKacknowledgesthatthebanklaggedbehindpeersinpercentage of totalrefinanceapplicationsreceivedfromAfricanAmericansin2014;however,BOK representsthatthebankexceededtheaggregatepeerthresholdwithrespecttoapplication ratesfromHispanicborrowers.BOKalsorepresentsthathome-purchaseloanorigination rateswerehigherthantheaggregatepeerdatainalldemographiccategories.Regardingthe PhoenixMSA,BOKrepresentsthatBOKBankoutperformedaggregatepeerdatainterms of thepercentageof homerefinanceloansoriginatedtoAfricanAmericanandHispanic borrowers,comparedtoapplicationsreceivedfromsuchborrowersin2014.BOKalso representsthatitoriginatedhomepurchaseloanstoAfricanAmericansandHispanicsata higherratethanthepeeraverage.Regardingtheallegationsof highdenialratesforrefinanceloanapplicationsintheHoustonandPhoenixMSAsin2014,BOKrepresentsthat itsdecisionswithrespecttotheapplicationsreceivedreflectedjudgmentsbasedoncredit history,collateral,debt-to-incomeratios,andothernondiscriminatoryfactors.27 Ineachof theKansasCity,Houston,andPhoenixMSAs,BOKrepresentsthatBOKBank engagesinanumberof outreachactivitiestargetedtominorityindividualsandcommunities.Forexample,intheKansasCityMSA,BOKrepresentsthatBOKBank’semployees providefinancialliteracyclassestoSpanishspeakersandworkwithorganizationsthat promotethedevelopmentandfinancingof homesinLMIareasandwithorganizations thatprovidescholarshipstominoritystudents.BOKalsorepresentsthatitexpectsadditionalopportunitiestoariseintheKansasCityMSAfollowingtheproposedtransaction duetotheincreasedresourcecapacityof BOKBankandtheproximityof MBTBank’s branchestoLMIandminoritycommunities.InthePhoenixMSA,BOKrepresentsthat BOKBanksponsorsand/orprovidescommunityservicetoseveralcommunityorganizationsfocusedonsupportingminoritycommunities.IntheHoustonMSA,BOKasserts thatithasappointedanemployeeasHispanicMarketCoordinatortofacilitateidentifying andmeetingthefinancialserviceneedsof theHispaniccommunity,anditsemployeesalso providecommunityservicetoanumberof organizationsthatserveminoritycommunities. BOKrepresentsthatitisimplementingastrategytoexpandthebank’slendingto minoritiesandLMIindividuals.ThestrategyincludessettingminorityandLMIlending goalsinallfull-scopeassessmentareasandthetargetingof resourcestoareasthatdonot 27 BOKrepresentsthatdenialratesforwhite,AfricanAmerican,andHispanicrefinanceapplicantswereallabove aggregatepeerdenialratesintheHoustonandPhoenixmarkets,whichBOKarguesindicatesaconsistent underwritingprogramregardlessofrace.

122 FederalReserveBulletin|February2017 meetthegoals;hiringanddeployingLMIloanofficersinvariousmarkets;28developingan enterprise-widemarketingstrategytotargetLMIcommunities;hiringanLMI/CRA ProgramManagerwithinthemortgagedivisiontofacilitatelendinginitiativesthatbenefit LMIandminorityborrowers;andcreatingaCommunityDevelopmentAdvisory Committeeinmajormarkets. BOKalsorepresentsthatBOKBankoffersanextensivesuiteof residentiallendingproductsthatbenefitLMIindividualsandgeographiesacrossallmarketsof thebank.Such productsincludelow-down-paymentproducts,government-sponsoredloanprograms, down-paymentassistanceprograms,andloanmodifications.BOKrepresentsthatBOK BankhasdeployedmarketingstrategiestotargetitsproductstoLMIandminority communitiesthroughsearchengine,directmail,ande-mailmarketingefforts. Further,BOKassertsthatithaspoliciesandprocedurestoensurecompliancewithfair lendinglawsandtomonitorfairlendingrisk,includinganenterprise-widefairlendingrisk assessment,whichisupdatedquarterly;ongoingHMDAandfairlendingmonitoringand testing;comparativeanalysistoidentifyspecificloansthatmayexhibitheightenedfair lendingrisk;escalationandreportingof fairlendingresultstoseniormanagement;regular monitoringof customercomplaintsforpotentialfairlendingconcerns;andathird-party duediligenceprogramthatevaluatesthird-partyserviceprovidersthatmaypresentfair lendingrisk. Recordsof PerformanceUndertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe applicant’sresponsetocomments.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRA performancerecordsof therelevantinstitutions,aswellasinformationandviewsprovided bytheappropriatefederalsupervisors.29Inthiscase,theBoardconsideredthesupervisoryviewsof andinformationprovidedbytheOCC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit 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’sdatareportedunderHMDA,inadditiontosmallbusiness,smallfarm,and 28 BOKrepresentsthatitdeploysLMIloanofficersinvariousmarketstoassistLMIandminorityindividualsin obtainingmortgagefinancingandtoconductoutreachintargetedcommunities.Theloanofficersalsohavea specificcompensationplanthatencouragesLMIlending.BOKrepresentsthatBOKBankhasemployedan LMIloanofficerintheKansasCitymarketandisintheprocessofhiringsuchloanofficerstoservethe PhoenixandHoustonMSAs. 29 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 30 12U.S.C.§2906.

LegalDevelopments:FourthQuarter,2016 123 communitydevelopmentloandatacollectedandreportedundertheCRAregulations,to assessaninstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors,including(1)thenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)the geographicdistributionof theinstitution’slendinginitsassessmentareasandthenumber andamountsof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)the distributionof loansbasedonborrowercharacteristics,including,forhomemortgage loans,thenumberandamountsof loanstolow-,moderate-,middle-,andupper-income individuals;31(4)theinstitution’scommunitydevelopmentlending,includingthenumber andamountof communitydevelopmentloansandtheircomplexityandinnovativeness; and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecredit needsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.32 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof BOKBank BOKBankwasassignedanoverallratingof “Outstanding”atitsmostrecentCRAperformanceevaluationbytheOCC,asof October28,2013(“BOKBankEvaluation”).33The bankreceived“Outstanding”ratingsforboththeLendingTestandtheInvestmentTest anda“HighSatisfactory”ratingfortheServiceTest.34TheBoardhasconsultedwiththe OCCregardingtheBOKBankEvaluation. 31 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 32 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 33 TheBOKBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedhomepurchase,homeimprovement,andhomerefinancemortgageloansreported,pursuantto HMDA,andsmallbusinessloansreportedunderCRAdatacollectionrequirementsfor2011and2012,except forloansinMarylandandOklahoma,wherereviewperiodswereJanuary26,2009,throughDecember31, 2012,andJanuary1,2009,throughDecember31,2012,respectively.Theevaluationperiodstartdatefor communitydevelopmentlending,investments,andserviceswasJanuary1,2011,forallareasexceptOklahoma andMaryland,whichhadstartdatesofSeptember21,2009,andFebruary26,2009,respectively.Theevaluationperiodenddateforcommunitydevelopmentlending,investments,andservicesinallratingareaswas October28,2013. 34 TheBOKBankEvaluationincludedfull-scopeevaluationsoftheKansasCity,Multi-StateMSA(composedof JohnsonandWyandottecountiesinKansasandJacksonCounty,Missouri);thePhoenix,Arizona,MSA (composedofMaricopaCounty);theFayetteville,Arkansas,MSA(composedofBentonandWashington counties);theDenver,Colorado,MSA(composedofAdams,Arapahoe,Broomfield,Denver,Douglas,and Jeffersoncounties);theAlbuquerque,NewMexico,MSA;theOklahomaCity,Oklahoma,MSA(composedof Canadian,Cleveland,andOklahomacounties);theTulsa,Oklahoma,MSA(composedofCreek,Rogers,Tulsa andWagonercounties);theHowardCounty,Maryland,MSA;theDallas,Texas,MSA(composedofCollin, Dallas,andDentoncounties);theFort-Worth,Texas,MSA(composedofTarrantCounty);andtheHouston, Texas,MSA(composedofFortBendandHarriscounties).Limitedscopeevaluationswereperformedinthe Bartlesville,Oklahoma,Non-MSA(composedofWashingtonCounty);theEnid,Oklahoma,Non-MSA (composedofGarfieldCounty);theEufaula,Oklahoma,Non-MSA(composedofMcIntoshCounty);the Grove,Oklahoma,Non-MSA(composedofDelawareCounty);theMcAlester,Oklahoma,Non-MSA (composedofPittsburgCounty);theMuskogee,Oklahoma,Non-MSA(composedofMuskogeeCounty);the

124 FederalReserveBulletin|February2017 ExaminersfoundthatBOKBank’soveralllendingactivitywasgood.Examinersnotedthat thebank’scommunitydevelopmentlendingwasexceptionallystrongandpositively impactedtheLendingTestinallratingareas.Accordingtoexaminers,thebank’scommunitydevelopmentloansprimarilysupportedaffordablehousinginitiatives,activitiesthat promotedeconomicdevelopmentintheassessmentareas,andactivitiesthatrevitalizedor stabilizedLMIcensustracts.Examinersalsofoundthatthebankoriginatedasubstantial majorityof loansinsideof itsassessmentareas.Overall,examinersfoundthatgeographic distributionof thebank’sloanswasadequateandborrower-incomedistributionwasgood, asevidencedbygooddistributionof homemortgageloansbyborrower-incomelevel. IntheKansasCityMSA,anareaof concernforthecommenterandtheareaaffectedby theproposedtransaction,examinersfoundBOKBank’slendingactivitytobeexcellent. Examinersfoundthatgeographicdistributionof thebank’sloanswasadequateandthat overallborrower-incomedistributionwasexcellentintheKansasCityMSA. InboththePhoenixandHoustonMSAs,theotherareasof concernforthecommenter, examinersfoundoveralllendingactivityandborrower-incomedistributiontobeadequate. Examinersfoundgeographicdistributionof loanstobeverypoorinthePhoenixMSAand poorintheHoustonMSA;however,communitydevelopmentlendinginbothMSAswas foundtobeexceptionallystrongandbeneficialtothecommunities,includingLMIareas andindividuals.Further,examinersanalyzedthebank’shomemortgageandsmallbusiness lendingactivityovertheevaluationperiodinthebank’sArizonaandTexasassessment areastoidentifyanygapsinthegeographicdistributionof loans;nounexplainedgaps werefoundintheseareas. ExaminersfoundthatBOKBank’soverallinvestmentperformancewasexcellent,andthey notedthatthebank’sinvestmentsprimarilysupportedaffordablehousing,community services,andeconomicdevelopmentinitsassessmentareas.Examinersalsonotedthatthe bank’sinvestmentswereresponsivetotheidentifiedneedsinthecommunitiesservedbythe bank.Further,examinersfoundthatBOKBank’sdeliverysystemswereaccessibletoall portionsof thebank’sassessmentareas,includingLMIcommunities.35Examinersalso foundthatthebankprovidedanoveralladequatelevelof communitydevelopmentservices initsassessmentareas. BOKBank’sEffortsSincetheBOKBankEvaluation BOKrepresentsthatBOKBankhascontinuedtodemonstrateresponsivenesstocredit needsinthebank’sassessmentareas.BOKassertsthatBOKBankhasremainedactivein marketingawideselectionof productsandserviceswithinitsassessmentareas,including productsandservicesthatbenefitLMIandminoritycommunities.BOKalsorepresents thatthebankhasmadeanumberof communitydevelopmentloansandinvestmentsto supportaffordablehousingandsmallbusinessesinitsassessmentareas.BOKnotesthat thebankhasengagedinvariousoutreacheffortsandcommunityserviceopportunitieswith organizationsthatserveLMIpersonsandcommunities,includingorganizationsthatfocus onfinancialeducation,economicdevelopment,andsmallbusinessdevelopment. PoncaCity,Oklahoma,Non-MSA(composedofKayCounty);theStillwater,Oklahoma,Non-MSA (composedofPayneCounty);theBoulder,Colorado,MSA;theSantaFe,NewMexico,MSA;andthe Sherman-Dennison,Texas,MSA. 35 Examinersfoundthebank’sbranchdistributionintheKansasCityMSAtobeadequateandfounditsbranch distributioninthePhoenixMSAtobegoodwhenconsideringitslimitedpresenceineachMSA.Theexaminersalsonotedthatthebrancheswereaccessibletogeographiesandindividualsofdifferentincomelevelsin bothassessmentareas.IntheHoustonMSA,examinersfoundthebank’sbranchdistributiontobeadequate andreasonablyaccessibletogeographiesandindividualsofdifferentincomelevels.

LegalDevelopments:FourthQuarter,2016 125 BOKrepresentsthatBOKBankcontinuestodevelopitsCRAprogramandevaluateCRA performancetodetermineif thereareopportunitiesforimprovement,includingthrough therecentcreationof aCRACommittee,whichmeetsquarterlyandhasseniormanagementparticipation.BOKrepresentsthattheCRACommitteereviewsthebank’sCRA performancelevelsandunderlyingCRAandHMDAdataqualityandintegrity;communicateswithkeystakeholders;assessestheriskandimpactof CRAandHMDAperformancelevels;andfacilitatesCRAplanningandresources.BOKrepresentsthattheCRA Committeewillalsoidentifytrendsandproposerecommendedchangestostrategicinitiatives;identifycompliancerisks;andevaluateresultsof initiatives,businessplans,models, andstrategies. CRAPerformanceof MBTBank MBTBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFDIC,asof July29,2013(“MBTBankEvaluation”).36Thebank received“Satisfactory”ratingsforboththeLendingTestandCommunityDevelopment Test. Examinersconcludedthatthebankdemonstratedasatisfactorycommitmenttocommunityreinvestment.Examinersnotedthatasubstantialmajorityof thebank’ssmallbusiness andhomemortgageloanswereoriginatedwithinthebank’sassessmentarea,which reflectedanexcellentcommitmenttomeetingthecreditneedsof itsassessmentarea. Examinersalsofoundthatthegeographicdistributionof thebank’sloansreflecteda reasonabledispersionthroughoutitsassessmentareaandthatthebank’sloan-to-deposit ratioreflectedareasonablewillingnesstoprovidecredit,giventhebank’ssize,financial condition,andthecreditneedsof itsassessmentarea.Examinersfoundthatthebank’s distributionof loanstoborrowersof differentincomesandbusinessesof differentsizes waspoor.However,examinersnotedthatMBThasabusinessfocus,andMBTmanagementindicatedthattherewassubstantialcompetitionforsmallbusinessloanstofinancially strongmoderate-sizedbusinessesintheassessmentarea. Examinersalsofoundthatthebank’soverallperformanceincommunitydevelopment activitiesinitsassessmentareawasreasonable.Examinersconcludedthatthebank’s communitydevelopmentperformancedemonstratedadequateresponsivenesstothe communitydevelopmentneedsinitsassessmentareathroughcommunitydevelopment loans,qualifiedinvestments,andcommunitydevelopmentservices. Viewsof theOCC TheBoardhasconsultedwiththeOCC,theprimaryfederalsupervisorof BOKBank, regardingtheOCC’sreviewof theproposedmergerof BOKBankandMBTBank.The OCCconductedareviewof thesamecommentthatwassubmittedtotheBoard,taking intoconsiderationBOKBank’sCRA,consumercompliance,andfairlendingrecords.37 TheBoardconsultedwiththeOCCregardingBOKBank’srecordof compliancewithfair lendinglawsandregulationsandthebank’spoliciesandproceduresrelatingtofair 36 TheMBTBankEvaluationwasconductedusingSmallInstitutionCRAExaminationProcedures.Examiners reviewedthebank’slendingactivitybasedontheinstitution’sloantrialreportandHMDAdatafor2011and 2012.TheMBTBankEvaluationreviewedthebank’sKansasCityMSA,whichincludedJohnsonand WyandotteCountiesinKansasandClay,Jackson,andPlatteCountiesinMissouri. 37 TheOCC’sreviewdidnotresultinfindingsrelatedtofairlendingthatwouldwarrantdenialofthebank mergerapplication;however,itwillcontinuetomonitorBOKBankforfairlendingissuesaspartofits ongoingsupervisoryprocess.SeeLetterfromStephenA.Lybarger,DeputyComptrollerforLicensing,OCC, toTamaraWagman,FredericDorwartLawyers(October19,2016).

126 FederalReserveBulletin|February2017 lendingandotherconsumerprotectionlawsandregulations.BOKBankintendstoimplementitsconsumercompliancepoliciesandproceduresatthecombinedorganization followingconsummationof thetransaction. Afterafullreviewof theproposal,theOCCdeterminedthattheproposalmetthestandardsof theBankMergerActandapprovedtheproposalwithoutconditions. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.BOKrepresentsthatuponconsummationof the proposal,existingcustomersof MBTwouldhaveaccesstoamoreexpansivelineof consumerproductsandservices,includingadditionallendingproductsthatarebeneficial toLMIborrowers.Specifically,BOKrepresentsthatitparticipatesinseveralgovernmentsponsoredlendingprograms,partnerswithnumerousentitiestoprovidedown-payment assistanceprogramsandfinancialsupportforaffordablehousing,andofferssecond-chance checkingaccountstocustomers. BOKrepresentsthattheacquisitionwillmakeavailableexpandedresourcestothecommunitiescurrentlyservedbyMBT.Forexample,BOKrepresentsthatMBThasapplied limitedresourcestoconsumerlendingtodateandthattheacquisitionwouldresultinadditionalmortgagelendersservingMBT’scommunities.Further,BOKrepresentsthatit intendstoincreasecurrentlevelsof communitydevelopmentactivity–bothfinanciallyand throughemployeeservice–fromthelevelsMBTandBOKengagedinasindividualentitiesintheaffectedmarket.Moreover,BOKrepresentsthatcustomersof bothinstitutions wouldbenefitfromamoreexpansivebranchnetwork.BOKhasassertedthatithasno planstocloseorconsolidateexistingbranchesof eitherdepositoryinstitutionfollowing consummationof theproposedtransactionandthatbranchesacquiredasaresultof the proposedtransactionwillallowforgreateropportunitiestoserveLMIandminority consumers.Further,BOKrepresentsthatMBTcustomerswillhaveaccesstoarangeof optionsforobtainingfinancialservices,includinga24-hour“ExpressBank”customer phoneserviceandonlineandmobilebankingoptions. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,consultationswiththeOCCandCFPB,confidential supervisoryinformation,informationprovidedbyBOK,thepubliccommentonthe proposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenience andneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”38 38 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7).

LegalDevelopments:FourthQuarter,2016 127 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.Theproposalinvolvestheacquisitionof approximately $601.9millionintotalassets.Afterconsummation,BOKwouldhaveapproximately $32.7billioninconsolidatedassetsandwouldnotbelikelytoposesystemicrisks.The Boardgenerallypresumesthataproposalthatinvolvesanacquisitionof lessthan $2billioninassetswillnotposesignificantriskstothefinancialstabilityof theUnited Statesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.41Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyBOKwithalltheconditionsimposedinthisOrder,includingreceiptof all 39 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 40 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 41 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.

128 FederalReserveBulletin|February2017 requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheproposal.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof KansasCity,actingunder delegatedauthority. Byorderof theBoardof Governors,effectiveNovember15,2016. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

LegalDevelopments:FourthQuarter,2016 129 Orders Issued Under International Banking Act Fédération des caisses Desjardins du Québec Levis, Canada OrderApprovingEstablishmentof aBranch FRBOrderNo.2016–20(December16,2016) FédérationdescaissesDesjardinsduQuébec(“Federation”),Levis,Canada,hasapplied undersection7(d)of theInternationalBankingActof 1978(“IBA”)1toestablishafederallylicensedbranchinHallandale,Florida,aspartof acorporatereorganizationof its existingbankingoperations.TheForeignBankSupervisionEnhancementActof 1991, whichamendedtheIBA,providesthataforeignbankmustobtaintheapprovalof the BoardtoestablishabranchintheUnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinFlorida(MiamiHerald,October, 28,2016).Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredall commentsreceived. Federationhasdeterminedtocombineanumberof itsoperationsinCanada,resultingina changeincontroloveritsexistingbankingoperationsintheUnitedStates.Federationisa depositoryinstitutionsubsidiaryof TheDesjardinsGroup(“Desjardins”),Levis, Canada.Desjardins,withconsolidatedassetsof approximately$200.7billion,isthe6th largestbankingorganizationinCanada.2Desjardinsisacooperativenetworkof financial institutionsoperatingprimarilyintheprovinceof Quebec,Canada.Desjardinsownsallof Federation’sshares.FederationcontrolsCaissecentraleDesjardinsduQuébec(“CCD”), Montreal,Canada,acooperativefinancialinstitution,aswellasthenonbankingcompaniesof Desjardins.CCDprimarilyprovidesclearingservicesandfundingforthefinancial institutionmembersof Desjardins.IntheUnitedStates,CCDoperatesafederallylicensed branchinHallandale,Florida.FederationandCCDproposetoamalgamateintoFederation.3Asaresultof thiscombination,Federationwouldtakeoveroperationof CCD’s existingU.S.branch.Federationis,andwouldremain,aqualifyingforeignbankingorganizationunderRegulationK.4 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether(1)theforeignbankandanyforeignbank parentengagedirectlyinthebusinessof bankingoutsideof theUnitedStates,(2)the foreignbankhasfurnishedtotheBoardtheinformationitneedstoassesstheapplication adequately,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.5TheBoard 1 12U.S.C.§3105(d). 2 AssetdataandrankinginformationareasofJune30,2016,andarebasedontheexchangerateonthatdate. 3 Inaddition,CCDownsaU.S.banksubsidiary,DesjardinsBank,NationalAssociation,throughitssubsidiary, DesjardinsFSBHoldings,Inc.,bothofHallandale,Florida.DesjardinsandFederationhaveappliedunder section3oftheBankHoldingCompanyActforFederationtomergewithCCD.Thisapplicationisbeing processedbytheFederalReserveBankofAtlantaunderdelegatedauthority. 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

130 FederalReserveBulletin|February2017 alsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.6 Asnotedabove,FederationandCCDengagedirectlyinthebusinessof bankingoutside theUnitedStates.FederationalsohasprovidedtheBoardwithinformationnecessaryto assesstheapplicationthroughsubmissionsthataddresstherelevantissues. TheFederalReservepreviouslyhasdeterminedthatDesjardins,Federation,andCCDare subjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor,theAutoritédesmarchésFinanciers(“AMF”).7Desjardins,Federation,andCCD remainsupervisedbytheAMFonsubstantiallythesametermsandconditions.8Basedon allthefactsof record,ithasbeendeterminedthat,aftertheproposedtransaction, DesjardinsandFederationwouldcontinuetobesubjecttocomprehensivesupervisionona consolidatedbasisbytheirhomecountrysupervisor. Theadditionalstandardssetforthinsection7of theIBAandRegulationKhavealsobeen takenintoaccount.TheAMFhasnoobjectiontotheestablishmentof theproposed branch. TheBoardhasalsoconsideredthefinancialandmanagerialfactorsinthiscase.AMF’s risk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapital Accord(“BaselAccord”).Federation’scapitalisinexcessof theminimumlevelsthat wouldberequiredbytheBaselAccordandisconsideredequivalenttocapitalthatwould berequiredof aU.S.bankingorganization.Managerialandotherfinancialresourcesof Federationareconsideredconsistentwithapproval,andFederationappearstohavethe experienceandcapacitytosupporttheproposedbranch.Inaddition,FederationhasestablishedcontrolsandproceduresfortheproposedbranchtoensurecompliancewithU.S.law andforitsoperationsingeneral.Moreover,asnotedabove,theproposalrepresentsthe reorganizationof existingbankingoperations. Canadahasenactedlawsandregulationstodetermoneylaunderingthatareconsistent withFinancialActionTaskForcerecommendations.Moneylaunderingisacriminal thatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports, auditreports,orotherwise;(iii)obtaininformationonthedealingsandrelationshipsbetweenthebankandits 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 TheDesjardinsGroup,90FederalReserveBulletin69(2004). 8 AtthetimeoftheBoard’spriorCCSdeterminationforDesjardins,theQuebecsupervisoryauthorityresponsibleforDesjardinswastheInspectorGeneral.Since2003,theentityperformingthesefunctionshasbeen restructuredandrenamed,withthecoresupervisoryfunctionsthatwereperformedbytheInspectorGeneralat thattimenowperformedbytheAMF.

LegalDevelopments:FourthQuarter,2016 131 offenseinCanada,andfinancialinstitutionsarerequiredtoestablishinternalpolicies, procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughout theirworldwideoperations.Federationhaspoliciesandprocedurestocomplywiththese lawsandregulations,andFederation’scompliancewithapplicablelawsandregulationsis monitoredbygovernmentalentitiesresponsibleforanti-money-launderingcompliance. WithrespecttoaccesstoinformationonFederation’soperations,therestrictionsondisclosureinrelevantjurisdictionsinwhichFederationoperateshavebeenreviewed.Federation hascommittedtomakeavailabletotheBoardsuchinformationonitsoperationsandon thoseof anyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeIBA,theBankHoldingCompanyActof 1956,andotherapplicable federallaw.Totheextentthattheprovisionof suchinformationtotheBoardmaybe prohibitedbylaworotherwise,FederationhascommittedtocooperatewiththeBoardto obtainanynecessaryconsentsorwaiversthatmightberequiredfromthirdpartiesfor disclosureof suchinformation.Inlightof thesecommitmentsandotherfactsof record,it hasbeendeterminedthatFederationhasprovidedadequateassurancesof accesstoany necessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd- FrankAct”)amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbank thatpresentsarisktothestabilityof theUnitedStatesfinancialsystem,whetherthehome countryof theforeignbankhasadopted,orismakingdemonstrableprogresstoward adopting,anappropriatesystemof financialregulationforthefinancialsystemof such homecountrytomitigatesuchrisk.9Informationrelevanttothestandardregardingriskto thestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular, considerationhasbeengiventotheabsoluteandrelativesizeof Federationinitshome jurisdiction;thescopeof Federation’sactivities,includingthetypesof activitiesitproposes toconductintheUnitedStates,andthepotentialforthoseactivitiestoincreaseortransmit financialinstability;andtheframeworkinplaceforsupervisingFederationinitshome jurisdiction.Basedontheseandotherfactors,financialstabilityconsiderationsforthis proposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyFederation aswellasthetermsandconditionssetforthinthisorder,Federation’sapplicationto establishabranchinFloridaisherebyapprovedbytheDirectorof theDivisionof BankingSupervisionandRegulation,withtheconcurrenceof theGeneralCounsel, pursuanttoauthoritydelegatedbytheBoard.10Shouldanyrestrictionsonaccesstoinformationontheoperationsoractivitiesof Federationanditsaffiliatessubsequentlyinterfere withtheBoard’sabilitytoobtaininformationtodetermineandenforcecomplianceby Federationoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof Federation’sdirectorindirectactivitiesintheUnitedStatesor,inthecaseof anysuchoperationslicensedbytheOfficeof theComptrollerof theCurrency(“OCC”), recommendterminationof suchoperations.Approvalof thisapplicationalsoisspecifically conditionedoncompliancebyFederationwiththecommitmentsmadeinconnectionwith thisapplicationandwiththeconditionsinthisorder.11 9 Pub.L.No.111-203,124Stat.1376,1440(2010),codifiedat12U.S.C.§3105(d)(3)(E). 10 12CFR265.7(d)(12). 11 TheBoard’sauthoritytoapprovetheestablishmentofbranchesparallelsthecontinuingauthorityoftheOCC tolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplanttheauthorityof theOCCtolicensetheproposedbranchofFederationinaccordancewithanytermsandconditionsthatthe OCCmayimpose.

132 FederalReserveBulletin|February2017 Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveDecember16, 2016. RobertdeV.Frierson Secretaryof theBoard

133 Federal Reserve BULLETIN June 2017 Vol. 103, No. 2 Legal Developments: First Quarter, 2017 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act First Citizens BancShares, Inc. Raleigh, North Carolina OrderApprovingtheAcquisitionof AdditionalSharesof aBank FRBOrderNo.2017-01(January11,2017) FirstCitizensBancShares,Inc.(“FirstCitizens”),Raleigh,NorthCarolina,afinancial holdingcompanywithinthemeaningof theBankHoldingCompanyActof 1956(“BHC Act”),1hasrequestedtheBoard’sapprovalundersection3of theBHCAct2toincreaseits ownershipinterestfrom4.9percentto9.0percentof thevotingsharesof CarterBank& Trust(“CarterBank”),Martinsville,Virginia. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister48421(July25,2016)).3Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. FirstCitizens,whichispartof theHoldingF&LFamilyChain,4hasconsolidatedassetsof approximately$32.2billionandisthe54thlargestinsureddepositoryorganizationinthe UnitedStates,controllingapproximately$27.3billioninconsolidateddeposits,which representlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.5FirstCitizenscontrolsFirst-CitizensBank&TrustCompany (“FirstCitizensBank”),whichoperatesinArizona,California,Colorado,Florida, Georgia,Kansas,Maryland,Missouri,NewMexico,NorthCarolina,Oklahoma,Oregon, SouthCarolina,Tennessee,Texas,Virginia,Washington,WestVirginia,andtheDistrict of Columbia.FirstCitizensBankisthefourthlargestinsureddepositoryinstitutionin NorthCarolina,controllingdepositsof approximately$14.0billion,whichrepresent 4.0percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6FirstCitizensBankalsoisthe15thlargestinsureddepositoryinstitutioninVirginia,controlling 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12CFR262.3(b). 4 InadditiontoFirstCitizens,theHoldingF&LFamilyChaincontrolstwootherbankholdingcompanies,Southern BancShares(N.C.),Inc.(“Southern”),MountOlive,andFidelityBancShares(N.C.),Inc.(“Fidelity”),Fuquay-Varina, bothofNorthCarolina. 5 NationalassetanddepositdataareasofJune30,2016,andstatedepositdataareasofJune30,2015,unlessotherwisenoted. 6 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsandloanassociations,andsavings banks.

134 FederalReserveBulletin|June2017 depositsof approximately$1.4billion,whichrepresentlessthan1percentof thetotal depositsof insureddepositoryinstitutionsinthatstate. CarterBank,withtotalassetsof approximately$4.9billion,isthe204thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$4.5billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.CarterBankoperatesinNorth CarolinaandVirginia.CarterBankisthetenthlargestinsureddepositoryinstitutionin Virginia,controllingdepositsof approximately$3.9billion,whichrepresent1.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.CarterBankalsoisthe 35thlargestinsureddepositoryinstitutioninNorthCarolina,controllingdepositsof approximately$488.4million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. NoncontrollingInvestment FirstCitizenscurrentlyownsapproximately4.9percentof thevotingsharesof Carter Bankandproposestoincreaseitsownershipinterestupto9.0percentof CarterBank’s votingshares.FirstCitizenshasrepresentedthatitdoesnotproposetocontrolorexercise acontrollinginfluenceoverCarterBankasaresultof thisproposal.7 TohelpensureitwouldnotcontrolCarterBankforpurposesof theBHCAct,FirstCitizensprovidedtheBoardwithcommitmentsthatareintendedtoensurethatFirstCitizens wouldnotexerciseorseektoexerciseacontrollinginfluenceoverCarterBankforpurposes of theBHCAct(“PassivityCommitments”).8Forexample,FirstCitizenshascommitted nottoexerciseorattempttoexerciseacontrollinginfluenceoverthemanagementorpoliciesof CarterBank;nottohaveorseektohaveanyemployeeorrepresentativeof First Citizensoritsaffiliatesserveasanofficer,agent,oremployeeof CarterBank;andnotto seekoracceptrepresentationontheboardof directorsof CarterBank.FirstCitizensalso hascommittednottoenterintoanyagreementwithCarterBankthatsubstantiallylimits thediscretionof CarterBank’smanagementovermajorpoliciesordecisions.Inaddition, FirstCitizenshascommittednottoacquire,orseektoacquire,confidentialornonpublic financialinformationfromoraboutCarterBank. Basedontheseconsiderationsandallthefactsof record,theBoardconcludesthatFirst Citizenswouldnotacquirecontrolof,orhavetheabilitytoexerciseacontrollinginfluence over,CarterBank.TheBoardnotesthattheBHCActrequiresFirstCitizenstoreceive theBoard’sapprovalbeforedirectlyorindirectlyacquiringanyadditionalsharesof Carter BankorattemptingtoexerciseacontrollinginfluenceoverCarterBank.9 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantbankingmarket,unlesstheanti-competitiveeffectsof theproposalareclearly 7 TheBoardpreviouslyhasapprovedtheacquisitionbyabankholdingcompanyoflessthanacontrolling interestinabank.See,e.g.,PennBancshares,Inc.,92FederalReserveBulletinC37(2006)(acquiringupto 24.89percentofthevotingsharesofabank);SunBanks,Inc.,71FederalReserveBulletin243(1985)(acquiring upto15percentofthevotingsharesofabank). 8 ThecommitmentsmadebyFirstCitizensaresetforthinappendixA. 9 See12U.S.C.§1842(a)(3).

LegalDevelopments:FirstQuarter,2017 135 outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitiestobeserved.10 FirstCitizensBank,itsaffiliates,andCarterBankcompetedirectlyin32bankingmarkets inNorthCarolinaandVirginia.11TheBoardhasconsideredthecompetitiveeffectsof the proposalinthebankingmarketsinwhichFirstCitizensBank,itsaffiliates,andCarter Bankcompete.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthebankingmarkets;therelativesharesof totaldepositsininsured depositoryinstitutionsinthemarkets(“marketdeposits”)thatFirstCitizens,itsaffiliates, andCarterBankwouldcontrol;12theconcentrationlevelsof marketdepositsandthe increaseintheselevelsasmeasuredbytheHerfindahlHirschmanIndex(“HHI”)under theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”);13othercharacteristicsof themarkets;and,asdiscussedbelow,the noncontrollingnatureof theproposedinvestment,aswellasthePassivityCommitments FirstCitizensmadetotheBoardwithrespecttoCarterBank. BankingMarketswithinEstablishedGuidelines Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesin28bankingmarkets.Onconsummation, 11bankingmarketswouldremainhighlyconcentrated;15bankingmarketswouldremain moderatelyconcentrated;andtwobankingmarketswouldremainunconcentrated,as measuredbytheHHI.ThechangeintheHHIinthesemarketsfromafullmergerbetween FirstCitizensandCarterBankwouldbesmall,consistentwithBoardprecedent,and withinthethresholdsintheDOJBankMergerGuidelines.Inaddition,numerouscompetitorswouldremaininmostof thesebankingmarkets.14 BankingMarketsWarrantingSpecialScrutiny Thestructuraleffectsthatconsummationof theproposalwouldhaveintheGalax, Martinsville,andMecklenburgbankingmarkets,allinVirginia,andtheDanville,Virginia– NorthCarolina,bankingmarketwarrantadetailedreview.Inthesemarkets,theconcentrationlevelsif FirstCitizensandCarterBankwereconsideredacombinedorganization onconsummation,wouldexceedthethresholdsintheDOJBankMergerGuidelinesand 10 12U.S.C.§1842(c)(1). 11 Forpurposesofitscompetitiveanalysis,theBoardaggregatesaffiliateholdingcompaniesasiftheywerea singleholdingcompany.See,e.g.,FirstNationalBankShares,Ltd.,80FederalReserveBulletin159(1994). Accordingly,FirstCitizensisaggregatedwithSouthernandFidelity,theothertwobankholdingcompanies thatarepartoftheHoldingF&LFamilyChain,forpurposesofexaminingthecompetitiveeffectsofthe proposedinvestmentinCarterBank. 12 DepositandmarketsharedataareasofJune30,2015,andunlessotherwisenoted,arebasedoncalculationsin whichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthat thriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks. See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70 FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinmarketshare calculationsona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 13 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicatinganticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymorethan 200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMergerGuidelinesin2010,theDOJhasconfirmedthatitsBankMergerGuidelines,whichwereissuedin1995,werenot modified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/ August/10-at-938.html. 14 Thesebankingmarketsandthecompetitiveeffectsoftheproposalinthesemarketsaredescribedin appendixB.

136 FederalReserveBulletin|June2017 wouldresultinthemarketdepositshareof FirstCitizens,itsaffiliates,andCarterBank equalingorexceeding35percentwhenusinginitialcompetitivescreeningdata. TheBoardpreviouslyhasstatedthatnoncontrollinginterestsindirectlycompetingdepositoryinstitutionsmayraisecompetitiveissuesundertheBHCAct.TheBoardhasnoted thatacompanyneednotacquirecontrolof anothercompanytolessencompetition betweenthemsubstantiallyandhasrecognizedthatasignificantreductionincompetition canresultfromthesharingof nonpublicfinancialinformationbetweentwoorganizationsthatarenotundercommoncontrol.15Accordingly,theBoardexaminesthespecific factsof eachcasetodeterminewhetheraminorityinvestmentinacompetitorwouldresult insignificantadversecompetitiveeffectsinabankingmarket.16 Danville,Virginia–NorthCarolina,BankingMarket FirstCitizensBankanditsaffiliate,Fidelity,wouldbethethirdlargestdepositoryinstitutionintheDanvillebankingmarket,controllingapproximately$225.4millionindeposits, whichrepresent12.5percentof marketdeposits.17CarterBankisthesecondlargest depositoryinstitutioninthemarket,controllingapproximately$534.8millionindeposits, whichrepresent29.6percentof marketdeposits.If consideredacombinedorganizationon consummationof theproposal,FirstCitizensBankandCarterBankwouldbethelargest depositoryinstitutionintheDanvillebankingmarket,controllingapproximately $760.2millionindeposits,whichwouldrepresentapproximately42.1percentof market deposits.TheHHIinthismarketwouldincrease740points,from2194to2934. ThreecreditunionsexertacompetitiveinfluenceintheDanvillebankingmarket.Each institutionoffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe relevantbankingmarket.18InadditiontoFirstCitizensBankandCarterBank,eightother depositoryinstitutionscompeteintheDanvillemarket,includingonecompetitorwith morethan30percentof marketdeposits. Galax,Virginia,BankingMarket FirstCitizensBankisthesixthlargestdepositoryinstitutionintheGalaxbankingmarket, controllingapproximately$30.3millionindeposits,whichrepresent3.6percentof market deposits.19CarterBankisthelargestdepositoryinstitutioninthemarket,controlling 15 See,e.g.,CityHoldingCompany,96FederalReserveBulletinB21(2010);SunTrustBanks,Inc.,76Federal ReserveBulletin542(1990). 16 See,e.g.,CityHoldingCompany,96FederalReserveBulletinB21(2010);PassumpsicBancorp,92Federal ReserveBulletinC175(2006);BOKFinancialCorp.,81FederalReserveBulletin1052(1995);Mansura Bancshares,Inc.79FederalReserveBulletin37(1993);SunBanks,Inc.,71FederalReserveBulletin243(1985). 17 TheDanvillebankingmarketisdefinedastheindependentcityofDanville,Virginia;PittsylvaniaCounty, Virginia;andtheDanRiver,Milton,Pelham,andYanceyvilletownshipsinCaswellCounty,NorthCarolina. 18 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);ThePNCFinancialServicesGroup, Inc.,93FederalReserveBulletinC65(2007);RegionsFinancialCorporation,93FederalReserveBulletinC16 (2007);PassumpsicBancorp,92FederalReserveBulletinC175(2006);andWachoviaCorporation,92Federal ReserveBulletinC183(2006).Here,URWCommunityFederalCreditUnion,BeaconCreditUnion,andPiedmontCreditUnioncontrolapproximately$92.0millionindepositsinthatmarketthat,ona50percent weightedbasis,representapproximately4.9percentofmarketdeposits.Afterinclusionofthesedeposits,First Citizenswouldcontrolapproximately40.1percentofmarketdeposits,andtheHHIwouldincreaseby670 pointsto2667. 19 TheGalaxbankingmarketisdefinedastheindependentcityofGalax,GraysonCounty,andtheportionof CarrollCountynorthoftheBlueRidgeParkway,allinVirginia.

LegalDevelopments:FirstQuarter,2017 137 approximately$286.2millionindeposits,whichrepresent34.4percentof marketdeposits. If consideredacombinedorganizationonconsummationof theproposal,FirstCitizens BankandCarterBankwouldbethelargestdepositoryinstitutionintheGalaxbanking market,controllingapproximately$316.5millionindeposits,whichwouldrepresent approximately38.1percentof marketdeposits.TheHHIinthismarketwouldincrease251 points,from2490to2741. OnecreditunionexertsacompetitiveinfluenceintheGalaxbankingmarket.Theinstitutionoffersawiderangeof consumerbankingproducts,operatesstreet-levelbranches,and hasbroadmembershipcriteriathatincludealmostallof theresidentsintherelevant bankingmarket.20InadditiontoFirstCitizensBankandCarterBank,sevenotherdepositoryinstitutionswouldcompeteintheGalaxmarket,includingtwocompetitorswithmore than15percentof marketdeposits. Martinsville,Virginia–NorthCarolina,BankingMarket FirstCitizens’affiliate,Fidelity,isthesixthlargestdepositoryinstitutionintheMartinsville bankingmarket,controllingapproximately$50.4millionindeposits,whichrepresent 3.3percentof marketdeposits.21CarterBankisthelargestdepositoryinstitutioninthe market,controllingapproximately$660.8millionindeposits,whichrepresent43.6percent of marketdeposits.If consideredacombinedorganizationonconsummationof the proposal,FidelityandCarterBankwouldbethelargestdepositoryinstitutioninthe Martinsvillebankingmarket,controllingapproximately$711.2millionindeposits,which wouldrepresentapproximately46.9percentof marketdeposits.TheHHIinthismarket wouldincrease290points,from2691to2981. OnecreditunionexertsacompetitiveinfluenceintheMartinsvillebankingmarket.This institutionalsooffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe relevantbankingmarket.22InadditiontoFidelityandCarterBank,nineotherdepositoryinstitutionswouldcompeteintheMartinsvillemarket,includingtwocompetitorswith morethan12percentof marketdeposits. Mecklenburg,Virginia,BankingMarket FirstCitizensBankisthelargestdepositoryinstitutionintheMecklenburgbanking market,controllingapproximately$274.8millionindeposits,whichrepresent28.6percent of marketdeposits.23CarterBankisthefifthlargestdepositoryinstitutioninthemarket, controllingapproximately$90.3millionindeposits,whichrepresent9.4percentof market deposits.If consideredacombinedorganizationonconsummationof theproposal,First CitizensBankandCarterBankwouldbethelargestdepositoryinstitutioninthe Mecklenburgbankingmarket,controllingapproximately$365.1millionindeposits,which wouldrepresentapproximately38.0percentof marketdeposits.TheHHIinthismarket 20 Self-HelpCreditUnioncontrolsapproximately$14.8millionindepositsinthatmarketthat,ona50percent weightedbasis,representapproximately1.8percentofmarketdeposits.Afterinclusionofthesedeposits,First Citizenswouldcontrolapproximately37.4percentofmarketdeposits,andtheHHIwouldincreaseby242 pointsto2649. 21 TheMartinsvillebankingmarketisdefinedastheindependentcityofMartinsville,Virginia;HenryCounty, Virginia;andPatrickCounty,Virginia(excludingtheDanRiverDistrict). 22 ValleyStarCreditUnioncontrolsapproximately$77.7millionindepositsinthatmarketthat,ona50percent weightedbasis,representapproximately4.9percentofmarketdeposits.Afterinclusionofthesedeposits,First Citizenswouldcontrolapproximately44.6percentofmarketdeposits,andtheHHIwouldincreaseby262 pointsto2721. 23 TheMecklenburgbankingmarketisdefinedasMecklenburg,LunenburgandBrunswickCounties,allin Virginia.

138 FederalReserveBulletin|June2017 wouldincrease538points,from1839to2377.InadditiontoFirstCitizensBankand CarterBank,sixotherdepositoryinstitutionswouldcompeteintheMecklenburgmarket, includingthreecompetitorswithmorethan10percentof marketdeposits. AdditionalConsiderationsRegardingCompetition Afterconsideringthecompetitiveinfluenceof certaincreditunionsandaccountingfor othercompetitorsintheDanville,Galax,Martinsville,andMecklenburgbankingmarkets, FirstCitizens’proposalcontinuestoexceedtheDOJBankMergerGuidelines.However, theBoardhasconsideredadditionalfactorsthat,inthiscase,indicatethattheproposalis notlikelytohaveasignificantlyadverseeffectoncompetitionintheDanville,Galax, Martinsville,andMecklenburgbankingmarkets.24FirstCitizens’investmentinCarter Bankislimitedtolessthan10percentof CarterBank’svotingshares,andCarterBank’s directorsandexecutiveofficers,includingthebank’slong-tenuredchief executiveofficer, own24.9percentof CarterBank’scommonstock.Asnoted,FirstCitizensalsohas providedtheBoardwithPassivityCommitmentsthataredesignedtolimittheabilityof FirstCitizenstouseitsinvestmentinCarterBanktoexertacontrollingoranti-competitive influenceoverCarterBank. WhiletheBoardpreviouslyandconsistentlyhasfoundthatanoncontrollingrelationship maystillraisecompetitiveissuesundertheBHCAct,itissignificantthat,inthiscase,First Citizenshasprovidedadditionalcommitmentsthathelpamelioratethepotentialthatthis proposalwillallowcollusionorotheranti-competitivebehavior.Inparticular,FirstCitizenshascommittednottoacquire,orseektoacquire,anyconfidentialornonpublicfinancialinformationaboutorfromCarterBank.Further,therearenoofficerordirector interlocksbetweentheinstitutionsthroughwhichFirstCitizenscouldacquireconfidential orothernonpublicinformationaboutCarterBank.TheselimitationsrestrictingFirst Citizens’accesstoconfidentialinformation,whencombinedwiththeotherrestrictionson FirstCitizens’abilitytoexerciseacontrollinginfluenceoverCarterBank,significantly reducethepotentialthatFirstCitizensmayengageinanti-competitiveorcollusive behaviorinanyrelevantbankingmarket.ThusFirstCitizenshasmitigatedthepotential thatitmayinfluencethebehaviorof CarterBankandthepotentialthatFirstCitizensmay changeitsownbehaviorinananti-competitivewaybasedonadvanceorconfidential knowledgeabouttheplans,operations,orpoliciesof CarterBank.Theserestrictions, combinedwiththeotherlimitationsdescribedabove,mitigatetheconcernsthatthis proposalwouldlikelyhavesignificantlyadverseeffectsoncompetitionintheDanville, Galax,Martinsville,andMecklenburgbankingmarkets. TheDOJalsoconductedareviewof thepotentialcompetitiveeffectsof theproposaland hasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,includingthelimitednatureof FirstCitizens’investment,thePassivityCommitments,andFirstCitizens’commitmentnottoacquire,orseek toacquire,confidentialornonpublicfinancialinformationaboutorfromCarterBank,the Boardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverse effectoncompetitionorontheconcentrationof resourcesinthebankingmarketsinwhich FirstCitizens,itsaffiliates,andCarterBankcompetedirectlyorinanyotherrelevant 24 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsBankCorporation, 84FederalReserveBulletin129(1998).

LegalDevelopments:FirstQuarter,2017 139 bankingmarket.Thus,theBoardfindscompetitiveconsiderationstobeconsistentwith 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.TheBoardevaluatesthefinancial conditionof theorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalso considerstheabilityof theorganizationtoabsorbthecostsof theproposal.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresources. FirstCitizensandFirstCitizensBankarebothwellcapitalizedandwouldremainsoon consummationof theproposal.TheproposedtransactionwouldbefundedfromFirstCitizens’existingcashreserves.Theassetquality,earnings,andliquidityof FirstCitizensis consistentwithapproval,andFirstCitizensappearstohaveadequateresourcestoabsorb thecostsof theproposal.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolved.The Boardhasreviewedtheexaminationrecordsof FirstCitizens,FirstCitizensBank,and CarterBank,includingassessmentsof theirmanagement,risk-managementsystems,and operations.Inaddition,theBoardhasconsideredinformationprovidedbyFirstCitizens, theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencies withtheorganizations,andtheorganizations’recordsof compliancewithapplicable banking,consumerprotection,andanti-money-launderinglaws. FirstCitizensandFirstCitizensBankareeachconsideredtobewellmanaged.FirstCitizens’directorsandseniorexecutiveofficershavesubstantialknowledgeof andexperience inthebankingandfinancialservicessectors,anditsrisk-managementprogramappears consistentwithapprovalof thisexpansionaryproposal. Basedonallthefactsof record,includingFirstCitizens’supervisoryrecordandmanagerialandoperationalresources,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedin theproposal,aswellastherecordsof effectivenessof FirstCitizensandCarterBankin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.25Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe 25 12U.S.C.§1842(c)(2).

140 FederalReserveBulletin|June2017 served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,26andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.27 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 FirstCitizensBankandCarterBank,thefairlendingandcompliancerecordsof bothbanks,confidentialsupervisoryinformation,andinformationprovidedbyFirstCitizens. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardevaluates aninstitution’sperformancerecordinlightof examinationsbytheappropriatefederal supervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviewsprovidedbytheappropriatefederalsupervisors.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’sdatareportedundertheHomeMortgageDisclosureActof 1975,12U.S.C. §2801etseq.inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloan 26 12U.S.C.§2901(b). 27 12U.S.C.§2903. 28 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 29 12U.S.C.§2906.

LegalDevelopments:FirstQuarter,2017 141 datacollectedandreportedundertheCRAregulations,toassessaninstitution’slending activitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors,including(1)thenumberand amountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable) intheinstitution’sassessmentareas;(2)thegeographicdistributionof thecompany’s lending,includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareasandthenumberandamountof loansinlow-,moderate-,middle-,andupperincomegeographies;(3)thedistributionof loansbasedonborrowercharacteristics, including,thenumberandamountof homemortgageloanstolow-,moderate-,middle-, andupper-incomeindividuals;30(4)theinstitution’scommunitydevelopmentlending, includingthenumberandamountof communitydevelopmentloansandtheircomplexity andinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpractices toaddressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof FirstCitizensBank FirstCitizensBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheFederalDepositInsuranceCorporation(“FDIC”),asof May28,2013(“FirstCitizensBankEvaluation”).31FirstCitizensBankreceiveda“High Satisfactory”ratingforeachof theLending,Investment,andServiceTests. ExaminersfoundthatFirstCitizensBank’slendinglevelsreflectedgoodresponsivenessto communitycreditneeds.Accordingtoexaminers,thebank’sgeographicdistributionof loansreflectedgoodpenetrationthroughoutthebank’sassessmentareas.Examinersalso foundthattheFirstCitizensBank’slendingtoborrowersreflectedagooddistribution amongbusinessesof differentsizesandanadequatedistributionamongretailcustomersof differentincomes.ExaminersnotedthatFirstCitizensBankusedflexiblelendingpractices inordertoserveassessmentareacreditneeds.ExaminersalsofoundthatFirstCitizens Bankoriginatedarelativelyhighlevelof communitydevelopmentloansandthatboththe numberanddollarvolumeof communitydevelopmentloansincreasedfromFirstCitizens Bank’spreviousCRAevaluation. ExaminersfoundthatFirstCitizensBankhadanexcellentlevelof qualifiedcommunity developmentinvestments,grants,anddonations.Examinersnotedthatthebankexhibited goodresponsivenesstocreditandcommunityeconomicdevelopmentneedsandthateach of thebank’sinvestmentswasresponsivetoanidentifiedneed,particularlythoseinvolving thebank’spositionintheCommunityAffordableHousingEquityCorporation.Thebank alsousedinnovativeandcomplexinvestmentstosupportcommunitydevelopment initiatives. 30 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 31 TheFirstCitizensBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examinersreviewedhomemortgagelendingdata,otherCRAdata(smallloanstobusinessesandfarms),community developmentloans,communitydevelopmentinvestmentsandservices,anddeliverysystemsforthebank’s productsandservicesfromOctober19,2009,throughMay28,2013.TheFirstCitizensBankEvaluation coveredFirstCitizensBank’s59assessmentareaslocatedin15statesandtwomultistatemetropolitanstatisticalareas(“MSAs”):Arizona;California;Colorado;Florida;Georgia;Maryland;NewMexico;NorthCarolina;Oklahoma;Oregon;Tennessee;Texas;Virginia;Washington;WestVirginia;theKansasCity,Missouri– Kansas,MSA;andtheWashington–Arlington–Alexandria,DistrictofColumbia–Virginia–Maryland–West Virginia,MSA.TheFirstCitizensBankEvaluationincludedafull-scopereviewof33oftheseassessmentareas, includingbothmultistateMSAs.Alimited-scopereviewwasconductedintheremaining26assessmentareas. TheFirstCitizensBankEvaluationwasreleasedinJune2014.

142 FederalReserveBulletin|June2017 ExaminersalsonotedthatFirstCitizensBank’sdeliverysystemswereaccessibletothe bank’sassessmentareas.Examinersfurthernotedthattheservicesandbusinesshours offeredbyFirstCitizensBankdidnotvaryinawaythatinconvenienceditsassessment areas,particularlyLMIgeographiesorindividuals.Examinersnotedthatthebank providedarelativelyhighlevelof communitydevelopmentservicesthatbenefitedorganizationsthroughoutitsassessmentareas,includingfororganizationsthatfocusoneconomic developmentandrevitalization,affordablehousing,smallbusinessdevelopment,financial education,servicesforat-riskyouth,andbasichumanneedsforLMIindividualsandareas. FirstCitizensBank’sEffortssincetheFirstCitizensBankEvaluation FirstCitizensrepresentsthatFirstCitizensBankhascontinueditscommitmenttoserve theneedsof LMIindividualsandgeographiesandsmallbusinessesinitscommunities. FirstCitizensassertsthatFirstCitizensBankoffersavarietyof productsandservices designedtomeettheneedsof LMIandminorityborrowers.Inparticular,FirstCitizens representsthatFirstCitizensBankhasmadeanumberof homemortgageloansandproductsavailabletoLMIandfirst-timehomebuyers.Inaddition,FirstCitizensrepresents thatFirstCitizensBankhasremainedactiveincommunitydevelopmentandsmallbusiness lending.FirstCitizensalsonotesthatFirstCitizensBankhascontinueditsparticipationin communitydevelopmentinvestmentsandthatthebankprovidesahighlevelof community developmentservices,includingbyprovidingtimeandexpertisetovariouscommunity organizationsandforhomebuyerandfinancialliteracyseminars. CRAPerformanceof CarterBank CarterBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof December15,2014(“CarterBankEvaluation”).32 CarterBankreceived“HighSatisfactory”ratingsfortheLendingTestandServiceTestand a“LowSatisfactory”ratingfortheInvestmentTest.33 ExaminersnotedthatCarterBank’soveralllendingactivityreflectedgoodresponsiveness toitsassessmentareacreditneeds.Examinersalsofoundthatthebank’sgeographicdistributionof loansshowedgoodpenetrationthroughoutitsassessmentareas.Examiners notedthatthebank’slendingtoborrowersreflectedagooddistributionamongbusinesses of differentsizesandretailcustomersof differentincomes.Examinersalsofoundthatthe bankoriginatedarelativelyhighlevelof communitydevelopmentloans. ExaminersnotedthatCarterBankhadanadequatelevelof qualifiedcommunitydevelopmentinvestmentsandgrants.Examinersalsofoundthatthebankexhibitedadequate responsivenesstocreditandcommunityeconomicdevelopmentneedsthroughitsinvestmentsandcontributions.ExaminersnotedthatCarterBankoccasionallyusedinnovative 32 TheCarterBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examiners reviewedhomemortgagelendingdata,otherCRAdata(smallloanstobusinessesandfarms),andqualified investmentsfromDecember27,2011,throughDecember14,2014. 33 TheCarterBankEvaluationincludedafull-scopeassessmentreviewofthebank’sassessmentareasinthe followinggeographies:theDanville,Virginia,MSA;theLynchburg,Virginia,MSA;theRoanoke,Virginia, MSA;theVirginiaNon–MSA;theDurham–ChapelHill,NorthCarolina,MSA;theGreensboro–HighPoint, NorthCarolina,MSA;andtheNorthCarolinaNon–MSA.Alimited-scopereviewwasperformedinthe Blacksburg–Christiansburg–Radford,Virginia,MSA;Charlottesville,Virginia,MSA;theHarrisonburg, Virginia,MSA;theKingsport–Bristol–Bristol,Tennessee–Virginia,MSA;theWashington–Arlington– Alexandria,DistrictofColumbia–Virginia–Maryland–WestVirginia,MetropolitanDivision;theBurlington, NorthCarolina,MSA;theFayetteville,NorthCarolina,MSA;theGoldsboro,NorthCarolina,MSA;the Greenville,NorthCarolina,MSA;theHickory–Lenoir–Morganton,NorthCarolinaMSA;theRaleigh,North Carolina,MSA;andtheWinston–Salem,NorthCarolina,MSA.

LegalDevelopments:FirstQuarter,2017 143 and/orcomplexinvestmentstosupportcommunitydevelopmentinitiativesinitsassessmentareas. Examinersfoundthatthebank’sdeliverysystemswerereadilyaccessibletoessentiallyall portionsof thebank’sassessmentareas.Examinersalsonotedthebank’sservicesandbusinesshoursdidnotvaryinawaythatinconvenienceditsassessmentareas,particularlyLMI geographiesorindividuals.Examinersfoundthatthebankprovidedarelativelyhighlevel of communitydevelopmentservicesthatbenefitorganizationsthroughoutitsassessment areas,includingforeconomicdevelopmentandrevitalization,affordablehousing,small businessdevelopment,financialeducation,servicesforat-riskyouth,andbasichuman needsforLMIindividualsandareas. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyFirstCitizens,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”34 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.35These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.36 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Inthiscase,theproposedacquisitionof anoncontrollinginterestin CarterBankisnotasignificantexpansionbyFirstCitizensandwouldhaveademinimis impactonFirstCitizens’ssystemicfootprint.Thevalueof theadditionalsharesthatFirst Citizensproposestopurchaseisapproximately$14.0million.TheBoardgenerally 34 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 35 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 36 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012).

144 FederalReserveBulletin|June2017 presumesthatanacquisitionof lessthan$2billioninassetswouldnotposesignificant riskstothefinancialstabilityof theUnitedStatesabsentevidencethatthetransaction wouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyFirstCitizenswithalltheconditionsimposedinthisorder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Richmond,actingunder delegatedauthority. Byorderof theBoardof Governors,effectiveJanuary11,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard AppendixA FirstCitizensBancShares,Inc.(“FirstCitizens”),Raleigh,togetherwithSouthern Bancshares(N.C.),Inc.(“Southern”),MountOlive,andFidelityBancshares(N.C.),Inc. (“Fidelity”),Fuquay-Varina,allof NorthCarolina,andtheirsubsidiariesandaffiliates (eacha“FirstCitizensAcquirer”andcollectively,the“FirstCitizensAcquirerGroup”), willnot,withoutthepriorapprovalof theBoardof Governorsof theFederalReserve System(the“Board”)oritsstaff,directlyorindirectly: 1. Exerciseorattempttoexerciseacontrollinginfluenceoverthemanagementorpolicies of CarterBank&Trust(“CarterBank”),Martinsville,Virginia,oranyof its subsidiaries; 2. Haveorseektohavearepresentativeof theFirstCitizensAcquirerGroupserveonthe boardof directorsof CarterBankoranyof itssubsidiaries; 3. Haveorseektohaveanyemployeeorrepresentativeof theFirstCitizensAcquirer Groupserveasanofficer,agent,oremployeeof CarterBankoranyof itssubsidiaries; 4. TakeanyactionthatwouldcauseCarterBankoranyof itssubsidiariestobecomea subsidiaryof theFirstCitizensAcquirerGroup; 5. Own,control,orholdwithpowertovotesecuritiesthat(whenaggregatedwithsecuritiesthattheexecutiveofficersanddirectorsof theFirstCitizensAcquirerGroupown,

LegalDevelopments:FirstQuarter,2017 145 control,orholdwithpowertovote)represent15.0percentormoreof anyclassof votingsecuritiesof CarterBankoranyof itssubsidiaries,butFirstCitizenswillnot own,control,orholdwithpowertovotesecuritiesthatrepresentmorethan9.0percent of anyclassof votingsecuritiesof CarterBankoranyof itssubsidiaries; 6. Ownorcontrolequityintereststhatwouldresultinthecombinedvotingand nonvotingequityinterestsof theFirstCitizensAcquirerGroupanditsexecutiveofficersanddirectorstoequalorexceed15.0percentof thetotalequitycapitalof Carter Bankoranyof itssubsidiaries,butFirstCitizenswillnotownorcontrolequityintereststhatwouldresultinthecombinedvotingandnonvotingequityinterestsof First Citizensthatexceed9.0percentof thetotalequitycapitalof CarterBankoranyof its subsidiaries; 7. Proposeadirectororslateof directorsinoppositiontoanomineeorslateof nominees proposedbythemanagementorboardof directorsof CarterBankoranyof its subsidiaries; 8. EnterintoanyagreementwithCarterBankoranyof itssubsidiariesthatsubstantially limitsthediscretionof CarterBank’smanagementovermajorpoliciesanddecisions, includingbutnotlimitedto,policiesordecisionsaboutemployingandcompensating executiveofficers;engaginginnewbusinesslines;raisingadditionaldebtorequity capital;mergingorconsolidatingwithanotherfirm;oracquiring,selling,leasing, transferring,ordisposingof materialassets,subsidiaries,orotherentities; 9. Solicitorparticipateinsolicitingproxieswithrespecttoanymatterpresentedtothe shareholdersof CarterBankoranyof itssubsidiaries; 10. Disposeorthreatentodispose(explicitlyorimplicitly)of equityinterestsof Carter Bankoranyof itssubsidiariesinanymannerasaconditionorinducementof specific actionornon-actionbyCarterBankoranyof itssubsidiaries;or 11. EnterintoanyotherbankingornonbankingtransactionswithCarterBankoranyof itssubsidiaries,exceptthattheFirstCitizensAcquirerGroupmayestablishandmaintaindepositaccountswithCarterBank,providedthattheaggregatebalanceof allsuch depositaccountsdoesnotexceed$500,000andthattheaccountsaremaintainedon substantiallythesametermsasthoseprevailingforcomparableaccountsof persons unaffiliatedwithCarterBank. 12. Acquire,orseektoacquire,anyconfidentialornonpublicfinancialinformationof CarterBankoranyof itssubsidiaries.TheFirstCitizensAcquirerGroupalso confirmsthattherearenolegal,contractual,orstatutoryprovisionsthatwouldallowit oritssubsidiariestohaveanyaccesstofinancialinformationof CarterBankorits subsidiariesbeyondtheinformationavailabletoallshareholders. EachFirstCitizensAcquirerunderstandsthatthesecommitmentsconstituteconditions imposedinwritinginconnectionwiththeBoard’sfindingsanddecisionsinFirstCitizens’ applicationtoacquireupto9.0percentof CarterBank,pursuanttosection3of the BankHoldingCompanyActof 1956,asamended(“BHCAct”),andtheBoard’sRegulationY,andassuch,maybeenforcedinproceedingsunderapplicablelaw.Nothingin thesecommitmentsreleasestheFirstCitizensAcquirerGroupfromcompliancewiththe BHCActandtheBoard’sregulationsthereunderforanysubsequentacquisitionor increaseinthepercentageownershipof anyclassof votingsharesof CarterBank.

146 FederalReserveBulletin|June2017 AppendixB FirstCitizensBank/CarterBankBankingMarkets ConsistentwithBoardPrecedentandDOJBankMergerGuidelines Remaining Amountof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors Washington,DC–DistrictofColumbia–Maryland–Virginia–WestVirginia—Washington,DC;Charles,Calvert,Frederick,Montgomery,and PrinceGeorge’sCountiesallinMaryland;District7inAnneArundelCounty,Maryland;theClarksvilleandSavagedistrictsinHowardCounty, Maryland;Arlington,Culpeper,Fairfax,Fauquier,Loudoun,PrinceWilliam,Rappahannock,Stafford,andWarrenCountiesallinVirginia;theVirginia citiesofAlexandria,Fairfax,FallsChurch,Manassas,andManassasPark;andJeffersonCounty,WestVirginia. FirstCitizens 56 $64.1M 0 CarterBank 44 $171.0M 0.1 FirstCitizensPost-Consummation 38 $235.1M 0.1 993 0 80 Charlotte,NorthCarolina–SouthCarolina—Anson,Cabarrus,Gaston,Lincoln,Mecklenburg,andUnionCounties,allinNorthCarolina;Lancaster andYorkCounties,bothinSouthCarolina;thecityofMooresvilleandthetownshipsofDavidsonandCoddleCreekinIredellCounty,North Carolina;thetownshipsofAtwellandChinaGroveinRowanCounty,NorthCarolina;andtheKing’sMountaintownshipinClevelandCounty,North Carolina. FirstCitizens 5 $2.0B 0.9 CarterBank 37 $27.1M 0 FirstCitizensPost-Consummation 5 $2.0B 0.9 5829 0 41 Durham–ChapelHill,NorthCarolina–Chatham,Durham,Orange,andPersonCounties,allinNorthCarolina. FirstCitizens 6 $469.2M 4.2 CarterBank 15 $48.8M 0.4 FirstCitizensPost-Consummation 6 $518.0M 4.7 1819 4 17 Fayetteville,NorthCarolina1—CumberlandandHokeCounties,bothinNorthCarolina;andtheAndersonCreek,Barbeque,Johnsonville,and StewartsCreektownshipsinHarnettCounty,NorthCarolina. FirstCitizens 2 $533.2M 17.4 CarterBank 10 $15.2M 0.5 FirstCitizensPost-Consummation 2 $548.4M 17.9 1940 17 13 Goldsboro,NorthCarolina2—WayneCounty,NorthCarolina;andtheFaison,Wolfscrape,Glisson,andAlbertsontownshipsinDuplinCounty, NorthCarolina. FirstCitizens 2 $377.7M 26.2 CarterBank 9 $3.7M 0.3 FirstCitizensPost-Consummation 2 $381.4M 26.5 2538 13 9 Greensboro–HighPoint,NorthCarolina1—Davidson,Guilford,Randolph,andRockinghamCounties,allinNorthCarolina. FirstCitizens 7 $849.2M 5.9 CarterBank 15 $195.8M 1.4 FirstCitizensPost-Consummation 7 $1.0B 7.3 1078 16 21 Greenville,NorthCarolina1—Pitt,Beaufort,andGreene(excludingtheShine,Jason,andHookertontownships)Counties,allinNorthCarolina. FirstCitizens 1 $641.2M 21.9 CarterBank 13 $3.7M 0.1 FirstCitizensPost-Consummation 1 $644.9M 22 1536 6 14 Hickory,NorthCarolina—Alexander,Burke,Caldwell,andCatawbaCounties,allinNorthCarolina. FirstCitizens 3 $613.1M 15.4 CarterBank 9 $50.8M 1.3 FirstCitizensPost-Consummation 3 $663.9M 16.7 1591 39 15 MountAiry,NorthCarolina—Virginia–SurryCounty,NorthCarolina;theDanRiverdistrictinPatrickCounty,Virginia;andtheportionofCarroll County,Virginia,southoftheBlueRidgeParkway. FirstCitizens 5 $98.5M 8 CarterBank 9 $35.9M 2.9 FirstCitizensPost-Consummation 4 $134.4M 11 1651 47 9 Raleigh,NorthCarolina3—Franklin,Granville,Johnston,Wake,andHarnett(excludingtheAndersonCreek,Barbeque,Johnsonville,and StewartsCreektownships),Counties,allinNorthCarolina. (continuedonnextpage)

LegalDevelopments:FirstQuarter,2017 147 AppendixB—continued FirstCitizensBank/CarterBankBankingMarkets ConsistentwithBoardPrecedentandDOJBankMergerGuidelines—continued Remaining Amountof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors FirstCitizens 3 $3.3B 12.9 CarterBank 27 $12.1M 0.1 FirstCitizensPost-Consummation 3 $3.3B 13 1372 1 31 RutherfordCounty,NorthCarolina—RutherfordCounty,NorthCarolina. FirstCitizens 3 $97.3M 14.6 CarterBank 10 $8.1M 1.2 FirstCitizensPost-Consummation 3 $105.4M 15.8 2058 35 10 Sanford,NorthCarolina1—LeeCounty,NorthCarolina. FirstCitizens 3 $108.1M 14.3 CarterBank 8 $11.8M 1.5 FirstCitizensPost-Consummation 3 $120.0M 15.9 1951 45 8 Henderson,NorthCarolina1—VanceandWarrenCounties,bothinNorthCarolina. FirstCitizens 2 $112.4M 22.8 CarterBank 6 $12.9M 2.6 FirstCitizensPost-Consummation 2 $125.3M 25.4 2362 119 8 WilkesCounty,NorthCarolina—WilkesCounty,NorthCarolina. FirstCitizens 4 $87.2M 12.3 CarterBank 10 $9.2M 1.3 FirstCitizensPost-Consummation 2 $96.3M 13.6 1554 33 10 Winston-Salem,NorthCarolina1—Davie,Forsyth,Stokes,andYadkinCounties,allinNorthCarolina. FirstCitizens 4 $586.1M 1.9 CarterBank 15 $21.6M 0.1 FirstCitizensPost-Consummation 3 $607.6M 1.9 6741 0 17 Wilson,NorthCarolina1—WilsonCounty,NorthCarolina. FirstCitizens 2 $196.6M 18.8 CarterBank 8 $10.1M 1 FirstCitizensPost-Consummation 2 $206.7M 19.7 3010 36 7 JohnsonCity–Bristol,Tennessee–Virginia—Carter,Sullivan,Unicoi,andWashingtonCounties,allinTennessee;ScottCounty,Virginia;the townsofChurchHill,Kingsport,MountCarmel,andHolstoninHawkinsCounty,Tennessee;theindependentcityofBristol,Virginia;andthetowns ofBenhams,GreenValley,BursonPlace,Wallace,Wyndale,andScenicParkinWashingtonCounty,Virginia. FirstCitizens 30 $8.2M 0.1 CarterBank 22 $34.0M 0.6 FirstCitizensPost-Consummation 21 $42.3M 0.7 889 0 32 Alleghany,Virginia—AlleghanyandBathCounties;andtheindependentcityofCovington,allinVirginia. FirstCitizens 7 $32.3M 6.4 CarterBank 9 $2.6M 0.5 FirstCitizensPost-Consummation 7 $34.9M 6.9 1792 6 8 Charlottesville,Virginia—theindependentcityofCharlottesville,Virginia,Albemarle;Buckingham,Fluvanna,Greene,Madison,andNelson Counties,allinVirginia;districts1,2,and3inOrangeCounty,Virginia. FirstCitizens 11 $69.4M 1.4 CarterBank 15 $24.8M 0.5 FirstCitizensPost-Consummation 10 $94.2M 1.9 1374 2 19 Emporia,Virginia—theindependentcityofEmporia,Virginia;andGreensvilleCounty,Virginia. FirstCitizens 5 $29.1M 12 CarterBank 6 $17.0M 7 FirstCitizensPost-Consummation 3 $46.1M 19.1 2163 170 5 (continuedonnextpage)

148 FederalReserveBulletin|June2017 AppendixB—continued FirstCitizensBank/CarterBankBankingMarkets ConsistentwithBoardPrecedentandDOJBankMergerGuidelines—continued Remaining Amountof MarketDeposit Bank Rank ResultingHHI ChangeinHHI Numberof Deposits Shares(%) Competitors Fredericksburg,Virginia—theindependentcityofFredericksburg,Virginia;Caroline,KingGeorge,andSpotsylvaniaCounties,allinVirginia; Districts4and5inOrangeCounty,Virginia,andtheWashingtonDistrictinWestmorelandCounty,Virginia. FirstCitizens 12 $19.8M 0.7 CarterBank 8 $67.1M 2.3 FirstCitizensPost-Consummation 8 $86.8M 3 1784 3 16 Harrisonburg,Virginia–WestVirginia—theindependentcityofHarrisonburg,Virginia;andRockinghamandPageCounties,bothinVirginia;and PendletonCounty,WestVirginia. FirstCitizens 15 $27.0M 1 CarterBank 12 $77.2M 2.9 FirstCitizensPost-Consummation 11 $104.2M 3.9 1029 6 17 Lynchburg,Virginia—theindependentcityofLynchburg,Virginia;Amherst,Appomattox,andCampbellCounties,allinVirginia;andtheportion ofBedfordCountyeastofRoute43(excludingtheindependentcityofBedford,Virginia),Virginia. FirstCitizens 10 $69.4M 1.7 CarterBank 5 $370.5M 8.9 FirstCitizensPost-Consummation 4 $439.9M 10.6 1366 30 15 Blacksburg,Virginia—theindependentcityofRadford,Virginia;andFloyd,Giles,Montgomery,andPulaskiCounties,allinVirginia. FirstCitizens 12 $21.4M 0.7 CarterBank 4 $287.6M 9.8 FirstCitizensPost-Consummation 4 $309.0M 10.5 1491 14 13 Roanoke,Virginia1—theindependentcitiesofBedford,Roanoke,andSalem,allinVirginia;Botetourt,Craig,Franklin,andRoanokeCounties,all inVirginia;andtheportionofBedfordCountywestofRoute43,inVirginia. FirstCitizens 6 $325.9M 4.2 CarterBank 4 $712.2M 9.1 FirstCitizensPost-Consummation 3 $1.0B 13.3 1515 76 18 Staunton,Virginia—theindependentcitiesofStauntonandWaynesboro,bothinVirginia;andAugustaandHighlandCounties,bothinVirginia. FirstCitizens 12 $42.8M 2.8 CarterBank 9 $66.3M 4.3 FirstCitizensPost-Consummation 5 $109.1M 7.1 1263 24 14 Burlington,NorthCarolina—AlamanceandCaswellCounties(excludingtheDanRiver,Milton,Pelham,andYanceyvilletownships),inNorth Carolina. Fidelity 12 $30.7M 1.6 CarterBank 14 $17.7M 0.9 FirstCitizensPost-Consummation 9 $48.4M 2.5 1355 3 15 Shelby,NorthCarolina—ClevelandCounty(excludingKing'sMountainTownship),NorthCarolina. Fidelity 4 $95.3M 11.6 CarterBank 10 $1.9M 0.2 FirstCitizensPost-Consummation 4 $97.2M 11.8 2130 6 9 Note:DataareasofJune30,2015.Allrankings,marketdepositshares,andHHIsarebasedonthriftdepositsweightedat50percent.The remainingnumberofcompetitorsnotedineachmarketincludesthriftinstitutions. 1 DatareflectinclusionofFidelity’sbankingoperationsinthemarket. 2 DatareflectinclusionofSouthern’sbankingoperationsinthemarket. 3 DatareflectsinclusionofbothSouthern’sandFidelity’sbankingoperationsinthemarket.

LegalDevelopments:FirstQuarter,2017 149 Central Bancompany, Inc. Jefferson City, Missouri OrderApprovingtheAcquisitionof aBank FRBOrderNo.2017-03(February8,2017) CentralBancompany,Inc.(“Central”),JeffersonCity,Missouri,abankholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2toacquire100percentof thevotingsharesof BankStarOne(“StarOne”),Fulton,Missouri. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister56,654(2016)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. Central,withconsolidatedassetsof approximately$12.3billion,isthe108thlargestdepositoryorganizationintheUnitedStates,controllingdepositsof approximately$9.2billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.4Centralcontrols13insureddepositoryinstitutions,which operateinIllinois,Kansas,Missouri,andOklahoma.Centralisthesixthlargestinsured depositoryorganizationinMissouri,controllingdepositsof approximately$7.6billion, whichrepresentapproximately4.8percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.5 StarOne,withtotalassetsof approximately$87.6million,isasubsidiaryof Bancstar,Inc., St.Louis,Missouri,the3,323rdlargestdepositoryorganizationintheUnitedStates.Star OneisaMissouri-charterednonmemberbankthatoperatesonlyinMissouri.Bancstar, Inc.isthe102ndlargestinsureddepositoryorganizationinMissouri,controllingapproximately$215.5millionindeposits,whichrepresentlessthan1percentof thetotaldeposits heldbyinsureddepositoryinstitutionsinMissouri. Onconsummationof thisproposal,Centralwouldbecomethe107thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$12.4billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.Centralwouldcontroldepositsof approximately$9.3billion,which representlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InMissouri,Centralwouldremainthesixthlargestdepository organization,controllingdepositsof approximately$7.7billion,whichrepresentapproximately5.0percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.6TheBHCActalsoprohibitstheBoardfromapprovinga 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12CFR262.3(b). 4 Nationwidedeposit,asset,andrankingdataareasofJune30,2016.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations. 5 Statedeposit,marketshare,andrankingdataareasofJune30,2015. 6 12U.S.C.§1842(c)(1)(A).

150 FederalReserveBulletin|June2017 proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.7 CentralhassubsidiarydepositoryinstitutionsthatcompetedirectlywithStarOneinthe JeffersonCity,Missouri,bankingmarket(the“JeffersonCitymarket”)8andtheLakeof theOzarks,Missouri,bankingmarket(the“Lakeof theOzarksmarket”).9TheBoardhas consideredthecompetitiveeffectsof theproposalinthesebankingmarketsinlightof all thefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthemarkets,therelativesharesof thetotaldepositsininsureddepository institutionsinthemarkets(“marketdeposits”)thatCentralwouldcontrol,10theconcentrationlevelof marketdepositsandtheincreaseintheselevelsasmeasuredbythe Herfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMerger CompetitiveReviewguidelines(“DOJBankMergerGuidelines”),11andothercharacteristicsof themarkets. Thecompetitiveeffectsof theproposalintheJeffersonCityandLakeof theOzarks marketswarrantadetailedreviewbecausetheproposalwouldresultinthemarketdeposit shareof Centralexceeding35percentinthesemarketswhenusinginitialcompetitive screeningdata. JeffersonCity,Missouri,BankingMarket Usingtheinitialcompetitivescreeningdata,Centralisthelargestdepositoryorganization intheJeffersonCitymarket,controllingdepositsof approximately$2.1billion,which representapproximately47.7percentof marketdeposits.StarOneisthe15thlargest depositoryorganizationinthemarket,controllingdepositsof approximately$42.8million, whichrepresentapproximately1.0percentof marketdeposits.Onconsummationof the proposal,thecombinedentitywouldbethelargestdepositoryorganizationintheJefferson Citymarket,controllingdepositsof approximately$2.1billion,whichwouldrepresent approximately48.7percentof marketdeposits.TheHHIinthemarketwouldincreaseby 92points,from2,553to2,645. TheBoardhasconsideredwhetherotherfactorseithermitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnothaveasignificantlyadverseeffecton competitionintheJeffersonCitymarket.12Factorsindicatethattheincreaseinconcentra- 7 12U.S.C.§1842(c)(1)(B). 8 TheJeffersonCitymarketisdefinedasCallaway,Cole,andOsagecounties;Boone,Jackson,andJefferson townshipsinMariesCounty;andthewesternhalfofGasconadeCounty,includingtheRichland,Boulware, ThirdCreek,Clay,andBourboistownships,allinMissouri. 9 TheLakeoftheOzarksmarketisdefinedasCamden,Miller,andMorgancounties,allinMissouri. 10 DepositandmarketsharedataareasofJune30,2015,andarebasedondatareportedbyinsureddepository institutionsintheFederalDepositInsuranceCorporation’sSummaryofDepositssurvey. 11 UndertheDOJBankMergerGuidelines,amarketisconsideredunconcentratedifthepost-mergerHHIis under1000,moderatelyconcentratedifthepost-mergerHHIisbetween1000and1800,andhighlyconcentratedifthepost-mergerHHIexceeds1800.TheDepartmentofJustice(“DOJ”)hasinformedtheBoardthata bankmergeroracquisitiongenerallywouldnotbechallenged(intheabsenceofotherfactorsindicating anticompetitiveeffects)unlessthepost-mergerHHIisatleast1800andthemergerincreasestheHHIbymore than200points.AlthoughtheDOJandtheFederalTradeCommissionissuedrevisedHorizontalMerger Guidelinesin2010,theDOJhasconfirmedthattheDOJBankMergerGuidelines,whichwereissuedin1995, werenotmodified.SeePressRelease,DepartmentofJustice(August19,2010),www.justice.gov/opa/pr/2010/August /10-at-938.html. 12 Thenumberandstrengthoffactorsnecessarytomitigatethecompetitiveeffectsofaproposaldependonthe sizeoftheincreasein,andresultinglevelof,concentrationinabankingmarket.SeeNationsbankCorp.,84 FederalReserveBulletin129(1998).

LegalDevelopments:FirstQuarter,2017 151 tionintheJeffersonCitymarket,asmeasuredbytheaboveHHIandmarketshare,overstatesthepotentialcompetitiveeffectsof theproposalinthemarket. TheBoardhasconsideredthecompetitiveinfluenceof fourcommunitycreditunionsinthe JeffersonCitymarket.Theinstitutionsofferawiderangeof consumerbankingproducts, operatestreetlevelbranches,andhavebroadmembershipcriteriathatincludealmostallof theresidentsintherelevantbankingmarket.13TheBoardfindsthatthesecircumstances warrantincludingthedepositsof thesecreditunionsata50percentweightinestimating marketinfluence.Thisweightingtakesintoaccountthelimitedlendingdonebythesecredit unionstosmallbusinessesrelativetocommercialbanks’lendinglevels. Thisadjustmentsuggestsmodestreductionsareappropriateintheresultingmarket concentrationof theproposedtransactionintheJeffersonCitymarket.Afterconsummation,adjustingtoreflectcompetitionfromcreditunionsinthemarket,themarketconcentrationlevelintheJeffersonCitymarketasmeasuredbytheHHIwouldincreaseby89, fromalevelof 2,445to2,534,andthemarketshareof Centralresultingfromthetransactionwouldincreaseinthemarketfrom46.7percentto47.6percent. Centralarguesthatcertainof itsdepositsintheJeffersonCitymarketdistortthemeasure of thecompetitiveeffectof theproposalontheJeffersonCitymarketbecausethose depositscannotbeusedforlending.Inconductingitscompetitiveanalysisinprevious cases,theBoardgenerallyhasnotadjusteditsmarketsharecalculationstoexcludecategoriesof depositsbecausealldepositsaretypicallyavailabletosupportlendingandother bankingactivitiesatanylocation,andthedepositsmaintainedinaspecificmarketrepresentafirm’sabilitytocompeteinthatmarket.TheBoard,however,hasadjustedmarket depositstoexcludespecifictypesof out-of-marketdepositsheldbyanacquirerinraresituationswhenevidencesupportsafindingthattheout-of-marketdepositsaresubjecttolegal orotherrestrictionsthatconstrainanorganization’sabilitytousethosedepositsto supportitsgeneralbankingactivitiesandthattherearedataavailabletomakecomparable adjustmentstothemarketsharesforotherparticipants,if appropriate.14 Centralhassomeout-of-marketdepositsthatarebookedatitsmainofficethataresubject tolegalorotherrestrictionsthatconstraintheorganization’sabilitytolendonsuch deposits.Thesedepositshavebeengeneratedfromalargeclassactionsettlementandare beingheldinescrowforpaymenttoconsumersthroughouttheUnitedStates.Central representsthatitcannotlendonthesedeposits. Toaccountforthepossibilitythatothermarketcompetitorsmightmaintainsimilar depositsintheJeffersonCitymarket,theBoardexcludeddepositsfromthesecondlargest competitorinthemarketsuchthatthesizeof thiscompetitor’slargestbranchinthe marketisreducedtothesizeof itssecondlargestbranchinthemarket.Thisadjustment alsosuggestsamodestreductionintheinitialmeasuresof marketconcentration.After makingtheseadjustmentsandweighingthedepositsof creditunionsat50percent,Central wouldcontrolapproximately46.6percentof marketdeposits,andtheHHIwouldincrease by96pointstoalevelof 2,422. 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 SeeHuntingtonBancsharesIncorporated,FRBOrderNo.2016-13,12-15(July29,2016);FirstSecurityCorp., 86FederalReserveBulletin122,125-27(2000).

152 FederalReserveBulletin|June2017 TheBoardhasalsoexaminedotheraspectsof thestructureof theJeffersonCitymarket thatmitigatethecompetitiveeffectsof theproposalorindicatethattheproposalwouldnot haveasignificantlyadverseeffectoncompetitionintheJeffersonCitymarket.After consummationof theproposal,Centralwouldfacecompetitionfrom23otherdepository institutionsinthemarket,oneof whichwouldcontrolmorethan9percentof market depositsandtwoof whichwouldcontrolmorethan6percentof marketdeposits.The presenceof theseviablecompetitorssuggeststhatCentralwouldhavelimitedabilityto unilaterallyofferlessattractivetermstoconsumersandthatthesecompetitorsareableto exertcompetitivepressureonCentralintheJeffersonCitymarket.Thisconclusionis supportedinthiscasebyananalysisof privatepricingdata,whichindicatesthatCentral’s feesandinterestratesfordepositproductsintheJeffersonCitymarketareclosetothe medianpricesof otherbanksinthemarketanddonotdeviatesubstantiallyfromCentral’s pricesinmarketswhereCentralisnotthedominantfirm.Moreover,althoughthemarketis highlyconcentrated,asmeasuredbytheHHI,thechangeinmarketshareandmarket structurewouldbedeminimis. Lakeof theOzarks,Missouri,BankingMarket Usingtheinitialcompetitivescreeningdata,Centralisthelargestdepositoryorganization intheLakeof theOzarksmarket,controllingdepositsof approximately$579.4million, whichrepresentapproximately36.8percentof marketdeposits.StarOneisthe10thlargest depositoryorganizationinthemarket,controllingdepositsof approximately $32.5million,whichrepresentapproximately2.1percentof marketdeposits.Onconsummationof theproposal,thecombinedentitywouldbethelargestdepositoryorganization intheLakeof theOzarksmarket,controllingdepositsof approximately$611.9million, whichwouldrepresentapproximately38.9percentof marketdeposits.TheHHIinthe marketwouldincreaseby152points,from1,816to1,968. OnecreditunionexertsacompetitiveinfluenceintheLakeof theOzarksmarket.This institutionoffersawiderangeof consumerbankingproducts,operatesstreet-level branches,andhasbroadmembershipcriteriathatincludealmostallof theresidentsinthe relevantbankingmarket.TheBoardfindsthatthesecircumstanceswarrantincludingthe depositsof thiscreditunionata50percentweightinestimatingmarketinfluence. Adjustingtoreflectcompetitionfromthiscreditunion,themarketconcentrationlevelin theLakeof theOzarksmarketasmeasuredbytheHHIwouldincreaseby149,fromalevel of 1,773to1,922,andthemarketshareof Centralresultingfromthetransactionwould increaseinthemarketfrom36.3percentto38.4percent.Inadditiontothecreditunion,17 commercialbankcompetitorswouldremaininthemarket,twoof whichwouldcontrol morethan10percentof marketdepositsandoneof whichisalarge,nationaldepository institutionthatwouldcontrolapproximately9percentof marketdeposits.Thepresenceof theseviablecompetitorssuggeststhatCentralwouldhavelimitedabilitytounilaterally offerlessattractivetermstoconsumersandthatthesecompetitorsareabletoexert competitivepressureonCentralintheLakeof theOzarksmarket.Moreover,asinthe JeffersonCitymarket,thechangeinmarketshareandmarketstructureresultingfromthe proposalintheLakeof theOzarksmarketwouldberelativelysmall. ConclusionRegardingCompetitiveEffects TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe JeffersonCitymarketandtheLakeof theOzarksmarket.Inaddition,theappropriate bankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedto theproposal.

LegalDevelopments:FirstQuarter,2017 153 Basedonallof thefactsof record,inparticularthestructureof therelevantmarkets,the numberof remainingcompetitors,thesmallincreaseinmarketshareassociatedwiththe proposal,andotherfactorsdiscussedabove,theBoardconcludesthatconsummationof theproposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheJeffersonCitymarket,theLakeof theOzarksmarket,orinany otherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.15Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialconditionof the organizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellasinformation regardingthefinancialconditionof therelevantdepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavariety of information,includingcapitaladequacy,assetquality,andearningsperformance,aswell aspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof the combinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalso considerstheabilityof theorganizationtoabsorbthecostsof theproposalandto completetheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoard considersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof their financialandmanagerialresourcesandtheproposedbusinessplan. CentralandStarOnearebothwellcapitalizedandwouldremainsoonconsummationof theproposedtransaction.Theproposedtransactionisapurchaseof stockinexchangefor cash.16Theassetquality,earnings,andliquidityof CentralandStarOneareconsistent withapproval,andCentralappearstohaveadequateresourcestoabsorbthecostsof the proposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,future prospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Central,itssubsidiarydepositoryinstitutions,andStarOne,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyCentral;theBoard’ssupervisoryexperiencesandthose of otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’ recordsof compliancewithapplicablebanking,consumerprotection,andanti-moneylaunderinglaws;aswellasinformationprovidedbythecommenter. Centralanditssubsidiarydepositoryinstitutionsareconsideredtobewellmanaged. Central’sdirectorsandseniorexecutiveofficershavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors,anditsrisk-managementprogram appearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredCentral’splansforimplementingtheproposal.Centralhas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother 15 12U.S.C.§§1842(c)(2),(5),and(6). 16 Centralwillpurchase100percentofStarOne’soutstandingvotingsharesfromBancStar,Inc.,St.Louis, Missouri,abankholdingcompany,inexchangeforcash.Centralhastheresourcestofundthistransaction.

154 FederalReserveBulletin|June2017 resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.StarOne wouldinitiallybeastandalonedepositoryinstitutionsubsidiaryof Centralfollowing consummationof theproposal.CentralhasrepresentedthatitplanstosubmitanapplicationtomergeStarOneintotwoof itssubsidiarydepositoryinstitutions,CentralBankof Lakeof theOzarksandTheCentralTrustBank,followingconsummationof theproposal. Centralwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatStar One,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition, Central’smanagementhastheexperienceandresourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner. Basedonallthefactsof record,includingCentral’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,andthecommentsreceivedontheproposal,theBoardconcludesthatconsiderations relatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof CentralandStarOnein combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.17Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,18andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.19 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 eachof Central’ssubsidiarydepositoryinstitutionsandStarOne,thefairlendingandcompliance recordsof eachof theinvolvedbanks,thesupervisoryviewsof examiners,confidential supervisoryinformation,informationprovidedbyCentral,andthepubliccomments receivedontheproposal. 17 12U.S.C.§1842(c)(2). 18 12U.S.C.§2901(b). 19 12U.S.C.§2903.

LegalDevelopments:FirstQuarter,2017 155 PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromcommenterswhoobjectedtotheproposal onthebasisof allegeddisparitiesinmortgagelendingbyoneof Central’ssubsidiary depositoryinstitutions,CentralBankof theMidwest(“CBMW”),particularlyinthe numberof homeimprovementandrefinancingloansmadetoAfricanAmericanborrowers andborrowersinminority-populatedLMIareasintheurbancoreof KansasCity, Missouri,asreflectedindatareportedundertheHomeMortgageDisclosureAct (“HMDA”)for2011to2015.ThecommentersstatedthatCBMWhasfailedtoadequately servetheneedsof thecommunitiesinwhichitoperatesanddoesnotadequatelycomply withtheCRA,theFairHousingAct,andtheEqualCreditOpportunityAct.20The commentersalsoallegedthatCBMWhasnotestablishedanybranchesinornearany minorityorLMIareasandthatitslendingintheseareasisnegligible;thatCBMW’s communitydevelopmentlendingeffortshaveignoredcertainminoritycommunitieswithin KansasCity;andthatCBMW’ssmallbusinesslendinginlow-incometractslagsbehind thatof otherbanksinthearea.Thecommentersindicatedthattheywouldsupportthe applicationif Centralwouldagreetotakeaseriesof steps,includingdesignatingafull-time urbanloanoriginator,21establishingabranchwithintheurbancoreof KansasCity,and adoptingcertaincommunitydevelopmentandlendinggoalsfortheurbancoreof Kansas City.22 Businessesof theInvolvedInstitutionsandResponsetoComments Centralcontrols12regionalbanksthroughoutMissouriandonebankinOklahoma. Central’ssubsidiarydepositoryinstitutionsprovideabroadrangeof retailandcommercial bankingproductsandservices.Central’sbanksubsidiariesengageinsignificantcommercialandindustriallendingandofferanarrayof financingalternatives,suchasrevolving linesof credit,equipmentandfixturefinancing,lettersof credit,andfloorplanlinesfor automobiledealers.Central’ssubsidiarybanksalsoprovidetreasurymanagementservices tocommercialcustomersandwealthmanagement,trust,andbrokerageservices. StarOnealsooffersabroadrangeof retailandcommercialbankingproductsandservices. StarOne’slendingactivitiesareprimarilyfocusedinreal-estate-securedcommercial lending. Centralassertsthatitssubsidiarydepositoryinstitutionshaveconsistentlymettherequirementsof theCRAandthatsinceCBMWwasacquiredbyCentralin1993,CBMWhas consistentlyreceived“Satisfactory”CRAratings.CentralstatesthatCBMWhasadopted communityoutreachinitiativestoassesstheneedsof localLMIandminoritycommunities andthatthebankhasmadeeffortstoreachthesesegmentsof thepopulation.Central furtherrepresentsthatCBMWmarketsitsproductstotheentireKansasCitymetroarea, includingtheurbancore,andhaspurposelydirectedsomeof itsadvertisingtomediathat reachprimarilyminorityaudiences.CentralalsoassertsthatCBMW’s“HomeTurf Loan Program”wasdesignedspecificallyforLMIindividualsandistargetedtoLMIcensus 20 42U.S.C.§§3601-3619;15U.S.C.§§1691etseq. 21 ThecommenterssubsequentlyacknowledgedthatCBMWalreadyhasestablishedafull-timeurbanloan originator. 22 TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,WintrustFinancialCorporation,FRBOrderNo.2016-17at8n.19(October28,2016); HuntingtonBancsharesIncorporated,FRBOrderNo.2016-13at32n.50(July29,2016);CITGroup,Inc.,FRB OrderNo.2015-20at24n.54(July19,2015).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethecreditneedsofits CRAassessmentareas.

156 FederalReserveBulletin|June2017 tractswithinthebank’sCRAassessmentarea.CentralalsoarguesthatCBMW’sofficers andemployeesareactivelyengagedinoutreachtoareasthroughoutKansasCityandthat CBMWhasmadesignificantinvestmentsinaffordablehousingprojectsintheKansasCity metroarea.CentralalsorepresentsthatCBMWhascreatedafull-timemortgagelending positionwithafocusontheLMIandminority-populatedareaswithintheurbancoreof KansasCity. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsestocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performanceinlightof examinationsbytheappropriatefederalsupervisorsof theCRA performancerecordsof therelevantinstitutions,aswellasinformationandviewsprovided bytheappropriatefederalsupervisors.23 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.24Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformance of asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-related activitiestodeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsandgeographiesof allincomelevels.Aspartof thelendingtest,examinersreview andanalyzeaninstitution’savailableHMDAdata,automatedloanreports,andother reportsgeneratedbytheinstitutiontoassesstheinstitution’slendingactivitieswithrespect toborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedontheinstitution’sloan-to-depositratio,loanoriginationsforsaletothe secondarymarket,lending-relatedactivitiesinitsassessmentareas,recordof engagingin lending-relatedactivitiesforborrowersof differentincomelevelsandbusinessesandfarms of differentsizes,geographicdistributionof loans,andrecordof takingactioninresponse towrittencomplaintsaboutitsperformance.25Intermediatesmallbanksaresubjecttothe lendingtest,aswellasacommunitydevelopmenttestthatevaluatesthenumberand amountof theircommunitydevelopmentloansandqualifiedinvestments,theextentto whichtheyprovidecommunitydevelopmentservices,andtheirresponsivenesstocommunitydevelopmentlending,investment,andserviceneeds.26Largeinstitutionsaresubjectto alendingtestsimilartothatdescribedaboveandaninvestmenttestthatevaluatesthe numberandamountof qualifiedinvestmentsthatbenefittheirassessmentareas.Large institutionsarealsosubjecttoaservicetestthatevaluatestheavailabilityandeffectiveness of theirsystemsfordeliveringretailbankingservicesandtheextentandinnovativenessof theircommunitydevelopmentservices.27 23 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48,506,48,548 (July25,2016). 24 12U.S.C.§2906. 25 See12CFR228.26(b). 26 See12CFR228.26(c). 27 See12CFR228.21etseq.

LegalDevelopments:FirstQuarter,2017 157 TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.28 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. Inthiscase,theBoardconsideredthesupervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserveBankof KansasCitywithrespecttoCBMW;the supervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserveBank of St.LouiswithrespecttoCentralBankof Lakeof theOzarksandTheCentralTrust Bank,whichoperateinthesamebankingmarketsasStarOne;andthesupervisoryviews of theFederalDepositInsuranceCorporation(“FDIC”)withrespecttoStarOne. CRAandConsumerCompliancePerformanceof CentralBankof theMidwest CBMW,whichoperatesprimarilyintheKansasCity,Missouri,bankingmarket,received anoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbythe FederalReserveBankof KansasCity,asof August24,2015(“CBMWEvaluation”).29 CBMWreceived“HighSatisfactory”ratingsforboththelendingtestandtheservicetest anda“LowSatisfactory”ratingfortheinvestmenttest.30 Examinersdeterminedthatthebank’slendingactivitiesreflectedgoodresponsivenessto thecreditneedsof itsassessmentarea,andahighpercentageof CBMW’sloansweremade insideitsassessmentarea.Thedistributionof CBMW’sloanstoborrowersof different incomelevelsandbusinessesof differentrevenuesizeswasconsideredadequate.Examiners foundthatthebankmadeuseof innovativeandflexiblelendingprogramstoreach minorityandLMIborrowers.ExaminersnotedthatCBMWmadearelativelyhighlevelof communitydevelopmentloans,includingrevitalizationandstabilizationloansinareas addressedincityrevitalizationplansandloanstosupporteconomicdevelopment,originatedthroughtheSmallBusinessAdministration.ExaminersconcludedthatCBMW’s totalqualifiedinvestmentactivityremainedadequate.Examinersfurthernotedthatthe bank’sinvestmentsdemonstratedadequateresponsivenesstocommunitydevelopment needs.ExaminersalsofoundthatCBMW’sperformanceundertheservicetestreflecteda highlevelof qualifiedcommunitydevelopmentserviceswithinthebank’sassessmentarea, includingbankstaff andofficersprovidingfinancialexpertise,personalfinancial checkups,homebuyercounseling,andsmallbusinesstraining.ExaminersnotedCBMW’s accessibledeliverysystems,reasonablebusinesshours,andaneutraleffectof branch openingsandclosings. ConcurrentlywiththeCBMWEvaluation,examinersconductedaconsumercompliance examinationof CBMW.Aspartof thisreview,examinersreviewedCBMW’slending activityreportedunderHMDAandassessedtheeffectivenessof controlstomitigatefair lendingrisk.TheBoardhastakenintoconsiderationtheresultsof thisexamination, 28 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 29 TheCBMWEvaluationwasconductedusingLargeBankCRAExaminationProcedures,consistingofthe lendingtest,theinvestmenttest,andtheservicetestdescribedabove.TheCBMWEvaluationreviewedHMDA loansandsmallbusinessloansfromJanuary1,2013,throughDecember31,2014.Examinersreviewed communitydevelopmentactivitiesfromAugust13,2013,throughAugust24,2015. 30 TheCBMWEvaluationreviewedthebank’sactivitiesinJohnsonCounty,KansasandJacksonandCassCounties,Missouri.

158 FederalReserveBulletin|June2017 includingexaminers’reviewof thebank’spoliciesandproceduresforfairlendingand conclusionthatthebankhaswellestablished,detailedpoliciesandprocedures. CBMW’sEffortssincetheCBMWEvaluation Centralrepresentsthat,sincetheCBMWEvaluation,CBMWhasmadeanumberof communitydevelopmentloansandinvestmentstosupportitsassessmentareaandthat CBMWcontinuestoreviewandanalyzeopportunitiestoincreasethelevelof applications andoriginationswithinLMIareas.CentralrepresentsthatCBMWhashiredanew CommunityAffairsOfficer,whobringssignificantexperienceandknowledgeof thechallengeswithinKansasCity’surbancore.CentralfurtherstatesthatCBMWplansto enhancethebank’s“HomeTurf LoanProgram,”whichistargetedtoLMIcommunities, bysignificantlyincreasingoutreacheffortsthroughoutthecommunity,includinginthe urbancoreof KansasCity. CRAPerformanceof CentralBankof Lakeof theOzarks CentralBankof theLakeof theOzarks(“CBLO”)receivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof St. Louis,asof August10,2015(“CBLOEvaluation”).31CBLOreceived“Satisfactory” ratingsforboththelendingtestandthecommunitydevelopmenttest.32 Examinersdeterminedthatthebank’sborrowerprofilerevealedexcellentpenetration amongborrowersof differentincomelevels,includingLMIborrowers,andbusinessesof differentsizes.Examinersfurtherfoundthatthegeographicdistributionof thebank’s loansreflectedreasonabledispersionthroughoutitsassessmentarea.Examinersalsonoted thatCBLO’sloan-to-depositratiowasreasonablegivenitssize,financialcondition,and assessmentareacreditneeds.Examinersnotedthatasubstantialmajorityof thebank’s loansandotherlending-relatedactivitieswereinitsassessmentarea.Examinersfoundthat CBLO’soverallcommunitydevelopmentperformancedemonstratedadequateresponsivenesstothecommunitydevelopmentneedsof itsassessmentarea,consideringitscapacity andtheavailabilityof opportunitiesforcommunitydevelopmentinitsassessmentarea. CBLO’sEffortssincetheCBLOEvaluation Centralrepresentsthat,sincetheCBLOEvaluation,CBLOhasmadesignificantqualified investmentsinitsassessmentarea.CentralalsorepresentsthatCBLOhasincreasedits communitydevelopmentlendingandthatCBLO’semployeescontinuetooffertheir bankingexpertisethroughcommunitydevelopmentservicesbyparticipatinginlocalorganizationsthatbenefitLMIindividuals. CRAPerformanceof TheCentralTrustBank TheCentralTrustBank(“CentralTrustBank”)receivedanoverallratingof “Satisfactory” atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof St. Louis,asof July18,2016(“CentralTrustBankEvaluation”).33CentralTrustBank 31 TheCBLOEvaluationwasconductedusingIntermediateSmallBankCRAExaminationProcedures, consistingofthelendingtestandthecommunitydevelopmenttestdescribedabove.TheCBLOEvaluation reviewed1-4familyresidentialrealestatelending,smallbusinesslending,andconsumermotorvehiclelending fromJanuary1,2014,toDecember31,2014,andcommunitydevelopmentactivitiesfromNovember5, 2012,toAugust10,2015. 32 TheCBLOEvaluationreviewedthebank’sactivitiesinCamden,Miller,andMorgancounties,Missouri. 33 TheCentralTrustBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures,consisting ofthelendingtest,theinvestmenttest,andtheservicetestdescribedabove.TheCentralTrustBankEvalua-

LegalDevelopments:FirstQuarter,2017 159 received“HighSatisfactory”ratingsforeachof thelendingtest,theinvestmenttest,and theservicetest.34 ExaminersfoundthatCentralTrustBank’slendinglevelsreflectedgoodresponsivenessto assessmentareacreditneedsandthatahighpercentageof thebank’sloansweremade withinitsassessmentareas.Examinersnotedthatthebank’sloandistributionreflected goodpenetrationamongborrowersof differentincomelevelsandbusinessesof different revenuesizes.Furthermore,examinersnotedthatthegeographicdistributionof loans reflectedgoodpenetrationthroughoutCentralTrustBank’sassessmentareas,including LMIgeographies.ExaminersalsofoundthatCentralTrustBankmadeanadequatelevelof communitydevelopmentloansandthatitmadeuseof innovativeandflexiblelending practicesinordertobetterservethecreditneedsof itsassessmentareas.Examinersdeterminedthatthebankmadeasignificantlevelof qualifiedcommunitydevelopmentinvestmentsanddonationsandwasoccasionallyinaleadershipposition.Examinersfoundthat thebank’sdeliverysystemswereaccessibletogeographiesandindividualsof different incomelevelsinitsassessmentareasandthatitsrecordof openingandclosingbranches hadnotadverselyaffectedtheaccessibilityof itsdeliverysystems,particularlytoLMI geographiesandindividuals.ExaminersalsofoundthatCentralTrustBankprovidedarelativelyhighlevelof communitydevelopmentserviceswithinitsassessmentareas. CRAPerformanceof Central’sOtherSubsidiaryBanks InadditiontoCBMW,CBLO,andCentralTrustBank,Centralistheparentcompanyof 10otherinsureddepositoryinstitutions.TheBoardalsoconsideredthereportsof examinationof theCRAperformanceandfairlendingcompliancerecordsof theseothersubsidiarydepositoryinstitutions.Eachof theseinstitutionsreceiveda“Satisfactory”ratingatits mostrecentCRAexamination. CRAPerformanceof StarOne StarOnereceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformance examinationbytheFDIC,asof February4,2013(“StarOneEvaluation”).35Examiners foundthatStarOne’sloan-to-depositratioreflectedareasonablewillingnesstoprovide creditgiventhebank’ssize,financialcondition,andcommunitycreditneeds.Examiners notedthatamajorityof thebank’sloanswereextendedinitsassessmentareas.Examiners alsofoundthatStarOne’soverallborrowerprofilereflectedareasonablepenetrationto individualsof differentincomelevelsandtobusinessesof differentrevenuesizes,giventhe demographicsof itsassessmentareas.Examinersalsonotedthatthebank’sgeographic distributionof lendingreflectedareasonabledispersionthroughoutitsassessmentareas. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.CentralrepresentsthatitwouldimproveStarOne’s tionreviewedHMDAloans,smallbusinessloans,andconsumermotorvehicleloansfromJanuary1,2014, throughDecember31,2015.ExaminersreviewedcommunitydevelopmentlendingactivityfromMay27,2014, throughJuly18,2016. 34 TheCentralTrustBankEvaluationreviewedthebank’sactivitiesintheJeffersonCity,Missouri,metropolitan statisticalarea,consistingofCallaway,Cole,andMoniteaucounties,Missouri.TheCentralTrustBankEvaluationalsoincludedalimited-scopeevaluationofCentralTrustBank’sactivitiesinMillerCounty,Missouri. 35 TheStarOneEvaluationwasconductedusingtheSmallBankCRAExaminationProcedures,consistingofthe lendingtestdescribedabove.TheStarOneEvaluationreviewedthebank’sHMDAdataandsmallbusiness loansoriginatedfromJanuary1,2010,throughDecember31,2011.TheStarOneEvaluationincludedreviews ofthebank’sactivitiesintwoseparateassessmentareas,oneencompassingallofCallawayCounty,Missouri, andanotherconsistingofCamden,Miller,andMorgancounties,Missouri.

160 FederalReserveBulletin|June2017 customers’accesstobankingproductsandservicesbecauseithasawiderselectionof productsandservicesthanthosecurrentlyofferedbyStarOne.Forexample,Central’s subsidiarybanksofferafullrangeof mortgageproductsthroughamortgageservice companyaffiliate,lockboxservices,businessinternetbankingwithACHandwiretransfers, andtheabilitytomakeloanpaymentsbytelephone.Customersof StarOnewillalso benefitfromanexpandedautomatedtellermachineandbranchnetwork. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyCentral,thepubliccommentsontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. 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’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.38 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,Centralwouldhaveapproximately $12.4billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,wouldnotbelikelytoposesystemicrisks.TheBoardgenerallypresumesthata proposalthatinvolvesanacquisitionof lessthan$2billioninassets,orresultsinafirm withlessthan$25billionintotalconsolidatedassets,willnotposesignificantriskstothe financialstabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultin asignificantincreaseininterconnectedness,complexity,cross-borderactivities,orother riskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. 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. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

LegalDevelopments:FirstQuarter,2017 161 Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyCentralwithalltheconditionssetforthinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheproposal.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedforgood causebytheBoardorbytheFederalReserveBankof St.Louisactingpursuantto delegatedauthority. Byorderof theBoardof Governors,effectiveFebruary8,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

162 FederalReserveBulletin|June2017 Anchor Bancshares, Inc. Houston, Texas OrderApprovingtheFormationof aBankHoldingCompany FRBOrderNo.2017-04(February9,2017) AnchorBancshares,Inc.(“Anchor”),Houston,Texas,hasrequestedtheBoard’sapproval undersection3of theBankHoldingCompanyAct(“BHCAct”)1tobecomeabank holdingcompanybyacquiring100percentof thevotingsharesof FirstBancsharesof Texas,Inc.(“FirstBancshares”),McGregor,Texas,andtherebyindirectlyacquiringcontrol of itssubsidiarystatenonmemberbank,SecurityBankof Crawford(“SBC”),Crawford, Texas. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister60701(2016)).2Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthinsection3of theBHCAct. AnchorisanewlyorganizedTexascorporationformedforthepurposeof acquiring controlof FirstBancshares.FirstBancshares,withconsolidatedassetsof approximately $32.3million,isthe5,712thlargestinsureddepositoryorganizationintheUnitedStates, controllingapproximately$27.6millionindeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.3First BancsharescontrolsSBC,whichoperatesonlyinTexas.FirstBancsharesisthe509th largestinsureddepositoryorganizationinTexas,controllingdepositsof approximately $17.9million,whichrepresentlessthan1percentof totaldepositsof insureddepository institutionsinthatstate.4 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitioninanyrelevantbankingmarket,unless theanticompetitiveeffectsof theproposalareclearlyoutweighedinthepublicinterestby theprobableeffectof theproposalinmeetingtheconvenienceandneedsof thecommunity tobeserved.5 Anchorisanewlyformedcompanythatdoesnotcontrolanydepositoryinstitutions. Consequently,theproposaldoesnotinvolveamergeroracquisitionthatwouldresultina monopolyoreliminationof acompetitorinanyrelevantmarket.TheDepartmentof JusticehasadvisedtheBoardthatitdoesnotbelievethatconsummationof theproposalis likelytohaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket. Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunityto commentandhavenotobjectedtotheproposal. 1 12U.S.C.§1842(a)(1). 2 12CFR262.3(b). 3 Assetandnationwidedeposit-rankingdataareasofJune30,2016,unlessotherwisenoted. 4 StatedepositdataareasofJune30,2015,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations. 5 12U.S.C.§1842(c)(1).

LegalDevelopments:FirstQuarter,2017 163 Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthat competitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCAct,theBoardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsthefinancialconditionof theorganizationsinvolved, aswellasthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavariety of information,includingcapitaladequacy,assetquality,andearningsperformance,and publiccommentsontheproposal.TheBoardalsoevaluatestheeffectof thetransactionon thefinancialconditionof theapplicant,includingitscapitalposition,assetquality, liquidity,andearningsprospects,andtheimpactof theproposedfundingof thetransaction.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespecially important.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. Onconsummationof theproposal,Anchorwouldbewellcapitalized.Inaddition,SBCis wellcapitalized.Thetransactionisstructuredasacashpurchasefundedfromcapital contributionsmadetoAnchorbyitsprincipals.Inaddition,futureprospectsareconsideredconsistentwithapproval.Basedonitsreviewof therecord,theBoardfindsthat Anchorhassufficientfinancialresourcestoeffecttheproposalandtocomplywiththe Board’sSmallBankHoldingCompanyPolicyStatement.6 TheBoardalsohasconsideredthemanagerialresourcesof theapplicantandthepublic commentsreceivedontheproposal.TheBoardhasreviewedtheexaminationrecordsof FirstBancsharesandSBC,includingassessmentsof theirmanagement,risk-management systems,andoperations.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizationsand theirrecordsof compliancewithapplicablebankingandanti-money-launderinglaws. FirstBancsharesandSBCarebothconsideredtobewellmanaged.FirstBancshares’ existingrisk-managementprogramanditsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof FirstBancshareshave substantialknowledgeof andexperienceinthebankingandfinancialservicessectors. AnchorrepresentsthatithasnoplanstoeffectsignificantchangesinmanagementatSBC, otherthantheappointmentof twoprincipalsof AnchortoSBC’sboardof directors.The currentofficersanddirectorsof SBCwillserveasdirectorsontheboardof Anchor. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof theorganizationsinvolved,as wellastherecordsof effectivenessof FirstBancsharesandSBCincombattingmoneylaunderingactivities,areconsistentwithapproval. 6 AnchorwouldbeasmallbankholdingcompanyafteracquiringcontrolofFirstBancsharesandwouldbe subjecttotheSmallBankHoldingCompanyPolicyStatement.12CFR225,appendixC.

164 FederalReserveBulletin|June2017 ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardmustconsiderthe effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Inits evaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe creditneedsof thecommunitiesitserves,aswellasotherpotentialeffectsof theproposal ontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,the Boardplacesparticularemphasisontherecordsof therelevantdepositoryinstitution undertheCommunityReinvestmentAct(“CRA”).7TheCRArequiresthefederalfinancial supervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,8andrequirestheappropriatefederalfinancialsupervisoryagencytotakeinto accountarelevantdepositoryinstitution’srecordof meetingthecreditneedsof itsentire community,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluating bankexpansionaryproposals.9 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 SBC,thefair lendingandcompliancerecordof thebank,thesupervisoryviewsof theFederalDeposit InsuranceCorporation(“FDIC”),confidentialsupervisoryinformation,otherinformation providedbyAnchor,andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal Onecommenterobjectstotheproposal,allegingthatAnchordiscriminatesagainstAfrican Americansand“redlines”AfricanAmericanneighborhoods,particularlyintheDallasand Houstonareas,bothinTexas,withrespecttoitsbranching,marketing,andlendingactivities.10ThecommenteralsostatesthatAnchorhasnoadvertisingormarketingefforts directedatAfricanAmericancommunities. Businessesof theInvolvedInstitutionsandResponsetoComments Anchorstatesthatitisanewlyformedentitywithnobankingoperationsoroperating locationsineitherHoustonorDallas,andithasnotengagedinanyadvertisingor marketingactivitiesanywhere.Anchorfurtherstatesthatuponconsummationof the 7 12U.S.C.§1842(c)(2);12U.S.C.§2901etseq. 8 12U.S.C.§2901(b). 9 12U.S.C.§2903. 10 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.SeeInteragencyFairLendingExaminationProcedures(August2009),availableathttps://www.ffiec.gov/pdf/fairlend.pdf.

LegalDevelopments:FirstQuarter,2017 165 proposedtransaction,AnchorintendstooperateSBCatitscurrentlocationof Crawford, Texas,whichisoutsidetheHoustonandDallasmetropolitanstatisticalareas. SBCisaone-branchcommunitybankservingtheCityof Crawford,westernMcLennan County,andsurroundingcommunities.SBCofferscommercialandconsumerdeposit accountswithonlinebankingandbillpayand24-hourtelephonebanking.Deposit accountsincludeno-service-chargechecking,moneymarket,savings,andcertificatesof deposit.SBCmakesloansinthecommunityforawiderangeof purposes,includingfor business,farm,andpersonalneeds. SBCrepresentsthatithasnotengagedinnorreceivedanyconsumercomplaintsregarding discriminatorylendingpracticesinHouston,Dallas,orelsewhere.SBCemphasizesthatit operatesoutof onelocationinCrawford,Texas,andthatitdoesnothaveanymaterial lendingactivityinHoustonorDallas.SBCstatesthatithasconsistentlyoperatedand continuestooperateinmaterialcompliancewithallapplicableconsumerregulationsand thatSBC’scompliancewithfairlendingstatutesandregulationshasbeenconsistently reviewedbytheFDICaspartof itsregularCRAperformanceevaluations. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe applicant’sresponsetocomments.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRA performancerecordof theinstitution,aswellasinformationandviewsprovidedbythe appropriatefederalsupervisors.11Inthiscase,theBoardconsideredthesupervisoryviews of andinformationprovidedbytheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.12Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationof theinstitution’s overallrecordof performanceundertheCRAbyitsappropriatefederalsupervisor. Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailabledataundertheHomeMortgageDisclosureAct(“HMDA”),automatedloanreports,andotherreportsgeneratedbytheinstitutiontoassesstheinstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincome levels.Theinstitution’slendingperformanceisbasedontheinstitution’sloan-to-deposit ratio,loanoriginationsforsaletothesecondarymarket,lending-relatedactivitiesinits assessmentareas,recordof engaginginlending-relatedactivitiesforborrowersof different incomelevelsandbusinessesandfarmsof differentsizes,geographicdistributionof loans, andrecordof takingactioninresponsetowrittencomplaintsaboutitsperformance.13 11 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642at 11665(2010). 12 12U.S.C.§2906. 13 See12CFR228.26(b).

166 FederalReserveBulletin|June2017 TheBoardisconcernedwhencommentersassertthatdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnic groupsinlocalareas.However,inthiscase,theBoardrecognizesthatneithertheapplicant norSBCoperatesinthebankingmarketsidentifiedbythecommenter.Rather,theapplicantisanewlyformedcompany,andSBCisasmallbankingorganizationthatoperates onlyinCrawford,Texas,andnotintheDallasorHoustonbankingmarkets. CRAPerformanceof SBC SBCwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRAperformance evaluationbytheFDICinAugust2014(the“SBCEvaluation”).14ExaminersdeterminedthatSBCdemonstratedreasonableperformanceregardingitsloan-to-depositratio giventhebank’sassetsize,financialcondition,andassessmentareacreditneeds.Inaddition,examinersfoundthatamajorityof loanssampledweremadewithintheassessment area,illustratingareasonablecommitmenttomeetingthecreditneedsof thelocalcommunity.Examinersalsonotedthatthebank’sgeographicdistributionof lendingwithinthe assessmentareareflectedreasonableperformance. DuringtheSBCEvaluation,FDICexaminersreviewedSBC’sloandatatoevaluaterisksof discrimination.15Examinersalsoreviewedthebank’spoliciesandproceduresforfair lending.TheBoardhasconsideredtheresultsof thesereviews. AnchorrepresentsthatsincetheSBCEvaluation,thebank’slendingstrategyhasnot changed.SBChasincreaseditslendingformultifamilyrentalunitsforlow-tomoderateincomefamiliesandindividuals.Inaddition,SBChasnotreceivedanycomplaintsfromthe publicregardinganyallegedviolationsof theEqualCreditOpportunityActorotherfair lendinglaws.Anchorrepresentsthatithasnoplanstoeffectsignificantchangesin managementatSBC.Anchorbelievesthatsuchcontinuityinmanagementisinthebest interestsof thecommunitiesservedbySBC.Further,AnchorrepresentsthatSBChas historicallyreceivedsatisfactoryratingsduringitsCRAexaminationsandthatSBCdoes notanticipateundertakinganynewprograms,activities,orproductsthatwouldundermine itsconsistentlysatisfactoryratings. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingthereportof examinationof theCRArecordof theinstitutioninvolved,informationprovidedbyAnchor,thepublic commentsreceived,andconfidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof SBC,reviewof examinationreports,consultationswiththeFDIC,andallthefactsof record,theBoard concludesthattheconvenienceandneedsfactor,includingtheCRArecordof theinsured depositoryinstitutioninvolvedinthistransaction,isconsistentwithapprovalof the application. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha 14 SBC’sCRAevaluationwasconductedusingSmallInstitutionCRAExaminationProcedures,andexaminers reviewedthebank’slendingactivityfromAugust10,2009,throughAugust4,2014. 15 SBCisnotrequiredtoreporthomeloandataundertheHMDAbecauseitfallsbelowtheHMDAasset-size exemptionthreshold.See12CFR1003.2(1)(i).SBC’sassessmentareacontainsnomajorityminoritycensus tracts.

LegalDevelopments:FirstQuarter,2017 167 proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof theUnitedStatesbankingorfinancialsystem.”16 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.17These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.18 TheBoardhasconsideredinformationrelevanttoriskstothestabilityof theU.S.banking orfinancialsystem.Afterconsummation,Anchorwouldhaveapproximately$32.3million inconsolidatedassetsandwouldnotbelikelytoposeasystemicrisk.TheBoardgenerallypresumesthatamergeroracquisitionresultinginafirmwithlessthan$25billionin consolidatedassetswouldnotposesignificantriskstothefinancialstabilityof theUnited Statesabsentevidencethatthetransactionwouldresultinasignificantincreasein interconnectedness,complexity,cross-borderactivities,orotherriskfactors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoardconcludesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyAnchorwithalltheconditionsimposedinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof Dallas,actingunderdelegated authority. 16 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1842(c)(7). 17 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 18 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012).

168 FederalReserveBulletin|June2017 Byorderof theBoardof Governors,effectiveFebruary9,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

LegalDevelopments:FirstQuarter,2017 169 F.N.B. Corporation Pittsburgh, Pennsylvania OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2017-06(February24,2017) F.N.B.Corporation(“FNB”),Pittsburgh,Pennsylvania,afinancialholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2tomergewithYadkin FinancialCorporation(“Yadkin”),Raleigh,andtherebyindirectlyacquireYadkinBank, Statesville,bothof NorthCarolina.Followingtheproposedacquisition,YadkinBank wouldbemergedintoFNB’ssubsidiarybank,FirstNationalBankof Pennsylvania(“First NationalBank”),Greenville,Pennsylvania.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister65358(September22,2016)).4Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. FNB,withconsolidatedassetsof approximately$21.6billion,isthe75thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$16.0billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.5FNBcontrolsFirstNationalBank, whichoperatesinMaryland,Ohio,Pennsylvania,andWestVirginia. Yadkin,withconsolidatedassetsof approximately$7.4billion,isthe166thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$5.3billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.YadkincontrolsYadkinBank, whichoperatesinNorthCarolinaandSouthCarolina. Onconsummationof thisproposal,FNBwouldbecomethe62ndlargestinsureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $28.9billion,whichrepresentlessthan1percentof thetotalamountof assetsof insured depositoryinstitutionsintheUnitedStates.FNBwouldcontrolconsolidateddepositsof approximately$21.3billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.6Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 ThemergerofYadkinBankintoFirstNationalBankissubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C. §1828(c). 4 12CFR262.3(b). 5 AssetanddepositdataareasofSeptember30,2016,unlessotherwisenoted. 6 12U.S.C.§1842(d)(1)(A).

170 FederalReserveBulletin|June2017 companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.7Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrolsorwould uponconsummationof theproposedtransactioncontrolmorethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,thebankholdingcompanywoulduponconsummationcontrol30percentormore of thetotaldepositsof insureddepositoryinstitutionsinanystateinwhichtheacquirer andtargethaveoverlappingbankingoperations.8 Forpurposesof theBHCAct,thehomestateof FNBisPennsylvania,andthehomestate of YadkinBankisNorthCarolina.9YadkinBankalsoislocatedinSouthCarolina.FNBis wellcapitalizedandwellmanagedunderapplicablelaw,andFirstNationalBankhasa “Satisfactory”ratingundertheCommunityReinvestmentActof 1977(“CRA”).10North Carolinadoesnothaveaminimumagerequirement,11andSouthCarolinadoesnothavea minimumagerequirementapplicabletothistransaction.12YadkinBankhasbeeninexistenceformorethanfiveyears. Onconsummationof theproposedtransaction,FNBwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.TheBoardhasconsideredallotherrequirementsundersection3(d)of theBHC Act,includingFNB’srecordof meetingthecreditneedsof thecommunitiesitserves.In lightof allthefactsof record,theBoardmayapprovetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitiestobeserved.13 FNBandYadkindonotdirectlycompeteinanyretailbankingmarket.Basedonallthe factsof record,theBoardconcludesthatconsummationof theproposalwouldnothavea significantlyadverseeffectoncompetitionorontheconcentrationof resourcesinany 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’shomestateisthestatebywhichthebankis chartered. 10 12U.S.C.§2901etseq. 11 SeeN.C.Gen.Stat.ch.53C. 12 SouthCarolinalawimposesaminimumagerequirementonlyontheacquisitionofabank,ortheacquisition ofallorsubstantiallyallthebranchesofabank,thatisorganizedunderthelawsofSouthCarolinaorthat maintainsitsprincipalplaceofbusinessinSouthCarolina.SeeS.C.CodeAnn.§§34-25-50and34-25-240. ThisagerequirementisnotapplicabletotheproposedtransactionbecauseYadkinBankisorganizedunderthe lawsofNorthCarolina. 13 12U.S.C.§1842(c)(1).

LegalDevelopments:FirstQuarter,2017 171 relevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval.14 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. FNBandFirstNationalBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposedacquisition.Theproposedtransactionisabankholdingcompany mergerthatisstructuredasacashandshareexchange.15Theassetquality,earnings,and liquidityof bothFirstNationalBankandYadkinBankareconsistentwithapproval,and FNBappearstohaveadequateresourcestoabsorbthecostsof theproposalandto completetheintegrationof theinstitutions’operations.Inaddition,futureprospectsare consideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of FNB,Yadkin,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyFNB,theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’ recordsof compliancewithapplicablebanking,consumerprotection,andanti-moneylaunderinglaws. FNB,Yadkin,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.FNBhasarecordof successfullyintegratingorganizationsintoitsoperations andrisk-managementsystemsafteracquisitions.FNB’sdirectorsandseniorexecutiveofficershaveknowledgeof andexperienceinthebankingandfinancialservicessectors,and itsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionary proposal. 14 TheDepartmentofJusticehasadvisedtheBoardthatconsummationoftheproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,theappropriate bankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. 15 Atthetimeofthemerger,eachshareofYadkinvotingcommonstockwouldbeconvertedintoarightto receiveFNBcommonstockbasedonanexchangeratio.EachshareofYadkinnonvotingcommonstockwould beconvertedintoarighttoreceiveeitherFNBcommonstock,basedonanexchangeratio,orcash.FNBhas thefinancialresourcestoeffectthetransaction.

172 FederalReserveBulletin|June2017 TheBoardalsohasconsideredFNB’splansforimplementingtheproposal.FNBhas conductedcomprehensiveduediligenceandisdevotingsufficientfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.FNB wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,FNB’sandYadkin’smanagementhavetheexperienceandresourcestooperatethe combinedorganizationinasafeandsoundmanner,andFNBplanstointegrateYadkin’s existingmanagementandpersonnelinamannerthataugmentsFNB’smanagement.16 Basedonallthefactsof record,includingFNB’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andpubliccommentsontheproposal,17theBoardconcludesthatconsiderationsrelating tothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof FNBandYadkinin combattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.18Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,19andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.20 Inaddition,theBoardconsidersthebanks’overallcompliancerecordandtheirrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. 16 FNBwillincreasethesizeofitsboardbyonedirector,whowillbeappointedfromYadkin’sboard.Inaddition,FNBwillinvitesixmembersoftheboardofdirectorsofYadkintoserveforaminimumofoneyearas membersofFNB’snewlyestablishedNorthCarolinaCommunityAdvisoryBoard. 17 Acommentercriticizedtheportionsoftransaction-accountrevenuesgeneratedbyoverdraftfeesatFirst NationalBankandYadkinBank,basedondatareportedfor2015.Thelevelsofoverdraft-feerevenuesatFirst NationalBankandYadkinBankdonotraisesafetyandsoundnessconcerns.Commentersalsocriticizedthe sequencingofcreditanddebittransactionsimplementedbyFirstNationalBankandcriticizedthenumberof overdraftitemfeesthatFirstNationalBankcouldchargeinasingledaypursuanttoitsaccounttermsand conditions.FNBcontendsthatitsnoninterestcharges,includingthesequencingoftransactions,areincompliancewithapplicableregulationsoftheOCC.See12CFR7.4002.TheBoardhasconsultedwiththeOCCand hasconsideredthesupervisoryhistoriesoftheinvolvedinstitutionsandthefirms’recordsofcompliancein consideringthiscase. 18 12U.S.C.§1842(c)(2). 19 12U.S.C.§2901(b). 20 12U.S.C.§2903.

LegalDevelopments:FirstQuarter,2017 173 Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof First NationalBankandYadkinBank,thefairlendingandcompliancerecordsof bothbanks, thesupervisoryviewsof theOCC,confidentialsupervisoryinformation,information providedbyFNB,andthepubliccommentsreceivedontheproposal. Summaryof PublicCommentsonConvenienceandNeeds TheBoardreceivedcommentsfrom16commenterssupportingtheproposal.Commenters describedfavorableexperienceswiththecommunityinvestmentandserviceprogramsof FNB.Severalcommenterscommendedthebankforitssupportof programsthatprovide servicestoLMIandotherhistoricallyunderservedcommunities.Onecommenterpraised thespeedatwhichFNBcreatesapositiveimpactingeographiesthatarenewtotheorganization.Anothercommentercontendedthattheproposalwillencourageeconomicdevelopment,jobcreation,andwealthgenerationinCleveland,Ohio,andinsurrounding communities. TheBoardalsoreceivedcommentsfromfourcommentersexpressingconcernsaboutthe proposal,allegingthatFNBandYadkinneglectLMIandminoritycommunities.Three commentersallege,onthebasisof datafor2015reportedundertheHomeMortgage DisclosureActof 1975(“HMDA”),21thatFNBmadeadisproportionatelylownumberof loanstoLMIandminorityborrowers,criticizingFirstNationalBank’srecordof lending tominoritiesintheAlleghenyCounty,Pennsylvania;Akron,Ohio;AnneArundelCounty, Maryland;Baltimore,Maryland;Cleveland,Ohio;andSummitCounty,Ohio,areas.One commenterallegesthatFirstNationalBankhasengagedin“redlining”intheBaltimore area.22ThreecommentersallegethatFNBdeniedadisproportionatelyhighnumberof loanstoLMIandminorityborrowers,basedon2015HMDAdata.Commentersexpressed particularconcernregardingdenialratesforminorityloanapplicantsintheAllegheny County,Baltimore,andClevelandareas.OnecommenterallegesthatFNBhadanaverage tobelow-averagerecordof smallbusinesslendinginLMIareas,andtwocommenterscriticizedFNB’srecordof smallbusinesslendinginAlleghenyCounty.Inaddition,one commentercriticizedYadkinBank’slevelof lendingtominorityborrowersin MecklenburgCounty,NorthCarolina,basedon2015HMDAdata.OnecommentercriticizedFirstNationalBank’scommunitydevelopmentlendingandinvestmentperformance, allegingthatthebank’sperformanceunderperformedthatof YadkinBank. CommentersalsoexpressedconcernsregardingthefutureCRAperformanceof the combinedbank.SeveralcommentersarguethatFNBshouldberequiredtoworkwith communitygroupstocreateacommunityreinvestmentplanandurgedtheBoardto approvetheapplicationontheconditionthatFNBdevelopandsuccessfullyimplement suchaplan. Businessesof theInvolvedInstitutionsandResponsetoComments FNBandFirstNationalBankassertthattheyprovidearangeof financialproductsand servicestoindividualcustomersandbusinesses.ThroughitsbranchnetworkinMaryland, Ohio,Pennsylvania,andWestVirginia,FirstNationalBankstatesthatitoffersbanking productsandservicestoitscustomers,includingdeposits,safedepositfacilities,electronic 21 12U.S.C.§2801etseq. 22 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.OfficeoftheComptrollerofthe Currencyetal.,InteragencyFairLendingExaminationProcedures(August2009),https://www.ffiec.gov/pdf/ fairlend.pdf.

174 FederalReserveBulletin|June2017 bankingservices,moneytransferservices,securedandunsecuredloans,andtrustandfiduciaryservices.FNBalsoexplainsthatitoffersservicesthroughnonbanksubsidiaries, includingaconsumer-financecompany,aninsuranceagency,aleasingcompany,anda wealth-managementaffiliate. FNBrepresentsthatYadkinandYadkinBankalsoofferarangeof financialproductsand servicestoindividualcustomersandbusinesses,includingbusinessandconsumerloans, commercialcashmanagementservices,andconsumerdepositproducts. Inresponsetothecommenters’allegations,FNBstatesthatitmaintainsappropriate controlstoensurecompliancewithapplicablefairlendinglawsandregulations.For example,FirstNationalBankmonitorsandreviewsitsloanpoliciesandpracticesforthe purposeof measuringitscompliancewithfairlendinglawsandequalcreditopportunity requirements.FNBstatesthatitwillensurethatthelevelof communityinvolvement historicallyperformedbyYadkinwillcontinueuninterruptedandcontendsthatthislevel willbeelevatedwhenbackedbytheresourcesof thecombinedorganization.FNBintends tomaintainYadkin’scommunitydevelopmentteamatthecombinedorganizationand hashiredanewCommunityDevelopmentOfficer,whoseprimaryobjectivewillbeto continuetoexecuteFNB’scommunitybenefitsplan. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.23 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.24Aninstitution’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 23 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 24 12U.S.C.§2906.

LegalDevelopments:FirstQuarter,2017 175 low-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof loans basedonborrowercharacteristics,including,forhomemortgageloans,thenumberand amountof loanstolow-,moderate-,middle-,andupper-incomeindividuals;25(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.26 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof FirstNationalBank FirstNationalBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheOCC,asof August10,2015(“FirstNationalBankEvaluation”).27FirstNationalBankreceiveda“HighSatisfactory”ratingfortheLendingTest,a “LowSatisfactory”ratingfortheInvestmentTest,anda“HighSatisfactory”ratingforthe ServiceTest. ExaminersfoundthatFirstNationalBank’soveralllendinglevelsreflectedexcellent responsivenesstocommunitycreditneeds.Accordingtoexaminers,thebank’sgeographic distributionof loansreflectedgoodpenetrationthroughoutmanyof thebank’sassessment areas.Examinersalsofoundthatthebank’sdistributionof borrowersreflectedgood penetrationamongborrowersof differentincomelevelsandamongbusinessandfarm customersof differentsizes,giventheproductlinesofferedbytheinstitution. InPennsylvania,28anareaof concernforcommenters,examinersnotedthatFirstNational Bankexhibitedagoodrecordof servingthecreditneedsof themosteconomicallydisadvantagedareasof itsassessmentareas,low-incomeindividuals,andverysmallbusinesses, consistentwithsafeandsoundbankingpractices.ExaminersfoundthatFirstNational Bankusedflexiblelendingpracticesinordertoserveassessmentareacreditneeds, 25 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 26 Otherdatarelevanttocreditdecisionscouldincludecredithistories,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 27 TheFirstNationalBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.ExaminersreviewedhomemortgageandsmallbusinessloanlendingfromJanuary1,2010,throughDecember31, 2014,exceptforcommunitydevelopmentloans,whichwereevaluatedfromJanuary22,2011,through December31,2014.TheevaluationperiodfortheInvestmentTestandtheServiceTestwasfromJanuary22, 2011,throughDecember31,2014.TheFirstNationalBankEvaluationincludedafull-scopereviewofthe bank’sassessmentareaswithinthefollowingareas:thePittsburgh,Pennsylvania,MetropolitanStatisticalArea (“Pittsburghassessmentarea”);theCleveland–Elyria,Ohio,MetropolitanStatisticalArea(“Clevelandassessmentarea”);theBaltimore–Columbia–Towson,Maryland,MetropolitanStatisticalArea(“Baltimoreassessmentarea”);theWeirton–Steubenville,WestVirginia–Ohio,MetropolitanStatisticalArea(“MSA”);the Youngstown–Warren–Boardman,Ohio–Pennsylvania,MSA;andthebank’sassessmentareainnon-MSA areasofPennsylvania.Alimited-scopereviewwasconductedin11otherassessmentareasinOhioand Pennsylvania. 28 FirstNationalBank’sperformanceinPennsylvaniahadthegreatestimpactonthebank’sCRAperformance duetoahigherconcentrationofdepositsandlendingthaninotherareas.

176 FederalReserveBulletin|June2017 includingsingle-familymortgageloanprogramsthatserveeligibleLMIborrowers.29These programsprovidedreduceddown-paymentrequirements,“zeropoint”fixedinterestrates, flexibleloan-to-valuelimits,andreducedclosingcosts.Examinersnotedthatthebank madearelativelyhighlevelof communitydevelopmentloansinPennsylvaniaduringthe reviewperiod. InOhio,30anotherareaof concernforcommenters,examinersfoundthatFirstNational Bankexhibitedanadequaterecordof servingthecreditneedsof themosteconomically disadvantagedareasof itsassessmentareas,low-incomeindividuals,andverysmallbusinesses.ExaminersfoundthatFirstNationalBank’slendinglevelsintheClevelandassessmentareareflectedexcellentresponsivenesstotheassessmentareacreditneedsrelativeto thebank’sdepositmarketshare.Examinersnotedthatthebankexhibitedanadequate recordof servingthecreditneedsof themosteconomicallydisadvantagedareasinthat assessmentarea,low-incomeindividuals,and/orverysmallbusinesseswhenconsidering banklendingdistributionsacrossgeographies,andamongborrowers,of differentincome levels.Examinersnotedthatthebankmadeanadequatelevelof communitydevelopment loansintheClevelandassessmentareaduringthereviewperiod. InMaryland,31anotherareaof concernforcommenters,examinersfoundthatthebank’s lendinglevelsreflectedadequateresponsivenesstocreditneedsintheBaltimoreassessment area,andthatthebankexhibitedanadequaterecordof servingthecreditneedsof the mosteconomicallydisadvantagedareasinthatassessmentarea,low-incomeindividuals, and/orverysmallbusinesses.Examinersnotedthatthebankmadeanadequatelevelof communitydevelopmentloansintheBaltimoreassessmentareaduringthereviewperiod, giventhebank’sshorttenureandcompetitivepositioninthemarket. ExaminersfoundthatFirstNationalBankhadanadequatelevelof qualifiedcommunity developmentinvestmentactivity.Intheareasof Pennsylvaniareceivingfull-scopereviews, thebankhadanadequatelevelof qualifiedcommunitydevelopmentinvestmentand grants.Thebank’sinvestmentssupportedaffordablehousingandactivitiesthatpromote economicdevelopment.Thebankalsopurchasedmortgage-backedsecuritieswiththe underlyingcollateralconsistingof loanstoLMIborrowerswithinthePittsburghassessmentarea.Ineachof theClevelandandBaltimoreassessmentareas,examinersfoundthe bank’sInvestmentTestperformancetobeadequate. WithrespecttotheServiceTest,examinersnotedthat,intheareasof Pennsylvania receivingfull-scopereviews,FirstNationalBank’sdeliverysystemswereaccessibleto essentiallyallportionsof FirstNationalBank’sassessmentareasandthatthebank’s servicesdidnotvaryinawaythatinconveniencedportionsof thebank’sassessmentareas, particularlyLMIgeographiesand/orindividuals.Examinersalsofoundthatthebank providedanadequatelevelof communitydevelopmentservicesthatwereresponsiveto communityneeds.Examinersindicatedthat,inthePittsburghassessmentarea,First NationalBank’semployeesprovidedtechnicalassistancetocommunitydevelopmentorganizationsthatprovidedanarrayof communityservicesandaccesstoaffordablehousing forLMIindividuals,aswellastechnicalassistancetoorganizationsthatsupported economicdevelopmentthroughprogramsthatassistLMIandunemployedpersonsobtain 29 AcommenterallegesthatFNBrarelyoriginatesFederalHousingAdministration(“FHA”)loans. 30 FirstNationalBank’sperformanceinOhiowasprimarilybasedontheresultsofexaminers’full-scopereview intheClevelandassessmentarea. 31 FirstNationalBank’sperformanceinMarylandwasbasedontheresultsofexaminers’full-scopereviewinthe Baltimoreassessmentarea.

LegalDevelopments:FirstQuarter,2017 177 jobs.IntheClevelandandBaltimoreassessmentareas,examinersfoundthebank’sService Testperformanceineachassessmentareatobeadequate.32 FirstNationalBank’sEffortssincethe2015CRAEvaluation FNBrepresentsthat,sincetheFirstNationalBankEvaluation,FirstNationalBankis satisfactorilymeetingthelendingneedsof LMIborrowersandareas,aswellasthelending needsof smallbusinessesandfarmslocatedinLMIcensustracts.FNBhascontinuedto providemortgageloanproductstargetedtowardLMIborrowers—theFamily HomeownershipProgramandtheFamilyHomeImprovement/RehabilitationProgram— thatincludefeaturessuchasreduceddown-paymentrequirements,flexibledown-payment assistance,andreducedclosingcosts.Thebankalsooffersflexibleloanproducts,suchas FHAandDepartmentof VeteransAffairs(“VA”)products.FirstNationalBankhas continuedtomakequalifyingcommunitydevelopmentinvestments,includingLowIncome HousingTaxCreditinvestments. CRAPerformanceof YadkinBank YadkinBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation,asof March23,2015 (“YadkinBankEvaluation”).33YadkinBankreceiveda“HighSatisfactory”ratingforthe LendingTest,a“LowSatisfactory”ratingfortheInvestmentTest,anda“HighSatisfactory”ratingfortheServiceTest.34 ExaminersnotedthatYadkinBank’soveralllendinglevelsreflectedgoodresponsivenessto theassessmentareas’creditneeds.Examinersalsofoundthatthebank’sgeographicdistributionof loansreflectedgoodpenetrationof homeloans,smallbusinessloans,andsmall farmloansthroughoutthebank’sassessmentareas.Examinersfoundthatthebankdistributionof borrowersreflectedgoodpenetrationamongretailcustomersof differentincome levelsandbusinessesandfarmsof differentsizes.Examinersnotedthatthebankmade extensiveuseof flexiblelendingpracticestoservetheassessmentareas’creditneeds, includingflexiblesmallbusinessloanproductsthroughtheSmallBusinessAdministration (“SBA”)andtheNorthCarolinaRuralEconomicDevelopmentCenter.TheSBArecognizedthebankasthenumberoneSBAlenderindollarvolumeinNorthCarolina.ExaminersalsonotedthatthebankofferedflexiblemortgageloanproductsthroughtheVA,the FHA,theU.S.Departmentof Agriculture(“USDA”),andtheNorthandSouthCarolina housingfinanceagencies.ExaminersfoundthatYadkinBankmadeanadequatelevelof communitydevelopmentloans. 32 OnecommenterallegesthatFNB’soverdraftpracticeswerefoundtobeunfairtradepracticesresultingin unjustenrichmentaspartofaclass-actionlitigation,Ordv.FirstNationalBankofPennsylvania,No.2:12-cv- 00766-AJS(W.D.Pa.dismissedJune21,2013).Thecasewassettledwithoutanyadmissionofwrongdoingby theparties.FinalJudgment&OrderofDismissalwithPrejudiceat4–5,Ord(No.2:12-cv-00766-AJS).FNB’s practiceshavesubsequentlybeenreviewedbytheOCC. 33 TheYadkinBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examiners reviewedloansreportedpursuanttoHMDAandCRAdatacollectionrequirementsfor2012through2014. ExaminersdidnotconsiderHMDAorCRAlendingdatafromtheformerVantageSouthBank,whichmerged withYadkinBankinJuly2014.Examinersalsoreviewedcommunitydevelopmentlending,innovativeandflexiblebusinesspractices,qualifiedinvestments,andcommunitydevelopmentservicesfromMay15,2012,through December31,2014.Examinersconsideredthebank’sbranchofficedistributionasofDecember31,2014. Examinersdidnotconsiderthebank’sbranchesacquiredfromVantageSouthBank,whichwerelocated outsideofthebank’sdelineatedassessmentareas. 34 TheYadkinBankEvaluationincludedafull-scopeassessmentreviewofthebank’sassessmentareasinthe followinggeographies:theDurham–ChapelHill,NorthCarolina,MSA;theCharlotte–Concord–Gastonia, NorthCarolina–SouthCarolina,MSA(“Charlotteassessmentarea”);andthebank’sassessmentareasin non-MSAareasofeachofNorthCarolinaandSouthCarolina.Alimited-scopereviewwasperformedinthe Winston-Salem,NorthCarolina,MSA.

178 FederalReserveBulletin|June2017 IntheCharlotteassessmentarea,anareaof concernforcommenters,examinersnotedthat YadkinBank’slendinglevelsreflectedgoodresponsivenesstoassessmentareacreditneeds. Examinersfoundthatthebank’sgeographicdistributionof loansreflectedadequate penetrationthroughouttheassessmentarea.Thebank’sdistributionof borrowerswas foundbyexaminerstoreflectgoodpenetrationamongretailcustomersof differentincome levels,businesscustomersof differentsizes,andfarmsof differentsizes.YadkinBankwas foundtohavemadeanadequatelevelof communitydevelopmentloansintheassessmentarea. Examinersobservedthatthebank’soveralllevelof communitydevelopmentinvestments wasadequate.YadkinBankinvestedinsmallbusinessinvestmentcompanies,purchased bondsthathelptofinanceaffordablehousinginNorthCarolina,investedinabondthat supportseconomicdevelopmentandrevitalizationindistressedandunderservedareasof NorthCarolina,andinvestedinmortgagepoolssecuredbyLMIborrowermortgages.The bankprovidedqualifiedgrantsanddonationstoorganizationsthatprimarilyprovide servicestoLMIfamilieslocatedwithinthebank’sassessmentareas.IntheCharlotte assessmentarea,examinersfoundthatthebankhadanadequatelevelof qualifiedcommunitydevelopmentinvestments. Examinersfoundthatthebank’sdeliverysystemswerereasonablyaccessibletoallportions of thebank’sassessmentareas.Examinersnotedthatthebank’sservicesdidnotvaryina waythatinconveniencesportionsof thebank’sassessmentareas,particularlyLMIgeographiesand/orindividuals.Examinersfoundthatthebankoverallhadprovidedarelatively highlevelof communitydevelopmentservices,includingintheCharlotteassessmentarea. YadkinBank’sEffortssincethe2015CRAEvaluation FNBrepresentsthat,sincetheYadkinBankEvaluation,YadkinBankhascontinuedsatisfactorilytohelpmeettheneedsof LMIborrowersandcommunities,aswellasthe borrowingneedsof smallbusinessesandfarmslocatedinLMIcensustracts.YadkinBank hascontinuedtoprovideflexibleloanproducts,suchasFHAloans,USDAloans,andVA loans.YadkinBank’semployeesparticipateontheboardsof organizationsthatsupportor sustaineconomicgrowthandprovideconsumer-financetraining. Viewsof theOCC Initsreviewof theproposal,theBoardconsultedwiththeOCCregardingFirstNational Bank’sCRA,consumercompliance,andfairlendingrecords.TheOCCisreviewingthe bankmergerunderlyingthisproposal,consideringthesameconvenienceandneedsfactor asmustbeconsideredbytheBoard.TheOCCseparatelyreceivedcommentsonthebank mergerapplicationandwasprovidedwiththecommentsreceivedbytheBoard.TheOCC isconsideringallof thecomments,thosereceivedbytheOCCandthoseprovidedtothe OCCbytheBoard,inconnectionwithitsreviewof thebankmergerapplication. TheBoardhasconsideredtheresultsof arecentconsumercomplianceexaminationof FirstNationalBankconductedbyOCCexaminers,whichincludedareviewof thebank’s compliancerisk-managementprogramandthebank’scompliancewithconsumerprotectionlawsandregulations.TheBoardalsohasconsideredtheresultsof arecentexaminationof FirstNationalBank’scompliancewiththeFairHousingAct(“FHA”),35which includedareviewof thebank’slendingdataandpoliciesandprocedurestoensurecompliancewiththeFHA. 35 42U.S.C.§3601etseq.

LegalDevelopments:FirstQuarter,2017 179 TheBoardhastakentheseconsultationswiththeOCCandtheinformationdiscussed aboveintoaccountinevaluatingthisproposal,includinginconsideringwhetherFNBhas theexperienceandresourcestoensurethattheorganizationeffectivelyimplementspolicies andprogramsthatwouldallowthecombinedorganizationtoserveeffectivelythecredit needsof allthecommunitieswithinthefirm’sassessmentareas.TheBoardexpectsFNBto ensurethatFirstNationalBankcomplieswithanycommitmentsorconditionsthatthe OCCmayrequestorimposeinconnectionwithitsactiononthebankmergerproposal. AdditionalConvenienceandNeedsConsiderations TheBoardalsohasconsideredotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.FNBrepresentsthatasaresultof theproposal, existingcustomersof Yadkinwouldhaveaccesstoacomplementof productsandservices thatiscomparabletoormoreexpansivethanthosecurrentlyavailableatYadkin,including trustservices,investmentproducts,insuranceproducts,internationalbanking,retirement planandtrustservices,productsforhigh-net-worthcustomers,andleasefinancingand otherasset-basedlending.36Moreover,FNBassertsthatcustomersof bothinstitutions wouldbenefitfromamoreexpansivebranchandATMnetwork.37 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyFNB,publiccommentsontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. 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 36 AcommenterexpressedconcernsaboutRegencyFinance,asubsidiaryofFNB,allegingthatthecompanymay violatestateusurylawsthroughthesaleofhigh-costcreditinsuranceproducts.FNBcontendsthatRegency Financeadherestoallrelevantfederallawsandregulationsandstatestatutes,includingthosegoverningusury, andwouldcontinuetodosoifRegencyFinanceweretooperateinNorthCarolina.TheBoardwillcontinueto monitorFNB’scompliancewithapplicablelawsandregulationsthroughthesupervisoryprocess. 37 CommentersurgedFNBtodevelopacommunityreinvestmentplan.Followingitssubmissionoftheapplication,FNBdevelopedacommunitybenefitsplaninconsultationwithcommentersandotherorganizations.In addition,twocommunityorganizationsurgedtheBoardtoapprovetheapplicationontheconditionthatFNB successfullyimplementacommunityreinvestmentplan.TheBoardhasconsistentlyfoundthatneitherthe CRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesor enterintocommitmentsoragreementswithanyorganization.See,e.g.,CITGroup,Inc.,FRBOrderNo. 2015-20at24n.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485(2002);FifthThirdBancorp,80 FederalReserveBulletin838,841(1994).Initsevaluation,theBoardreviewstheexistingCRAperformance recordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethecreditneedsofitsCRA assessmentareas. 38 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7).

180 FederalReserveBulletin|June2017 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.Boththeacquirerandthetargetarepredominately engagedinretailcommercialbankingactivities.41Theproformaorganizationwouldhave minimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complex interrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirm intheeventof financialdistress.Inaddition,theorganizationwouldneitherbeacritical servicesprovidernorwoulditbesointerconnectedwithotherfirmsorthemarketsthatit wouldposesignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.42Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe 39 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 40 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 41 FNBprimarilyoffersdeposit,loan,wealth-management,insurance,andconsumerfinanceproducts.Yadkin primarilyoffersdeposit,loan,wealth-management,andinsuranceproducts.Ineachofitsactivities,FNBhas, andasaresultoftheproposalwouldcontinuetohave,asmallmarketshareonanationwidebasis,and numerouscompetitorswouldremainfortheseservices. 42 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.IntheBoard’sview,thecommenterhashadampleopportunitytosubmit commentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtotheBoard’sdecision thatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywrittencomments donotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbenecessaryor appropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublic hearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingor meetingontheproposalisdenied. Inaddition,acommenterrequestedanextensionofthecommentperiodfortheproposal.TheBoard’srules contemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationofhardshipor othermeritoriousreasonforseekingadditionaltime.Thecommenter’srequestforadditionaltimetocomment doesnotidentifycircumstancesthatwouldwarrantanextensionofthepubliccommentperiodforthis proposal.Accordingly,theBoarddeterminesnottoextendthecommentperiod.

LegalDevelopments:FirstQuarter,2017 181 BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyFNBwithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Cleveland,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveFebruary24,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

182 FederalReserveBulletin|June2017 People’s United Financial, Inc. Bridgeport, Connecticut OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2017-08(March16,2017) People’sUnitedFinancial,Inc.(“People’sUnited”),Bridgeport,Connecticut,afinancial holdingcompanywithinthemeaningof theBankHoldingCompanyActof 1956(“BHC Act”),1hasrequestedtheBoard’sapprovalundersection3of theBHCAct2tomergewith SuffolkBancorp,andtherebyindirectlyacquireTheSuffolkCountyNationalBankof Riverhead(“SuffolkBank”),bothof Riverhead,NewYork.Followingtheproposedacquisition,SuffolkBankwouldbemergedintoPeople’sUnited’ssubsidiarybank,People’s UnitedBank,N.A.(“People’sUnitedBank”),Bridgeport,Connecticut.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister55457(August19,2016)).4Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. People’sUnited,withconsolidatedassetsof approximately$40.6billion,isthe60thlargest depositoryorganizationintheUnitedStates.People’sUnitedcontrolsapproximately $29.7billioninconsolidateddeposits,whichrepresentlessthan0.3percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.5People’s UnitedcontrolsPeople’sUnitedBank,whichoperatesinConnecticut,Maine,Massachusetts,NewHampshire,NewYork,andVermont.People’sUnitedisthe34thlargestdepositoryorganizationinNewYork,controllingdepositsof approximately$3.4billioninNew York,whichrepresentapproximately0.3percentof thetotaldepositsof insureddepository institutionsinthatstate.6 SuffolkBancorp,withconsolidatedassetsof approximately$2.1billion,isthe412thlargest depositoryorganizationintheUnitedStates,controllingapproximately$1.9billionin consolidateddepositsnationwide,whichrepresentlessthan0.03percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Suffolk BancorpcontrolsSuffolkBank,whichoperatesonlyinNewYork.SuffolkBancorpisthe 52ndlargestinsureddepositoryorganizationinNewYork,controllingdepositsof approximately$1.7billioninNewYork,whichrepresent0.1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,People’sUnitedwouldremainthe60thlargestdepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $43.0billion,whichrepresentlessthan0.2percentof thetotalamountof assetsof insured depositoryinstitutionsintheUnitedStates.People’sUnitedwouldcontrolconsolidated depositsof approximately$31.6billion,whichrepresentlessthan0.3percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates.People’sUnitedwould becomethe29thlargestdepositoryorganizationinNewYork,controllingdepositsof 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 ThemergerofSuffolkBankwithandintoPeople’sUnitedBankissubjecttotheapprovaloftheOfficeofthe ComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct. 12U.S.C.§1828(c).TheOCCapprovedthemergeronFebruary2,2017. 4 12CFR262.3(b). 5 NationalassetanddepositdataareasofSeptember30,2016,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2015.

LegalDevelopments:FirstQuarter,2017 183 approximately$5.1billion,whichrepresentapproximately0.4percentof thetotaldeposits of insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.7Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforless thanthestatestatutoryminimumperiodof timeorfiveyears.8Inaddition,theBoardmay notapproveaninterstateapplicationif thebankholdingcompanycontrols,orwouldupon consummationof theproposedtransactioncontrol,morethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances, thebankholdingcompanywoulduponconsummationcontrol30percentormoreof the totaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateorinany stateinwhichtheacquirerandtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof People’sUnitedisConnecticut,andthe homestateof SuffolkBankisNewYork.10People’sUnitediswellcapitalizedandwell managedunderapplicablelawandPeople’sUnitedBankhasa“Satisfactory”ratingunder theCommunityReinvestmentActof 1977(“CRA”).11NewYorkdoesnothaveany minimumagerequirements,12andSuffolkBankhasbeeninexistenceformorethanfive years. Onconsummationof theproposedtransaction,People’sUnitedwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Inaddition,thecombinedorganizationwouldcontrollessthan 30percentof thetotalamountof depositsof insureddepositoryinstitutionsinNewYork, theonlystateinwhichPeople’sUnitedandSuffolkBancorphaveoverlappingbanking operations.TheBoardhasconsideredallotherrequirementsundersection3(d)of the BHCAct,includingPeople’sUnited’srecordof meetingtheconvenienceandneedsof the communitiesitserves.Accordingly,inlightof allthefactsof record,theBoardmay approvetheproposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga 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.Anationalbank’shomestateisthestateinwhichthemain officeofthebankislocated. 11 12U.S.C.§2901etseq. 12 SeeN.Y.BankingLaw§223.

184 FederalReserveBulletin|June2017 proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitiestobeserved.13 People’sUnitedandSuffolkBancorphavesubsidiarydepositoryinstitutionsthatcompete directlyinonegeographicbankingmarket,theMetroNewYorkCitybankingmarket.14 TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarketin lightof allthefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;therelativesharesof totaldeposits ininsureddepositoryinstitutionsinthemarket(“marketdeposits”)thatPeople’sUnited wouldcontrol;15theconcentrationlevelsof marketdepositsandtheincreaseintheselevels asmeasuredbytheHerfindahlHirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16 andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheMetroNewYorkCitybanking market.Onconsummation,theMetroNewYorkCitybankingmarketwouldremain unconcentrated,asmeasuredbytheHHIandasdefinedbytheDOJBankMergerGuidelines.ThechangeinHHIwouldbesmall,andnumerouscompetitorswouldremaininthe market.17 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheMetroNewYorkCitymarketorinanyotherrelevantbanking 13 12U.S.C.§1842(c)(1). 14 TheMetroNewYorkCitymarketincludesBronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam, Queens,Richmond,Rockland,Suffolk,Sullivan,Ulster,andWestchestercountiesandportionsofColumbia andGreenecountiesinNewYork;Bergen,Essex,Hudson,Hunterdon,Middlesex,Monmouth,Morris,Ocean, Passaic,Somerset,Sussex,andUnioncountiesandportionsofBurlington,Mercer,andWarrencountiesin NewJersey;PikeCountyandportionsofMonroeandWaynecountiesinPennsylvania;andFairfieldCounty andportionsofLitchfieldandNewHavencountiesinConnecticut. 15 DepositandmarketsharedataareasofJune30,2015,andunlessotherwisenoted,arebasedoncalculationsin whichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthat thriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks. See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70 FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketshare calculationona50percentweightedbasis.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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html. 17 Together,thetwofirmscontrol1.1percentofthedepositsinthatmarketandtheirmergerwouldincreasethe HHIbyonly1point.Nearly240competitorswouldremaininthemarketaftertheproposedacquisition.

LegalDevelopments:FirstQuarter,2017 185 market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof information,includingcapitaladequacy,assetquality,and earningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthe financialconditionof thecombinedorganization,includingitscapitalposition,asset quality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespecially important.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. People’sUnitedandSuffolkBancorparebothwellcapitalizedandPeople’sUnitedwould remainsoonconsummationof theproposedacquisition.Theproposedtransactionisa bankholdingcompanymergerthatisstructuredasashareexchange.18Theassetquality, earnings,andliquidityof bothPeople’sUnitedBankandSuffolkBankareconsistentwith approval,andPeople’sUnitedappearstohaveadequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition, futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of People’sUnited,SuffolkBancorp,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition, theBoardhasconsideredinformationprovidedbyPeople’sUnited;theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;theorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws;andinformationprovidedbythecommenters. People’sUnited,SuffolkBancorp,andtheirsubsidiarydepositoryinstitutionsareeach consideredtobewellmanaged.People’sUnited’sexistingrisk-managementprogramand itsdirectorateandseniormanagementareconsideredtobesatisfactory.Thedirectorsand seniorexecutiveofficersof People’sUnitedhavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredPeople’sUnited’splansforimplementingtheproposal. People’sUnitedhasconductedcomprehensiveduediligenceandisdevotingsufficient financialandotherresourcestoaddressallaspectsof thepost-integrationprocessforthis proposal.People’sUnitedwouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervi- 18 Atthetimeofthemerger,eachshareofSuffolkBancorpcommonstockwouldbeconvertedintotherightto receivesharesofPeople’sUnitedcommonstock,basedonanexchangeratio.

186 FederalReserveBulletin|June2017 soryperspective.Inaddition,People’sUnited’smanagementhastheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner, andPeople’sUnitedplanstointegrateSuffolkBancorp’sexistingmanagementand personnelinamannerthataugmentsPeople’sUnited’smanagement.19 Basedonallthefactsof record,includingPeople’sUnited’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof People’sUnitedandSuffolkBancorpincombattingmoneylaunderingactivities,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,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof People’s UnitedBankandSuffolkBank,thefairlendingandcompliancerecordsof bothbanks,the supervisoryviewsof theOCCandtheConsumerFinancialProtectionBureau(“CFPB”), confidentialsupervisoryinformation,informationprovidedbyPeople’sUnited,andthe publiccommentsreceivedontheproposal. 19 People’sUnitedwillinvitethemembersoftheboardofdirectorsofSuffolkBancorptoserveasmembersofa regionaladvisoryboard.People’sUnitedBankalsoplanstohirethepresidentandchiefexecutiveofficerof SuffolkBancorpasitsNewYorkMarketPresident. 20 12U.S.C.§1842(c)(2). 21 12U.S.C.§2901(b). 22 12U.S.C.§2903.

LegalDevelopments:FirstQuarter,2017 187 Summaryof PublicCommentsonConvenienceandNeeds TheBoardreceivedcommentsfrom14commentersobjectingtotheproposal.All14 commenterscriticizedPeople’sUnitedBank’slendinginthebank’sNewYorkCityand Nassau-SuffolkCountyassessmentareas(“AAs”)byassertingthatPeople’sUnitedBank madeadisproportionatelylownumberof homepurchaseloans,homeimprovementloans, andrefinanceloanstoAfricanAmerican,Asian,Hispanic,andLMIborrowersandby criticizingtherateatwhichPeople’sUniteddeniedapplicationsbyAfricanAmericansand Hispanics,ascomparedtowhites,forhomepurchaseloans,homeimprovementloans,and refinanceloans,asreflectedindatareportedundertheHomeMortgageDisclosureActof 1975(“HMDA”)23for2012through2015.OnecommentersuggestedthatPeople’s UnitedBankengagedinredliningintheNewYorkCityandNassau-SuffolkCountyAAs. Thirteenof thecommentersallegedthatPeople’sUnitedBankmakesadisproportionatelylownumberof loanstobusinesseswithannualrevenuesof lessthan$1millioninthe bank’sHartfordCountyandNewHavenCountyAAs,bothinConnecticut.Thesesame commentersalsogenerallyallegedthatPeople’sUnitedBankhasaninadequaterecordof helpingtomeettheconvenienceandneedsof thecommunitieswhereitdoesbusiness becausePeople’sUnitedBankreceiveda“VeryPoor”ratingonitsinvestmentperformance intheBostonAA,a“LowSatisfactory”ratingonitsinvestmenttestineverystateinwhich itoperatesexceptVermont,anda“LowSatisfactory”ratingonitslendingandservicetests intheNewYorkCityandBostonAAs,allin2013.Thesecommentersrequestthatthe BoardnotapprovetheproposaluntilPeople’sUnitedentersintoacommunitybenefits planthatoutlineshowthebankplanstohelpmeettheconvenienceandneedsof the communitiesitserves. Onecommenterexpressedconcernaboutthesizeof People’sUnited’sphilanthropic grants.Thiscommenterallegedthatsmallergrantscanbelesshelpfulformanynonprofit organizations,especiallywhencoupledwithextensivereportingrequirements. TheBoardalsoreceived117commentsinsupportof theproposalfromorganizationsthat servethecommunitiesinwhichPeople’sUnitedBankdoesbusiness.Thesecommenters statedthatPeople’sUnitedBankhasbeenavaluablecommunitypartnerandsponsorfor manyinitiatives,includingafterschool,crimereduction,communitydevelopment,and homelessnessreductionprograms. Businessof theInvolvedInstitutionsandResponsetoComments People’sUnitedandPeople’sUnitedBankofferabroadrangeof financialproductsand servicestoconsumersandbusinesses.ThroughitsbranchnetworkinConnecticut,Maine, Massachusetts,NewHampshire,NewYork,andVermont,People’sUnitedBankoffersa varietyof bankingproductsandservicestoitscustomers,includingcommercial,retail,and smallbusinessbankingservices,aswellaswealthmanagementservicestoindividual, corporate,andmunicipalcustomers. SuffolkBankisafull-servicebankthatofferscommercialandretailbankingproductsand services,includingcommercialrealestateloans,multifamilyandmixed-usecommercial loansprimarilyintheboroughsof NewYorkCity,commercialandindustrialloansand agriculturalloans,aswellasloanssecuredbyresidentialmortgages(includingsecondlien mortgageloans)withavarietyof plansforrepayment. 23 12U.S.C.§2801etseq.

188 FederalReserveBulletin|June2017 People’sUniteddeniesthecommenters’allegationsof discriminatorylendingand redlining.People’sUnitedrepresentsthatitiscommittedtoallfairlendinglawsandregulationsandactivelyengagesinmonitoring,testing,andinternalcontrolstomaintain compliancewithfairlendinglawsandregulations.People’sUnitedassertsthatitoffers manyaffordablemortgageloanprogramsandcommunitydevelopmentactivitiesto increaseaffordablehousingopportunitiesforLMIindividualsandcommunities.People’s UnitedalsoassertsthatitshomemortgagelendingvolumeintheNewYorkCityand Nassau-SuffolkCountyAAsissmallbecausePeople’sUnitedenteredthesemarketsbeginningin2010byacquiringbankinginstitutionsthathadeithersmallmortgageportfoliosor whosebranchstaff werenottrainedtoacceptapplicationsformortgageloans.People’s Unitedarguesthat,asaresult,ithashadtocreateamortgageoriginationbusinessdenovo inthesemarkets.People’sUnitedmaintainsthatitisdifficultforaninstitutionwithfew branchesinNewYorkCitytogainmaterialmarketsharebecauseitisahighlycompetitive bankingmarketwheresignificantlylargerinstitutionsenjoybroadernamerecognition. Since2015,toincreaseitsmortgagebusinessintheNewYorkCityandNassau-Suffolk CountyAAs,People’sUnitedhashiredadditionalmortgageaccountofficersandtrained staff atthebranchlocationsithasrecentlyacquiredtoacceptmortgageapplications. People’sUnitedrepresentsthatitisacommittedlendertosmallbusinesses.Accordingto People’sUnited,ithasbeenrankedasoneof thetopU.S.SmallBusinessAdministration volumelenders.People’sUnitednotesthatitparticipatesinprogramswithseveralgovernmentagenciestoprovidecapitalandspecialloanstosmallbusinesses.Specifically,People’s UnitedrepresentsthatPeople’UnitedBankisasignificantinvestorinseveralsmallbusinessloanfunds,includingtheConnecticut-basedCommunityEconomicDevelopment FundandCapitalforChange.People’sUnitedalsorepresentsthatitsemployeesprovide humancapitalsupporttocommunitydevelopmentfinancialinstitutionsandotherentities thatarefocusedonservingtheneedsof thesecommunities. People’sUnitedarguesthatitsoverallCRAratingof “Satisfactory”isconsistentwith approval,notwithstandingtheisolatedtestratingsinthespecificgeographiesnotedbythe commenters.People’sUnitednotesthatitsmostrecentCRAexamwasconductedshortly afterPeople’sUnitedBankacquiredbranchesinNewYorkandBoston,soitsCRArating reflectsthebank’sperformanceinthosemarketsbeforetheinstitutionhadanopportunitytobuilditsCRAprograminthoseareasanddoesnotreflectthebank’smostrecent effortstoimproveitsCRAperformance.People’sUnitedalsorepresentsthatithastaken stepstoimproveitsCRAperformanceinthemarketscitedbythecommenters,including byincreasingitsCRA-relatedinvestmentsintheNassau-SuffolkCountyandBostonAAs between2013and2016.People’sUnitedrepresentsthatithasmadelow-income,historic, newmarkets,andstatetaxcreditinvestmentsintheNewYorkCityandNassau-Suffolk CountyAAs.Inaddition,People’sUnitedrepresentsthatPeople’sUnitedBankhasundertakenasignificantinitiativetoexpandandbroadenitsmortgageoriginationcapabilitiesin NewYorkCityandLongIslandandhassoughttoexpanditsofferingof affordablehome mortgageproductsbyparticipatinginvariousstatehousingauthorityprograms.Further, People’sUnitedrepresentsthatithasinvestedsubstantialamountsinfundsthatsupport affordablehousinginMassachusetts. Inresponsetocommenters’contentionthatapprovalshouldbeconditionedonPeople’s United’senteringintoacommunitybenefitsplan,People’sUnitedarguesthatthesubmissionof suchaplanisnotrequiredforapprovalundersection3of theBHCAct.Itasserts

LegalDevelopments:FirstQuarter,2017 189 thattherecordof People’sUnitedandPeople’sUnitedBankinmeetingtheconvenience andneedsof thecommunitiestheyserveisotherwiseconsistentwithapproval.24 Withrespecttocriticismsof itsphilanthropicactivity,People’sUnitedrepresentsthatit hasmaintainedahighlevelof cashgivingthroughThePeople’sUnitedCommunityFoundation,ThePeople’sUnitedCommunityFoundationof EasternMassachusetts,and People’sUnited’scorporatephilanthropyprogram.People’sUnitedassertsthatithasallocateditsphilanthropicresourcesinamanneritbelievestobeinthebestinterestof its charitablerecipientsandthecommunitiestheyserve.Additionally,theBoardreceived severallettersfromcommunitygroupsstatingthatPeople’sUnited’sgrant-makingactivitieswerepositivelyimpactful.25 Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsestocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performanceinlightof examinationsbytheappropriatefederalsupervisorsof theCRA performancerecordsof therelevantinstitutions,aswellasinformationandviewsprovided bytheappropriatefederalsupervisors.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.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sHMDAdatainadditiontosmallbusiness,smallfarm,andcommunity developmentloandatacollectedandreportedundertheCRAregulations,toassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors, including(1)thenumberandamountof homemortgage,smallbusiness,smallfarm,and consumerloans(asapplicable)intheinstitution’sAAs;(2)thegeographicdistributionof thecompany’slending,includingtheproportionanddispersionof theinstitution’slending initsAAsandthenumberandamountof loansinlow-,moderate-,middle-,andupper- 24 TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,CentralBancompany,Inc.,FRBOrderNo.2017-03at12n.22(February8,2017);Wintrust FinancialCorporation,FRBOrderNo.2016-17at8n.19(October28,2016);HuntingtonBancsharesIncorporated,FRBOrderNo.2016-13at32n.50(July29,2016);CITGroup,Inc.,FRBOrderNo.2015-20at24n.54 (July19,2015).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordofanapplicantand theprogramsthattheapplicanthasinplacetoservethecreditneedsofitsCRAAAs. 25 TheBoardhasnotedthatneithertheCRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionstoengageincharitablegiving.Seee.g.,CITGroup,Inc.,FRBOrderNo.2015-20at22n.51 (July19,2015). 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75Fed.Reg.11642,11665 (March11,2010). 27 12U.S.C.§2906.

190 FederalReserveBulletin|June2017 incomegeographies;(3)thedistributionof loansbasedonborrowercharacteristics, including,forhomemortgageloans,thenumberandamountof loanstolow-,moderate-, middle-,andupper-incomeindividuals;28(4)theinstitution’scommunitydevelopment lending,includingthenumberandamountof communitydevelopmentloansandtheir complexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelending practicestoaddressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.29 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof People’sUnitedBank People’sUnitedBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheOCC,asof July15,2013(“2013CRAEvaluation”).30 People’sUnitedBankreceiveda“HighSatisfactory”ratingfortheLendingandService testsanda“LowSatisfactory”ratingfortheInvestmentTest. ExaminersfoundthatPeople’sUnitedBank’soveralllendinglevelswereresponsiveto communitycreditneeds.Accordingtoexaminers,thebankoriginatedasubstantial majorityof loanswithinitsAAs,andthedistributionof loansacrossgeographiesand incomelevelswasgood.ExaminersalsofoundthatPeople’sUnitedBankexhibitedavery strongrecordof communitydevelopmentlendingthatenhancedthebank’sCRAperformanceinseveralAAs. InNewYork,anareainwhichPeople’sUnitedwasarecententrantatthetimeof the CRAexamination,People’sUnitedBank’sperformanceundertheLendingTestwasrated “LowSatisfactory.”IntheNassau-SuffolkCountyAA,anareaof concerntothe commenters,People’sUnitedBank’slendingperformancewasconsideredadequate.Examinersfoundthat,inNewYork,thebank’slevelof communitydevelopmentlendingwas good,theoverallgeographicdistributionof smallloanstobusinesseswasgood,andthe overallgeographicdistributionof homemortgageloanswasadequate.Examinersalso foundthattheoverallborrowerdistributionof homemortgagelendingandsmallloansto businesseswasadequate.ExaminersnotedthatPeople’sUnitedBankofferedloan programstargetedtoLMIborrowers,demonstratingproductflexibility. 28 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 29 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 30 The2013CRAEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedhomemortgagelendingdataandotherCRAdata(smallloanstobusinessesandfarms)fromJuly1, 2009,throughDecember31,2012.Examinersreviewedcommunitydevelopmentloans,qualifiedinvestments, branchingactivities,andcommunitydevelopmentservicesfromJuly1,2009,throughJune30,2013.The2013 CRAEvaluationcoveredPeople’sUnitedBank’s22AAslocatedinsixstatesandonemultistatemetropolitan statisticalarea(“MSA”):Connecticut,Maine,Massachusetts,NewHampshire,NewYork,Vermont,andthe Boston-Cambridge-QuincyMSA.The2013CRAEvaluationincludedafull-scopereviewofnineofthese AAs,includingthemultistateMSA.Alimited-scopereviewwasconductedoftheremaining13AAs.

LegalDevelopments:FirstQuarter,2017 191 InConnecticut,includingtheBridgeport,Hartford,andNewHaven,ConnecticutMSAs (“ConnecticutMSAs”),anotherareaof concernforthecommentersandanareainwhich People’sUnitedwaswellestablishedatthetimetheCRAexaminationwasconducted, examinersassignedPeople’sUniteda“HighSatisfactory”ratingfortheLendingTest. Examinersfoundthattheoverallgeographicdistributionof smallloanstobusinesseswas excellentandof homemortgageloanswasadequate.Theexaminersalsofoundthat, overall,theborrowerdistributionof thebank’slendingwasgood. IntheBoston-Cambridge-QuincyMA-NHMultistateMSA(“BostonMSA”),anareaof concernforthecommentersandanareainwhichPeople’sUnitedwasarecententrantat thetimetheCRAexaminationwasconducted,examinersfoundthatthebank’sperformanceundertheLendingTestwas“LowSatisfactory.”Withrespecttohomemortgage loans,examinersfoundthattheoverallgeographicdistributionof homepurchaseloans wasgood,butthattheoverallgeographicdistributionof homerefinanceloanswaspoor. Examinersalsofoundthattheoverallborrowerdistributionof loanstosmallbusinesses waspoor.However,examinersfoundthatPeople’sUnitedBankmadeuseof innovative andflexiblelendingpractices. WithrespecttothebankwideInvestmentTest,examinersfoundthatthebank’soverall communitydevelopmentperformancewasadequatewhenconsideringthebank’sresponsivenesstocommunityneedsthroughitsstronglendingperformance.InNewYork,the bankreceiveda“LowSatisfactory”rating.IntheConnecticutMSAs,examinersfoundthat People’sUnitedBank’sperformancewasadequateconsideringitsinvestmentauthority limitationsand“HighSatisfactory”performanceundertheLendingTest.IntheBoston MSA,examinersfoundthatPeople’sUnited’sperformanceontheInvestmentTestwas verypoorandwasnotoffsetbythebank’slendingperformanceinthatAA. Asnoted,People’sUnitedBankreceiveda“HighSatisfactory”ratingfortheServiceTest overall.InNewYork,examinersratedPeople’sUnitedBank’sperformanceas“LowSatisfactory.”However,examinersfoundthatthebank’sbranchdistributionintheNassau- SuffolkCountyAAwasgoodandthatbrancheswerereasonablyaccessibletoindividuals of differentincomelevels.IntheConnecticutMSAs,examinersratedPeople’sUnited’s performanceas“HighSatisfactory.”Examinersfoundthatbankemployeesparticipated, manyinleadershiproles,inavarietyof organizationsandpartnerships,whichbenefited LMIindividuals,promotedeconomicdevelopment,andprovidedaffordablehousing.In theBostonMSA,People’sUnitedBank’sperformanceontheServiceTestwasrated“Low Satisfactory.”Examinersnotedthebank’sbranchdistributionwasadequateandthat brancheswerereasonablyaccessibletogeographiesandindividualsof differentincomes. Examinersstatedthatthebank’smanagementprovidedalternativedeliverysystemstoits customers.However,examinersnotedthatthebankhadnobranchesinlow-incomegeographies.Examinersalsonotedthatthebank’semployeesprovidedagoodlevelof communitydevelopmentservicesandparticipatedinavarietyof organizationsandpartnerships thatbenefitedlow-andmoderate-incomeindividuals,promotedeconomicdevelopment, andprovidedaffordablehousing. People’sUnitedBank’sEffortssincethe2013CRAEvaluation People’sUnitedBankrepresentsthatithassignificantlyexpandeditsinvestmentactivities, particularlyinNewYorkandMassachusetts,inordertohelpmeettheneedsof LMI communitiessincethe2013CRAEvaluation.Thebankstatesthatithassignificantly increaseditsCRA-relatedinvestments,includinginaffordablehousing.Itrepresentsthatit hasoffereddebtfacilitiestofurtherprovidecapitalforeconomicdevelopment.Itstatesthat italsohasprovidedgrantsandgiftstoanumberof communitydevelopmentorganizations.Itrepresentsthatitsupportsnumerousnonprofitandeconomicdevelopment

192 FederalReserveBulletin|June2017 committeesandhasrepresentativesthatserveonadvisoryboards,investmentcommittees, andloancommitteesfororganizationsengagedincommunitydevelopmentandworkforce development.ThebankalsoassertsthatthefoundationaffiliatedwithPeople’sUnited Bankhasprovidedgrantstononprofitsengagedinfinancialeducationoutreachforadults andchildren. InNewYork,People’sUnitedBankrepresentsthatithasmadeinvestmentstobuild low-incomehousing,primarilythroughthepurchaseof Low-IncomeHousingTaxCredits. Thebankstatesthatitalsohasmadecommunitydevelopmentandsmallbusinessassociationloans.Itrepresentsthatithasrepresentativeswhositonadvisoryboardsandcommitteesforanumberof communitydevelopmentorganizations.Inaddition,thebankasserts thatthecommunityfoundationaffiliatedwithPeople’sUnitedhasprovidedgrantsto nonprofitorganizationsandtaughtover250financialliteracyclassesinNewYorksincethe 2013CRAEvaluation. InConnecticut,People’sUnitedBankrepresentsthatithascontinueditscommitmentto providingbankingservicesandinvestmentcapitaltosmallbusinesses.Thebankstatesthat ithascontinuedtoinvestinseveralsmallbusinessloanfundsandthatitsemployees continuetositontheloancommitteesof thesefundsandtohelpsmallbusinessesdevelop theircreditworthiness.Itstatesthatitsreputationforprovidingbusinessoperationsand treasurymanagementservicestosmallbusinessescontinuestogrowineachof itsAAs.The bankalsohighlighteditseffortstoimproveitshomepurchaselendinginConnecticut. People’sUnitedBankstatesthatithasinvestedinparticipationcertificatesforjuniormortgageinstrumentsthatallowconsumerstopurchasehomeswithcloseto100percent financing.Thebankalsorepresentsthatithasexpandedthenumberof first-time homebuyerseminarsitprovidesatnocosttoconsumers. InMassachusetts,People’sUnitedBankrepresentsthatithassubstantiallyincreasedits levelof CRA-relatedinvestments.Forexample,thebankrepresentsithassignificantly increaseditslevelof CRA-qualifiedinvestmentsinBoston.Thebanksimilarlyrepresents thatithastripleditsqualifyinginvestmentsinMassachusettsasmeasuredbybothabsolute dollaramountsandasapercentageof itstier1capitalattributabletoMassachusetts. People’sUnitedBankstatesthattheseinvestmentshaveprimarilybeenusedtodevelop affordablehousingandtoassistcommunitydevelopmentcorporationsthatmakecapital contributionsandloanstolocalandsmallbusinesses.Thebankstatesthatithascontinued tosponsortheFederalHomeLoanBankof Boston’saffordablehousingprogramandhas committedadditionalfundstostateandnonprofitentitiesthatdeveloplow-income housingprojectsandmakeloanstosmallbusinesses.Thebanknotesthatitsemployees activelyparticipateandvolunteerwithnonprofitsinMassachusettsandthatthebankhasa dedicatedCRAofficerwhofocusesonMassachusettsandspendsasignificantamountof timedevelopingrelationshipswithcommunitydevelopmentorganizationsinthestate. People’sUnitedassertsthatPeople’sUnitedBankoffersavarietyof loanproductstoLMI householdsandcommunities,includinghomemortgages,smallbusinessloans,economic developmentloans,loansforaffordablehousing,andloansforruraldevelopment.Itasserts thatthebankalsopartnerswithfederalandstateagenciestoprovidelendingproducts tailoredtoLMIhouseholds.ItcontendsthatPeople’sUnitedBankmakescommunity developmentinvestmentsbypurchasinglow-incomehousingtaxcredits,statetaxcredits, andhistoricaltaxcredits,andbyinvestinginequityfundsthatworktomeetthebanking needsof thecommunitiesinwhichthebankoperates. People’sUnitedrepresentsthatithasundertakenseveralmarketingandinformational campaignstomakeLMIandotherconsumersawareof itsproductofferings.Itassertsthat thebankhasdistributedmortgageproductinformationtolocalrealtors,aswellasinfor-

LegalDevelopments:FirstQuarter,2017 193 mationpacketsforfirst-timehomebuyerstothebank’slendingpartners.Itcontendsthat, inthethirdquarterof 2016,People’sUnitedBankengagedamarketingfirmtocreatea programtoinformLMIborrowersaboutaffordablehome-purchaseandrefinancemortgageoptions.Italsomaintainsthatthebankoperatesbranchesingrocerystoresthatoffer extendedweekdayandweekendhourstoaccommodateconsumerswhoseworkschedules prohibitthemfromvisitingabankduringregularbusinesshours. CRAPerformanceof SuffolkBank SuffolkBankwasassignedanoverall“Outstanding”ratingatitsmostrecentCRAperformanceevaluationbytheOCC,asof November30,2015(“SuffolkBankEvaluation”).31 SuffolkBankreceived“Outstanding”ratingsfortheLendingTestandServiceTestanda “HighSatisfactory”ratingfortheInvestmentTest.32 ExaminersfoundthatSuffolkBank’sgeographicandborrowerdistributionof homemortgageloanswasexcellent,includingintheNassau-SuffolkCountyAA.Examinersalso foundthatSuffolkBank’sgeographicdistributionof smallloanstobusinessesanddistributionof loanstosmallbusinesseswasexcellent.Examinersnotedthatthebankhas providedflexiblelendingprogramsthatareresponsivetoidentifiedaffordablehousing needsandthatahighpercentageof thebank’sloansweremadewithinthebank’sAA. ExaminersfoundthatSuffolkBankmadeasignificantnumberof communitydevelopment investmentseventhoughtherehadbeenfewopportunitiesforsuchinvestments.Examinersnotedthatthemajorityof investmentstargetedanidentifiedneedinSuffolkBank’s AA,affordablehousingforbothhomeownershipandrentalunits. Examinersnotedthatthebank’sdeliverysystemswerereadilyaccessibletogeographies andindividualsof differentincomelevels.Examinersfoundthatallof SuffolkBank’s branchesofferedfullretailservicesandthatthepercentageof brancheslocatedin moderate-incomegeographiescoincidedwiththepercentageof thepopulationthatlivesin moderate-incomegeographies.Examinersobservedthatthebankhadnobranchesin low-incomegeographies,butnotedthatonlyafewof thecensustractsavailabletoSuffolk Bankqualifiedaslow-incomeandthatlessthan2percentof thelow-incomepopulation livedinthebank’sAA.ExaminersalsonotedthatSuffolkBankhadbeenresponsivetothe retailbankingneedsof thecommunitiesitservedbyadjustingitsbranchhoursbasedon feedbackfromcustomersandcommunitymembers.ExaminersstatedthatSuffolkBank wasaleaderinprovidingcommunitydevelopmentservices,includingbyhavingitsbranch managersandexecutivesprovidetechnicalassistancetolocalorganizationsthatfocusedon economicdevelopment,includingchambersof commerce,economicdevelopmentcorporations,redevelopmentcouncils,andlocalnon-profitorganizations.Examinerscommented favorablyonthebank’sfreehomebuyerworkshopthateducatedLMIborrowersabout homeownershipandfinancingandthebank’sseminarstohelpcustomersprotectthemselvesagainstfraudandcybersecurityrisks.ExaminersconcludedthatSuffolkBank’s communitydevelopmentservicesbenefittheneedsof LMIindividualsinthebank’sAA. 31 TheSuffolkBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedhomemortgagelendingdataandotherCRAdata(smallloanstobusinessesandfarms)from January1,2013,toSeptember30,2015.TheevaluationperiodfortheLendingTest,InvestmentTest,and ServiceTestwasfromDecember3,2012,throughNovember30,2015. 32 TheSuffolkBankEvaluationincludedafull-scopeassessmentreviewofthebank’ssoleAAintheNassau- Suffolk,NewYorkMSA.

194 FederalReserveBulletin|June2017 Viewsof theOCCandCFPB Inadditiontoconductingitsownreviewof theinstitutions’recordsof meetingtheconvenienceandneedsof thecommunitiesinwhichtheyoperate,theBoardconsultedwiththe OCCregardingbothinstitutions’CRAandconsumercompliancerecords,aswellaswith theCFPBregardingPeople’sUnitedBank’srecordof consumercompliance.TheOCCis theprimarysupervisorof bothPeople’sUnitedBankandSuffolkBank.TheOCCconsideredallof thecomments,includingthosereceivedbytheBoardandthosereceivedjointly bytheOCCandtheBoard,inconnectionwithitsreviewof thebankmergerapplication submittedbyPeople’sUnitedBank.TheOCCapprovedthebankmergerapplicationon February2,2017. TheBoardalsoconsultedwiththeOCCregardingPeople’sUnited’sandSuffolkBancorp’s recordsof compliancewithfairlendinglawsandregulationsandthebanks’policiesand proceduresrelatingtofairlendingandotherconsumerprotectionlawsandregulations,as wellasthelendingrecordsof bothinstitutions.TheOCCrecentlyreviewedPeople’s UnitedBank’sfairlendingmanagementpracticesandthebank’sframeworkforidentifying fairlendingrisks.Inconductingthisreview,theOCCevaluatedthebank’sproductofferings,deliverychannels,underwritingprocesses,pricing,marketingpractices,andlender compensationprograms.TheOCCalsorecentlycompletedareviewof SuffolkBank’sfair lendingprogram.Aspartof itsreview,theOCCreviewedpoliciesandprocedures,training materialsandrecords,compliancereviews,andloandata.TheBoardhastakenintoconsiderationthissupervisoryinformation. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.People’sUnitedrepresentsthat,asaresultof the proposal,existingcustomersof SuffolkBancorpwouldhaveaccesstoacomplementof productsandservicesthatiscomparabletoormoreexpansivethanthatcurrentlyavailable atSuffolkBancorp,includingbrokerage,financialadvisory,andinvestmentmanagement services.Similarly,People’sUnitedrepresentsthatthemergerwouldallowittoprovide bankingproductsnotprovidedbySuffolkBancorpthataretargetedtowardsLMI consumers,includingloansofferedthroughtheNewYorkMortgageAuthority,Fannie Mae,theHomeDevelopmentFund,theDepartmentsof AgricultureandVeteransAffairs, aswellastheFederalHousingAdministration.Moreover,People’sUnitedassertsthat customersof bothinstitutionswouldbenefitfromamoreexpansivebranchandATM network.Forexample,People’sUnitedBank’ssupermarketbranchesofferexpanded eveningandweekendhours,providingexpandedbranchaccessandgreaterflexibilityfor peopleof allincomelevels,includingLMIindividualswhoseworkschedulesmakeitdifficulttovisitabranchduring“traditional”bankinghours.People’sUnitedalsoasserts thatitwillmaintainandenhanceSuffolkBank’sstrongCRAperformancebyleveraging SuffolkBank’sexpertiseintheLongIslandmarket,especiallyitsLMIlendingperformance,communitydevelopment,andsmallbusinessloancapabilities,anditsexisting involvementwithlocalcommunitydevelopmentorganizations. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyPeople’sUnited,publiccommentsontheproposal,informationprovidedbytheOCCandCFPB,andotherpotentialeffectsof theproposalonthe

LegalDevelopments:FirstQuarter,2017 195 convenienceandneedsof thecommunitiestobeserved.Basedonthisreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. 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 In2012,initsorderapprovingCapitalOneFinancialCorporation’sacquisitionof certain U.S.operationsof ING,theBoardstatedthataproposalthatinvolvesanacquisitionof lessthan$2billioninassets,thatresultsinafirmwithlessthan$25billionintotalassets, orthatrepresentsacorporatereorganizationmaybepresumednottoraisematerialfinancialstabilityconcernsabsentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.36 Sinceestablishingthispresumption,theBoard’sexperiencehasshownthatproposals involvinganacquisitionof lessthan$10billioninassets,orthatresultinafirmwithless than$100billionintotalassets,aregenerallynotlikelytocreateinstitutionsthatpose systemicrisks.Transactionsbeloweitherof theseassetthresholdshavetypicallynot involved,orresultedin,firmswithactivities,structures,andoperationsthatarecomplexor opaque.37Suchtransactionshavealsonotmateriallyincreasedtheinterconnectednessor complexityof thefinancialsystem. Accordingly,theBoardnowpresumesthataproposaldoesnotraisematerialfinancial stabilityconcernsif theassetsinvolvedfallbeloweitherof theaforementionedsizethresholds,absentevidencethatthetransactionwouldresultinasignificantincreasein 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 Idat30. 37 Seee.g.,F.N.B.Corporation,FRBOrderNo.2017-06(February24,2017);HuntingtonBancsharesIncorporated, FRBOrderNo.2016-13(July29,2016);KeyCorp,FRBOrderNo.2016-12(July12,2016);BB&TCorporation,FRBOrderNo.2015-35(December23,2015);M&TBankCorporation,FRBOrderNo.2015-27 (September30,2015);BB&TCorporation,FRBOrderNo.2015-18(July7,2015).

196 FederalReserveBulletin|June2017 interconnectedness,complexity,cross-borderactivities,orotherriskfactors.38TheBoard willcontinuetopresumethataproposalthatrepresentsacorporatereorganizationdoes notraisefinancialstabilityconcerns.39 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthathaslessthan $10billioninassetsandaproformaorganizationof lessthan$100billioninassets.Both theacquirerandthetargetarepredominatelyengagedinretailcommercialbankingactivities.40Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwould notexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwith otherfirmsorthemarketsthatitwouldposesignificantrisktothefinancialsysteminthe eventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.41Inreachingitsconclusion,theBoardhasconsid- 38 Notwithstandingthesepresumptions,theBoardhastheauthoritytoreviewthefinancialstabilityimplications ofanyproposal.Forexample,anyacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarranta financialstabilityreviewbytheBoard,regardlessofthesizeoftheacquisition. 39 TheBoarddelegatestotheReserveBankstheauthoritytoapproveapplicationsandnoticesinconnectionwith proposalsthatmeetthepresumptionsdescribedaboveandthatotherwisemeetthecriteriafordelegatedaction. 40 People’sUnitedprimarilyofferscommercialandconsumerbankingservices,mortgagebankingservices, commercialrealestatelending,automobilefinancing,equipmentleasing,communitydevelopmentinvestment, investmentadvisoryandmanagementservices,fiduciaryadministration,trustservicesandoperations,discount securitiesbrokerageservices,treasurymanagement,capitalmarketservices(includingcorporateriskmanagement,institutionalsales,andtradingandunderwriting,includingmunicipalbondunderwritingandprivate placementactivities),aswellasreinsuringcreditlifeanddisabilityinsuranceandsellingotherinsuranceand financialproductsandservicesasagent.SuffolkBancorpoffersprimarilyretailandcommercialdepositand loanproducts,commercialleasefinancingandrelatedservices,insurancebrokerageservices,financial consulting,trustoperations,andfiduciaryservices.Ineachofitsactivities,People’sUnitedhas,andasaresult oftheproposalwouldcontinuetohave,asmallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices. 41 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.NoticeoftheproposalwaspublishedintheFederalRegisteronAugust19,2016, andinrelevantnewspapersofgeneralcirculation(NewsdayandConnecticutPost)onAugust11,2016.The commentperiodendedonSeptember10,2016.IntheBoard’sview,thecommenterhashadampleopportunity tosubmitcommentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredin actingontheproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtotheBoard’s decisionthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywritten commentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublic hearingormeetingontheproposalisdenied. Inaddition,severalcommentersrequestedafurtherextensionofthecommentperiodfortheproposal.As notedabove,theBoardbelievesthatcommentershavehadampleopportunitytosubmitcommentsonthe proposal.Duringthecommentperiod,thecommenters,includingtherequestors,submitteddetailedcomments

LegalDevelopments:FirstQuarter,2017 197 eredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyPeople’sUnitedwithalltheconditionsimposedinthisorder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof NewYork,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveMarch16,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard inwritingregardingtheproposal.TheBoard’srulescontemplatethatthepubliccommentperiodwillnotbe extendedabsentacleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.The commenters’requestsforadditionaltimetocommentdonotidentifycircumstancesthatwouldwarrantan extensionofthepubliccommentperiodforthisproposal.Accordingly,theBoarddeterminednottoextend furtherthecommentperiod.

198 FederalReserveBulletin|June2017 Cathay General Bancorp Los Angeles, California OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2017-09(March20,2017) CathayGeneralBancorp(“Cathay”),LosAngeles,California,abankholdingcompany withinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1has requestedtheBoard’sapprovalundersection3of theBHCAct2toacquireSinoPac Bancorp(“SinoPac”)andtherebyindirectlyacquireFarEastNationalBank(“FarEast Bank”),bothof LosAngeles,California.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’srules(81FederalRegister70682 (October13,2016)).4Thetimeforsubmittingcommentshasexpired,andtheBoardhas consideredtheproposalandallcommentsreceivedinlightof thefactorssetforthin section3of theBHCAct. Cathay,withconsolidatedassetsof approximately$14.1billion,isthe102ndlargestinsured depositoryorganizationintheUnitedStates.Cathaycontrolsapproximately$10.9billion inconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.5CathaycontrolsCathay Bank,whichoperatesinCalifornia,Illinois,Nevada,NewYork,NewJersey,Maryland, Massachusetts,Texas,Washington,HongKong,Shanghai,andTaipei.CathayBankisthe 18thlargestinsureddepositoryinstitutioninCalifornia,controllingdepositsof approximately$7.4billioninCalifornia,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6 SinoPac,withconsolidatedassetsof approximately$1.3billion,isthe571stlargestinsured depositoryorganizationintheUnitedStates.SinoPaccontrolsapproximately $981.8millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.SinoPac controlsFarEastBank,whichoperatesinCaliforniaandcontrolslessthan1percentof the totaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Cathaywouldbecomethe94thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$15.4billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryorganizationsintheUnitedStates.Cathaywouldcontrolconsolidateddepositsof approximately 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 Followingtheproposedacquisition,Cathayplanstosubmitanapplicationpursuanttosection18(c)ofthe FederalDepositInsuranceActtomergeFarEastBankintoCathay’ssubsidiarybank,CathayBank,Los Angeles,California.ThemergerofFarEastBankintoCathayBankwillbesubjecttotheapprovalofthe FederalDepositInsuranceCorporation(“FDIC”).12U.S.C.§1828(c).Fortheinterimperiodbetween consummationoftheproposedacquisitionandtheanticipatedbankmerger,CathayintendstooperateCathay BankandFarEastBankasseparatesubsidiaries. 4 12CFR262.3(b).TheBoardreceivedacommentassertingthatCathaydidnotprovideadequatenoticeofthe proposedacquisitiontocommunitiesoutsideofCalifornia.InaccordancewiththeBoard’srules,noticeof theproposalwaspublishedinarelevantnewspaperofgeneralcirculation(TheLosAngelesTimes)inthe communityinwhichbothCathayandFarEastBankhavetheirheadoffices,andcommenterswereprovided over30daysfromthedateofpublicationtosubmittheirviewsonallaspectsoftheproposal. 5 NationalassetanddepositdataareasofSeptember30,2016,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2015.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,creditunions,savingsassociations,andsavingsbanks.

LegalDevelopments:FirstQuarter,2017 199 $11.9billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryorganizationsintheUnitedStates.InCalifornia,Cathaywouldremainthe18th largestdepositoryinstitution,controllingdepositsof approximately$8.2billion,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.7TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitytobeserved.8 CathayandSinoPachavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe LosAngeles,California,bankingmarket(“LosAngelesmarket”)9andtheSanFrancisco- Oakland-SanJose,California,bankingmarket(“SanFranciscomarket”).10TheBoardhas consideredthecompetitiveeffectsof theproposalinthesebankingmarkets.Inparticular, theBoardhasconsideredthenumberof competitorsthatwouldremaininthebanking market;therelativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket (“marketdeposits”)thatCathaywouldcontrol;11theconcentrationlevelsof market depositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”);12andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesintheLosAngelesandSanFrancisco markets.Onconsummationof theproposal,theLosAngelesmarketwouldremain unconcentrated,asmeasuredbytheHHI,accordingtotheDOJBankMergerGuidelines. ThechangeintheHHIinthismarketwouldbesmall,andnumerouscompetitorswould remaininthebankingmarket.13Onconsummationof theproposal,theSanFrancisco 7 12U.S.C.§1842(c)(1). 8 12U.S.C.§1842(c)(1)(B). 9 TheLosAngelesmarketisdefinedastheLosAngelesmetropolitanareainLosAngelesandOrangecounties, aswellasportionsofSanBernardino,Ventura,andKerncounties. 10 TheSanFranciscomarketisdefinedastheSanFrancisco-Oakland-SanJosemetropolitanareainAlameda, ContraCosta,Marin,SanFrancisco,SanMateo,andSantaClaracounties,aswellasportionsofSonoma, Solano,SanBenito,andNapacounties. 11 LocaldepositandmarketsharedataareasofJune30,2015,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 12 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. 13 Cathayoperatesthe14thlargestdepositoryinstitutionintheLosAngelesmarket,controllingapproximately $6.0billionindeposits,whichrepresent1.34percentofmarketdeposits.SinoPacoperatesthe43rdlargest

200 FederalReserveBulletin|June2017 marketwouldremainhighlyconcentrated,asmeasuredbytheHHI.Thechangeinthe HHIintheSanFranciscomarketwouldbesmall,andnumerouscompetitorswouldremain inthebankingmarket.14 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheLosAngelesorSanFranciscomarketsorinanyotherrelevant bankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsare consistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialcondition of theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellas informationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsand theorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof informationregardingcapitaladequacy,assetquality,andearnings performance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompletetheproposedintegrationof theoperationsof theinstitutions.Inassessing financialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.The Boardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlight of theirfinancialandmanagerialresourcesandtheproposedbusinessplan. CathayandSinoPacarebothwellcapitalized,andthecombinedentitywouldremainsoon consummationof theproposedtransaction.Theproposedtransactionisabankholding companyacquisitionthatisstructuredprimarilyasanexchangeof sharesforcash.15The assetquality,earnings,andliquidityof CathayBankandFarEastBankareconsistentwith approval,andCathayappearstohaveadequateresourcestoabsorbthecostsof the depositoryinstitutioninthesamemarket,controllingdepositsofapproximately$616.1million,whichrepresentabout0.14percentofmarketdeposits.Onconsummationoftheproposedtransaction,Cathaywould becomethe13thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $6.6billion,whichrepresentapproximately1.48percentofmarketdeposits.TheHHIfortheLosAngeles marketwouldincreasebylessthan1pointandremainat982,and125competitorswouldremaininthe market. 14 Cathayoperatesthe22ndlargestdepositoryinstitutionintheSanFranciscomarket,controllingapproximately $1.2billionindeposits,whichrepresent0.28percentofmarketdeposits.SinoPacoperatesthe44thlargest depositoryinstitutioninthesamemarket,controllingdepositsofapproximately$219.0million,whichrepresentabout0.05percentofmarketdeposits.Onconsummationoftheproposedtransaction,Cathaywould becomethe20thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $1.42billion,whichrepresentapproximately0.33percentofmarketdeposits.TheHHIfortheSanFrancisco marketwouldincreasebylessthan1pointandremainat1810,and83competitorswouldremaininthe market. 15 Toeffectthetransaction,eachshareofSinoPaccommonstockwouldbeconvertedintoarighttoreceivecash, basedonanexchangeratio.Additionally,Cathaymayelecttopayupto10percentofthepurchasepriceinthe formofsharesofCathaycommonstock.Cathayhasthefinancialresourcestofundthetransaction.

LegalDevelopments:FirstQuarter,2017 201 proposalandtocompleteintegrationof theinstitutions’operations.Inaddition,future prospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Cathay,SinoPac,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyCathay;theBoard’ssupervisoryexperienceswith CathayandSinoPacandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicablebanking,consumer protection,andanti-money-launderinglaws.16 Cathay,SinoPac,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.Cathay’sdirectorsandseniorexecutiveofficershavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors,andCathay’sriskmanagementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredCathay’splansforimplementingtheproposal.Cathayhas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.Cathay representsthat,followingconsummationof theanticipatedmergerof CathayBankand FarEastBank,itwouldimplementitsrisk-managementpolicies,procedures,andcontrols atthecombinedorganization.17Thesepolicies,procedures,andcontrolsareconsidered satisfactoryfromasupervisoryperspective.Inaddition,Cathay’smanagementhasthe experienceandresourcestoensurethatthecombinedorganizationoperatesinasafeand soundmanner.18 16 Acommenterexpressedconcernthatthepurchasepriceofthetransactionwaslowanddidnotreflectanarm’s lengthtransaction.Anothercommenterraisedconcernsaboutwhethertheproposedtransactionwould promotetraderelationsandforeignpolicywithChina.Theseconcernsareoutsidethelimitedstatutoryfactors thattheBoardisauthorizedtoconsiderwhenreviewinganapplicationundertheBHCAct.See,Western Bancshares,Inc.v.BoardofGovernors,480F.2d749(10thCir.1973)(“WesternBancshares”).Onecommenter expressedconcern,withoutprovidinganyevidence,thatthegovernmentofChinaisinfluencingCathayBank, aUnitedStates-basedbank.Basedontherecord,thereisnoindicationthatthegovernmentofChinahasan ownershipinterestinCathay. TheBoardalsoreceivedacommentcitingnewspaperarticlesregardingconcernsrelatedtopotentialaffiliate andinsidertransactionsbytheforeignparentsofSinoPac.SinoPacisawhollyownedUnitedStatessubsidiary ofBankSinoPacCompanyLimited(“BankSinoPac”),aforeignbankingorganizationbasedinTaipei, Taiwan.Theincidentscitedbythecommenterdonotrelatetotheapplicantinthiscaseanddonotappearto relatetotheoperationsofSinoPacorFarEastBank,butinvolvetheforeignoperationsandactivitiesofBank SinoPacandasubsidiaryofBankSinoPac’sTaiwan-basedparent,SinoPacFinancialHoldingsCompany Limited.Asdiscussedabove,theBoardhasreviewedthesupervisoryrecordsofSinoPacandFarEastBank, theinstitutionsthatCathayisproposingtoacquire.ThisreviewincludedconsiderationofSinoPac’sandFar EastBank’srecordsofcompliancewithapplicablelawsandregulations,includingthoserelatedtoaffiliateand insidertransactions. 17 CathayrepresentsthatFarEastBank’srisk-managementpoliciesandprocedureswouldbemaintainedduring theinterimperiodbetweenconsummatingtheproposedacquisitionofSinoPacandtheanticipatedmergerof CathayBankandFarEastBank;however,CathayBank’scurrentmanagementteamwouldprovidecomprehensiveoversightandday-to-daymonitoring. 18 OnecommenteraskedtheBoardtoconsiderthediversityofCathay’semployeesandmanagementinreviewing theproposedtransaction.WhiletheBoardencouragesallfirmstopromotediversityintheirmanagementand workforce,thestatutoryfactorsthattheBoardisauthorizedtoconsiderwhenreviewinganapplicationunder theBHCActarelimitedandspecificallydefined.See,e.g.,PacWestBancorp,102FederalReserveBulletin82, 88n.24(2015);CITGroup,Inc.,102FederalReserveBulletin1,7n.24(2015);BankofAmericaCorporation,90 FederalReserveBulletin217,223n.31(2004).SeealsoWesternBancshares.Otherprovisionsoflawauthorize theBoard,togetherwiththeotherfederalfinancialsupervisoryagencies,tomonitortheeffortsofregulated entitiestopromotediversityandinclusion.FinalInteragencyPolicyStatementEstablishingJointStandardsfor AssessingtheDiversityPoliciesandPracticesofEntitiesRegulatedbytheAgencies,80FederalRegister33016 (June10,2015).SeePub.L.No.111-203,124Stat.1376,1541-44(2010),codifiedat12U.S.C.§5452.

202 FederalReserveBulletin|June2017 Basedonallthefactsof record,includingCathay’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof CathayandSinoPacincombattingmoney-launderingactivities, areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.19Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair 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 CathayBank andFarEastBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisoryviewsof theFDICandtheConsumerFinancialProtectionBureau(“CFPB”);confidentialsupervisoryinformation;informationprovidedbyCathay;andthepublic commentsreceivedontheproposal. Summaryof PublicCommentsonConvenienceandNeeds Inthiscase,theBoardreceivedcommentsfromtwocommentersobjectingtotheproposal onthebasisof Cathay’sCRAperformanceandrecordof meetingthecreditneedsof the communitiesthatitserves.ThecommentsfocusedonCathayBank’srecordof serving LMI,AfricanAmerican,andHispanicindividuals,andsmallbusinesses.Onecomment focusedprimarilyonthebank’sperformanceinitsCaliforniaassessmentareas,particularly theLosAngelesassessmentarea.Thecommentersarguedthatthebankisprimarily 19 12U.S.C.§1842(c)(2). 20 12U.S.C.§2901(b). 21 12U.S.C.§2903.

LegalDevelopments:FirstQuarter,2017 203 focusedonmeetingtheneedsof ChineseAmericanand/orAsianAmericanindividualsand shouldexpanditscustomerbasetootherminoritypopulations. Specifically,onecommenterarguedthatCathayBankmadeadisproportionatelysmall numberof loanstoLMIindividualsandsmallbusinessesascomparedtopeerinstitutions.22Thiscommenterarguedthat,basedondatareportedfor2015undertheHome MortgageDisclosureAct(“HMDA”),CathayBankdidnotadequatelyserveAfrican AmericanandHispanicindividualsinthebank’sCaliforniaassessmentareas.This commenteralsoarguedthatCathayBankwasinadequatelyservingSoutheastAsianindividualsaccordingtosuchdata.Further,thiscommenterallegedthatCathayBankengages inredliningandrewardedredliningbyitsmanagement.Thiscommenterwasalsocriticalof theamountCathayBankhasdevotedtoCRA-relatedphilanthropyandassertedthat CathayBank’sprogramstoaddressissuesrelatedtotheunbankedorunderbankedare inadequate.23AnothercommenterassertedthatCathayBank’sCRAperformanceisgenerallypoorandcontendedthatCathayBankreceivedsomeof itsworstratingsoutsidethe stateof California.ThiscommenteralsocontendedthatCathayplanstocloseseveral branchesfollowingconsummationof theproposedtransaction. InadditiontotheadversecommentsreceivedbytheBoard,Cathaysubmitted17letters fromCalifornia-basedcommunity,charitable,andbusinessorganizationssupportingthe proposal.TheseorganizationsgenerallyrepresentedthatCathayBankandFarEastBank havestronghistoriesof providingbankingservicestounderservedpopulationsinthe communityandthatthemergerwouldenableCathaytobetteraddressthediverseneedsof thecommunitiesinwhichitoperates. Businessesof theInvolvedInstitutionsandResponsetoComments CathayoperatesprimarilythroughCathayBankandprovidesabroadrangeof financial productsandservicestoretailconsumersandbusinesses.CathayBank’sproductsand servicesincludeavarietyof checking,savings,andcertificateof depositaccounts;mortgageandotherconsumerlendingproducts;businessservicesandlending;forwardcurrency spotandforwardcontracts;andinternationalbanking.Cathay’snonbankingsubsidiaries providecustomerswithwealthmanagementservices,securities,andinvestmentproducts. FarEastBankoffersabroadrangeof consumerandcommercialbankingproductsand servicesthroughninelocationsinCalifornia.Itsproductsandservicesincludechecking, savings,andcertificateof depositaccounts;mortgageandotherconsumerlendingproducts;businessservicesandlending;andinternationalbankingservices. Inresponsetothecomments,CathayassertsthatCathayBankiscommittedtomeetingthe creditneedsof thecommunitiesitservesandbelievesitsproductandserviceofferingsare responsivetothediverseneedsof itsassessmentareas.Further,Cathaymaintainsthat CathayBankhascomprehensivepoliciesandproceduresinplacetoensurecompliance withfairlendinglawsandtomonitorfairlendingrisk. Cathayassertsthatithasastrongrecordof lendingtosmallbusinessesandcompares favorablytopeersintermsof lendingratestosmallbusinessesinLMIareas,includingin itsCaliforniaassessmentareas.Insupportof thisclaim,CathayrepresentsthatCathay 22 OnecommenteralsovoicedconcernsaboutCathayBank’slendinglevelstominority-ownedbusinessesand assertedthatCathayBankmadenoSmallBusinessAdministration7(a)loanstoAfricanAmerican,Hispanic, orSoutheastAsianAmerican-ownedbusinessesin2015. 23 TheBoardnotesthatneithertheCRAnortheagencies’implementingrulesrequirethatinstitutionsengagein aspecificactivity,suchascharitablegiving,inordertomeetthecreditneedsofthecommunitiestheinstitutionsserve.See,e.g.,PacWestBancorp,102FederalReserveBulletin82,88(2015).

204 FederalReserveBulletin|June2017 Bank’spenetrationrateforsmallbusinessesinLMIareasexceededtheaveragepenetration ratebyatleast3percentinboth2014and2015.Further,CathayassertsthatCathayBank offersanumberof loanproductsandprogramstargetedtosmallbusinesses,including microloansinamountsrangingfrom$5,000to$10,000andunsecuredrevolvinglinesof creditwithsimpleunderwritingcriteriathatareofferedinamountsrangingfrom $10,000to$150,000.Cathayalsorepresentsthat,contrarytoonecommenter’sclaim, CathayBankhasmadeanumberof loanstobusinessesownedbyindividualsof Southeast AsianoriginandLatino-ownedbusinesses. CathaynotesthatCathayBank’shomemortgageloanoperationisnotlarge,representing only25percentof thebank’soveralllendingportfolioasof year-end2015.Further,Cathay representsthatmortgageloanpenetrationintheLosAngelesareaisdifficultconsidering thecompetitiveenvironmentandaverylowpercentageof owner-occupiedhousing.Nevertheless,Cathayrepresentsthat,asmeasuredasapercentageof totallending,Cathay Bank’slendingtolow-incomeindividualsiscomparabletoitspeers.Cathayrepresentsthat anotherwayithastriedtoreachLMIandminoritycustomersisthroughspecificproduct andserviceofferings,includingfreeorlow-coststarterorsecond-chancebankaccounts, andfinancialeducationprograms.Cathayalsorepresentsthatthebankoffersamortgage productforfirst-timehomebuyerswithlowerfees,flexibleterms,andlowerdown-payment requirements.Cathayalsorepresentsthatsomeof theseproductsareofferedaspartof a nationalprogramtomoveunderbankedandunbankedindividualsintothemainstream financialsystemandtoimproveaccesstofinancialeducation. CathaydeniesallegationsthatCathayBankengagesinorrewardsexecutivesforredlining andassertsthattheseallegationsareunfounded.Further,Cathayassertsthatfairtreatment of allof itscustomersandpotentialcustomersisanintegralpartof thebank’scompliance managementprogram.Cathayrepresentsthatthisprogramincludesongoingfairlending andHMDAmonitoringandtesting;escalationandreportingof fairlendingresultsto seniormanagement;regularmonitoringof customercomplaintsforpotentialfairlending concerns;andassessmentsforpotentialredlining,reverseredlining,andsteering.In particular,Cathayrepresentsthatallapplicationsaresubjecttoamultilevelmanagerreview priortofundingordenialtoensurethatalllendingdecisionsaremadewithinthescopeof thebank’sfairlendingpolicies.Cathayalsorepresentsthatthebank’scompliance departmentmonitorsandevaluatestheeffectivenessof thesepoliciesandprocedures, includingthroughanannualfairlendingcompliancemonitoringreviewof mortgageand retaillendingacrossalllinesof business.Cathayfurtherrepresentsthattheresultsof the bank’scompliancemonitoringactivitiesarereportedtotheappropriatelineof business,as wellasthebank’schief riskofficer,chief executiveofficer,president,andtheboard’srisk andcompliancecommittee. CathayrepresentsthatCathayBankbranchesarelocatedinareaswithhighAsianpopulationsandthebankhasstrongbrandidentificationwithAsianAmericans;however, CathayBankalsorepresentsthatthebankactivelyengagesinoutreachactivitiestoother minorityorethnicpopulations,includingbyadvertisinginavarietyof languages.Further, CathayassertsthatCathayBankdoesnotturnawayorotherwiseexcludeanymortgage applicants.AccordingtoCathay,allapplicantsarereviewedusingthebank’snormalpoliciesandproceduresforunderwritingandaresubjecttoallof thebank’spoliciesandprocedureswithrespecttofairlendingandotherconsumerprotectionlaws. CathayalsorepresentsthatitandCathayBankhaveengagedorganizationsinCalifornia communitiestodeterminetheneedsof thosecommunities.Cathayfurtherrepresentsthat, basedoninputfromvariouscommunitygroups,aswellasthroughCathayBank’scommunitydevelopmentefforts,CathayBankhasidentifiedaffordablehousing,smallbusiness training,andfinancialliteracyasimportantneedsinitsassessmentareas.Moreover,

LegalDevelopments:FirstQuarter,2017 205 Cathayrepresentsthat,asaresult,thebank’scommunitydevelopmenteffortshavebeen focused,andwillcontinuetofocus,ontheseareas.Further,inOctober2016,CathayBank announcedmultiyeargoalsandcommitmentsrelatedtocommunitydevelopmentlending, investmentsandservices,charitablecontributions,andresidentialmortgagelendingand smallbusinesslending.Aspartof thisannouncement,CathayBankcommittedtoworkto increaseanddiversifymortgageloanoriginationsoverthecourseof fouryearswiththe goalthatitspercentagesof mortgageoriginationstoLMIindividualsandcensustracts,as wellastoracialandethnicminorities,aresubstantiallycomparabletotheaverageof all lendersintherelevantassessmentareas. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe applicant’sresponsetocomments.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRA performancerecordsof therelevantinstitutions,aswellasinformationandviewsprovided bytheappropriatefederalsupervisors,inthiscase,theFDICandtheCFPB.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’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 theinstitution’slendinginitsassessmentareasandthenumber andamountsof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)the distributionof loansbasedonborrowercharacteristics,including,forhomemortgage loans,thenumberandamountsof loanstolow-,moderate-,middle-,andupper-income individuals;26(4)theinstitution’scommunitydevelopmentlending,includingthenumber andamountof communitydevelopmentloansandtheircomplexityandinnovativeness; and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecredit needsof LMIindividualsandgeographies. 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 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).

206 FederalReserveBulletin|June2017 TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.27 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof CathayBank CathayBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof March7,2016(“CathayBankEvaluation”).28 Thebankreceiveda“LowSatisfactory”ratingfortheLendingTestand“HighSatisfactory”ratingsforboththeInvestmentTestandtheServiceTest.29AlthoughCathayBank’s overallratingtookintoconsiderationitsperformanceineachof itsstateandmultistate metropolitanassessmentareas,examinersgavethegreatestweighttoCathayBank’sperformanceinCaliforniaduetohighervolumeof activitiesinthatstate.30TheBoardhas consultedwiththeFDICregardingtheCathayBankEvaluation. ExaminersfoundthatCathayBank’soveralllendingactivityreflectedadequateresponsivenesstothecreditneedsof itscombinedassessmentarea.Examinersnotedthatthebank wasaleaderincommunitydevelopmentlendingconsideringthebank’saverageassetsize, financialability,competition,andavailableopportunities.Accordingtoexaminers,the bank’scommunitydevelopmentloansprimarilysupportedaffordablehousinginitiatives, communityservices,economicdevelopment,andrevitalizationorstabilizationof communities.Examinersalsofoundthatthebankoriginatedasubstantialmajorityof loansinside of itsassessmentareas.Althoughexaminersfoundthat,overall,thebank’sdistributionof borrowersreflectedpoorpenetrationamongretailcustomersof differentincomelevelsand businesscustomersof differentrevenuesizes,theyconcludedthatthebankexhibitedan 27 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 28 TheCathayBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedhomepurchase,homeimprovement,andhomerefinancemortgageloansreportedpursuantto HMDA,andsmallbusinessloansreportedunderCRAdatacollectionrequirements,for2014and2015.The evaluationperiodforcommunitydevelopmentlending,investments,andserviceswasSeptember4,2012, throughMarch7,2016. 29 TheCathayBankEvaluationincludedfull-scopeevaluationsofnineassessmentareas:LosAngeles,California (theLosAngeles–LongBeach–Glendale,California,MetropolitanDivision(“MD”);theAnaheim-Santa Ana-Irvine,California,MD;andtheRiverside-SanBernardino-Ontario,California,MetropolitanStatistical Area(“MSA”);SanFrancisco,California(theSanFrancisco-RedwoodCity-SouthSanFrancisco,California, MSA;theSanJose-Sunnyvale-SantaClara,California,MSA;andtheOakland-Hayward-Berkeley,California, MD);NewYork/NewJersey(theNassauCounty-SuffolkCounty,NewYork,MD;theNewYork-Wayne- WhitePlains,NewYork-NewJerseyMD;andtheNewark,NewJersey-PennsylvaniaMD);Seattle,Washington(theSeattle-Bellevue-Everett,Washington,MD);Houston,Texas(theHouston-TheWoodlands- Sugarland,Texas,MSA);Boston,Massachusetts(theBoston,Massachusetts,MDandtheCambridge- Newton-Framingham,Massachusetts,MD);Chicago,Illinois(theChicago-Naperville-ArlingtonHeights,Illinois,MD);LasVegas,Nevada(theLasVegas-Henderson-Paradise,Nevada,MSA);Maryland(theSilver Spring-Frederick-RockvilleMD);andtheWashington-Arlington-Alexandria,DistrictofColumbia-Virginia- Maryland-WestVirginiaMD).Limitedscopeevaluationswereperformedinthreeassessmentareas:Sacramento,California(theSacramento-Roseville-Arden-Arcade,California,MSA);SanDiego,California(theSan Diego-Carlsbad,California,MSA);andDallas,Texas(theDallas-Plano-Irving,Texas,MD). 30 CathayBankreceiveda“Satisfactory”overallratingineachofitsstateandmultistatemetropolitanassessment areas,exceptforNevadaandMarylandwhereitreceivedratingsof“SubstantialNon-Compliance.”Because onlyaminorportionofthebank’soveralllending,investments,andserviceswereconductedinNevadaand Maryland,performancewithineachstatereceivedlessweightindeterminingthebank’soverallCRArating.As describedinmoredetailbelow,CathayrepresentsthatthebankisworkingtoimproveitsCRAperformancein bothstatesandhasalreadymadesignificantprogressindoingsosincetheCathayBankEvaluation.Further, Cathayrepresentsthatthebankisarelativelyrecententrantin,andhasalimitedpresencein,eachstate.

LegalDevelopments:FirstQuarter,2017 207 adequaterecordof servingthecreditneedsof themosteconomicallydisadvantagedindividualsandverysmallbusinesses.Examinersalsonotedthat,overall,geographicdistributionof thebank’sloanswasadequate. InCathayBank’sCaliforniaassessmentareas,theprimaryfocusof concernforone commenter,examinersfoundCathayBank’slendingactivityreflectedadequateresponsivenesstocreditneeds.Thiswasalsotheconclusionregardingthebank’sLosAngelesassessmentarea,theareamostaffectedbytheproposedtransactionandthatwasgiventhe mostweightfordeterminingthebank’soverallCRArating. Examinersfoundthat,overall,thebank’sgeographicdistributionof loansreflected adequatepenetrationthroughouttheCaliforniaassessmentareas,andnoconspicuous lendinggapswerenoted.Whileexaminersfoundgeographicdistributionof residential mortgageloansreflectedpoorpenetrationthroughouttheLosAngelesassessmentarea, theyfoundgeographicdistributionof smallbusinessloansreflectedgoodpenetration. Examinersnotedthat,for2014,thebank’spercentageof smallbusinessloansinLMI censustractsintheassessmentareaexceededthepercentageof businessesinsuchcensus tracts.For2015,examinersnotedthatthebank’spercentageof smallbusinessloans exceededthepercentageof businessesinlow-incomecensustractsintheassessmentarea andwasconsistentwiththepercentageof businessesinmoderateincomecensustracts. Examinersfoundthat,overall,thebank’slendingtobusinessesof differentrevenuesizes andborrowersof differentincomelevelswaspoorintheCaliforniaassessmentareas;31 however,CathayBankwasfoundtobealeaderincommunitydevelopmentlendinginthe state.IntheLosAngelesassessmentarea,forexample,examinersfoundthebanktobe excellentincommunitydevelopmentlendingandhighlightedseveralloanstosupport affordablehousing,businesses,andnonprofitsinLMIareas.Further,examinersconcluded thatCathayBankexhibitedanadequaterecordof servingthecreditneedsof themost economicallydisadvantagedareasof itsCaliforniaassessmentareas,low-incomeindividuals,andverysmallbusinesses,consistentwithsafeandsoundbankingpractices. ExaminersfoundthatCathayBankmadeasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantswithinitsassessmentareas,particularlythosethatarenot routinelyprovidedbyprivateinvestors.ExaminersalsonotedthatoccasionallyCathay Banktookaleadershippositionwithrespecttothesecommunitydevelopmentinvestments andgrants.Examinersalsonotedthatthebankexhibitedgoodresponsivenesstocreditand communityeconomicdevelopmentneeds.Examinersfurtherobservedthatthebankmade significantuseof innovativeorcomplexqualifiedinvestmentstosupportcommunitydevelopmentinitiatives.Examinersexplainedthatthebank’sinvestmentsincludedinvestments inaffordablehousingprojects,communitydevelopmentfinancialinstitutions,andsmall businessinvestmentcompanies. Additionally,examinersfoundthatCathayBank’sdeliverysystemswereaccessibletoall portionsof thebank’sassessmentareas,includingLMIcommunities.Totheextentthat CathayBankhadmadechangestoitsbranchnetwork,examinersnotedthattheinstitution’srecordof openingandclosingbrancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystems,particularlytoLMIgeographiesand/orLMIindividuals.Examiners alsofoundthatthebankprovidedarelativelyhighlevelof communitydevelopment servicesinitsassessmentareas. 31 IntheLosAngelesassessmentarea,examinersnotedthatnearly13percentoftheassessmentarea’sfamilies livebelowthepovertylevel,whichcanadverselyimpacttheabilityoffamiliestoqualifyformortgageloansand thebank’sabilitytomakemortgageloansbasedonnormalunderwritingstandards.

208 FederalReserveBulletin|June2017 CathayBank’sEffortsSincetheCathayBankEvaluation CathayrepresentsthatCathayBankhascontinuedtodemonstrateresponsivenesstocredit needsinthebank’sassessmentareasandcontinuestogrowitsCRAprograms.Cathay assertsthatthebankhasmadeanumberof communitydevelopmentloansandinvestmentstosupportaffordablehousingandeconomicdevelopmentinitsassessmentareas. Cathaynotesthatthebankhasengagedinvariousoutreacheffortsandcommunityservice opportunitiestosupportLMIpersonsandcommunities,aswellassmallbusinesses.Such effortshaveincludedprovidingfinancialliteracycoursestoLMIindividualsandtechnical assistancetosmallbusinessowners. Cathayrepresentsthatmanyof thesecommunitydevelopmentloansandinvestmentshave beenmadeinCathayBank’sCaliforniaassessmentareas,wheremostof CathayBank’s activitiestakeplaceandtheareasof primaryconcernforonecommenter.Inparticular, CathayrepresentsthatCathayBankhasmadeanumberof communitydevelopmentloans thatpromoteeconomicdevelopmentandinvestmentsthatpromoteaffordablehousing. Further,CathayrepresentsthatCathayBankhasprovidedcommunityservicehours supportingfinancialliteracyandsmallbusinessdevelopment. Whilereceivinganoverall“Satisfactory”ratingattheCathayBankEvaluation,Cathay acknowledgesthatexaminersidentifiedweaknessesinCathayBank’sCRAperformancein itsNevadaandMarylandassessmentareas,butrepresentsthatthebankismakingsignificantprogressinaddressingtheseweaknesses.CathaynotesthatCathayBankentered bothmarketsasaresultof recentacquisitionsandthatthebankonlyhasasinglebranch ineachmarket.CathayassertsthatCathayBankhasmadesignificantstridessincethe CathayBankEvaluationtoimprovetheCRAprogramsateachbranch,anditisclosely monitoringtheprograms’performance.AccordingtoCathay,thebank’srecenteffortsin bothassessmentareashaveincludedtrainingprogramsforbranchemployeesonthebank’s CRAprogram,goals,andexpectations,aswellasmeetingswithcommunityorganizations togainabetterunderstandingof communitycreditneeds.Cathayrepresentsthatitsefforts havealreadyledtoasignificantlyincreasedCRApresenceforeachbranchoverprevious levels,andthatitisconfidentthebank’sperformancewillcontinuetoimproveasit becomesmoreestablishedintheareas. CRAPerformanceof FarEastBank FarEastBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheOfficeof theComptrollerof theCurrency,asof April23,2014 (“FarEastBankEvaluation”).32Thebankreceiveda“Satisfactory”ratingfortheLending Testandan“Outstanding”ratingfortheCommunityDevelopmentTest. 32 TheFarEastBankEvaluationwasconductedusingIntermediateSmallInstitutionCRAExaminationProcedures,consistingofthelendingandcommunitydevelopmenttests.Theinstitution’slendingperformanceis basedonits(1)loan-to-depositratio,(2)loanoriginationsforsaletothesecondarymarket,(3)lending-related activitiesinitsassessmentareas,(4)recordofengaginginlending-relatedactivitiesforborrowersofdifferent incomelevelsandbusinessesandfarmsofdifferentsizes,(5)geographicdistributionofloans,and(6)recordof takingactioninresponsetowrittencomplaintsaboutitsperformance.Thecommunitydevelopmenttest evaluatesthenumberandamountoftheinstitution’scommunitydevelopmentloansandqualifiedinvestments; theextenttowhichtheinstitutionprovidescommunitydevelopmentservices;andtheinstitution’sresponsivenessthroughsuchactivitiestocommunitydevelopmentlending,investment,andserviceneeds.TheFarEast BankExaminationreviewedthebank’ssmallbusinessloansoriginatedduringtheperiodfromJanuary1,2012, throughDecember31,2013,aswellasalimitednumberofmortgageloansoriginatedbeforethebankdiscontinueditsmortgageoperationsin2010.Examinersalsoreviewedcommunitydevelopmentloans,qualified investments,andcommunitydevelopmentservicesfromMarch1,2010,throughApril23,2014.TheFarEast BankEvaluationincludedafull-scopereviewofthebank’sLosAngelesCountyandAlamedaCountyassessmentareas.Limited-scopereviewswereconductedofthebank’sOrangeCounty,SanFranciscoCounty,and SantaClaraCountyassessmentareas.

LegalDevelopments:FirstQuarter,2017 209 ExaminersdeterminedthatFarEastBank’sloan-to-depositratioexceededthestandardfor satisfactoryperformanceontheLendingTestgiventhebank’ssize,financialcondition, andthecreditneedsof thebank’sassessmentareas.Accordingtoexaminers,thebank’s loan-to-depositratiocomparedfavorablytopeerinstitutions.Examinersalsofoundthat thebankoriginatedasubstantialmajorityof loansinsideitsassessmentareas. Examinersfoundthatgeographicdistributionof thebank’sloansreflectedanexcellent dispersionof loansinLMIareas.Inthebank’sLosAngelesassessmentarea,examiners alsofoundthatborrowerdistributionof smallloanstobusinessesreflectedareasonable penetrationtobusinesseswithrevenuesof $1millionorless.Inthebank’sAlamedaassessmentarea,examinersfoundthatborrowerdistributionof loanstobusinessesreflected poorpenetrationof loanstobusinesseswithrevenuesof $1millionorless,butnotedthat thebankonlymadeasmallvolumeof loanstobusinessesof anysize.Examinersfurther explainedthatlendingrestrictions,competition,andlimitedbranchstaff hamperedlending effortsintheAlamedaassessmentarea. Examinersfoundthatthebank’soverallperformanceincommunitydevelopmentactivities initsassessmentareawas“Outstanding.”Thisconclusionwasbasedonhighlevelsof communitydevelopmentloansandcommunitydevelopmentinvestments,andanadequate levelof retailandcommunitydevelopmentservices.Examinersexplainedthatthebank’s communitydevelopmentloansandinvestmentsfocusedprimarilyonaffordablehousing andthebank’scommunityservicesfocusedonfinancialliteracy,whicharebothstated needsinthebank’sassessmentareas. Viewsof OtherRegulators TheBoardhasconsideredtherecordof CathayBankincomplyingwithfairlendingand otherconsumerprotectionlaws,includingthebank’spoliciesandproceduresrelatingto fairlendingandotherconsumerprotectionlawsandregulations.TheFDICandCFPB haveeachconductedconsumercomplianceexaminationsof CathayBank.TheBoard reviewedthoseexaminationreportsandconsultedwiththeFDICandCFPBregarding CathayBank’srecordof compliancewithfairlendinglawsandregulations.Aspartof its consumercomplianceexamination,theFDICconductedafairlendingreviewfocusingon residentialmortgagelending.ConcurrentwiththeFDIC’sexamination,theCFPB conductedareviewof CathayBank’smortgageoriginationoperationsinordertodeterminecompliancewithapplicablefederalconsumerfinanciallaws,aswellasCathayBank’s systemformanagingcompliancewiththeselaws. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Cathayrepresentsthatuponconsummationof the proposal,existingcustomersof FarEastBankwouldhaveaccesstoamoreexpansiveline of productsandservices.Specifically,Cathayrepresentsthatexistingcustomersof FarEast Bankwouldgainaccesstoavarietyof consumerandcommercialcreditcardproducts, personalautomobileloans,andavarietyof investmentproductsandservicesofferedby affiliatesof CathayBank.ExistingFarEastBankcustomersalsowouldhaveaccesstoa broaderarrayof cashmanagementproductsandservices. Cathayrepresentsthattheacquisitionwillmakeavailableexpandedresourcestothe communitiescurrentlyservedbyFarEastBank.Specifically,Cathayrepresentsthat customersof bothinstitutionswouldbenefitfromalargerlendingcapacityandahigher

210 FederalReserveBulletin|June2017 lendinglimit.Cathayalsorepresentsthatcustomersof bothinstitutionswouldbenefit fromamoreexpansivebranchnetwork.33 Cathayrepresentsthatithasnotmadeanydecisionsregardingclosingbranches,butitmay considerclosingorconsolidatingCathayBankorFarEastBankbranchesfollowing consummationof theanticipatedbankmerger.Cathayrepresentsthatanysuchdecisions wouldbebasedonavarietyof factors,includingproximityof locations,futureprospects of branchlocationsfromacostandincomeperspective,andwhetherthebranchwould provideaddedbenefittothecommunity.AccordingtoCathay,locationinamajorityminorityorLMIareawouldbeonefactortakenintoconsideration.Moreover,Cathay representsthatanybranchclosureswouldbecompletedinaccordancewithregulatory requirementsassociatedwithclosingbranches.34 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,consultationswiththeFDICandCFPB,confidential supervisoryinformation,informationprovidedbyCathay,thepubliccommentsonthe proposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenience andneedsfactorisconsistentwithapproval.Moreover,theBoardexpectsCathaytoimplementpolicies,programs,andactivitiestohelpmeetcommunitycreditneedsatalevel commensuratewiththeexpandedsizeandscopeof thecombinedorganization. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterormoreconcentratedriskstothestabilityof 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 33 OnecommenterassertedthatCathayBankshoulddevelopaCommunityReinvestmentActPlan(“Plan”)that addressescertaingoalsandmeetstheneedsofspecificsegmentsofthecommunity.Thiscommenterurgedthe BoardtoapprovetheproposedtransactiononlyifsuchaPlanisfinalized.TheBoardhasconsistentlyfound thatneithertheCRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionsto makepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,HuntingtonBancshares Incorporated,FRBOrderNo.2016-13at32n.50(July29,2016);CITGroup,Inc.,FRBOrderNo.2015-20at 24n.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485(2002);FifthThirdBancorp,80Federal ReserveBulletin838,841(1994).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordof anapplicantandtheprogramsthattheapplicanthasinplacetoservethecreditneedsofitsCRAassessment areas. 34 TheBoardnotesthatsection42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1),asimplementedby theJointPolicyStatementRegardingBranchClosings(64Fed.Reg.34844(1999)),requiresthatabank providethepublicwithatleast30days’notice,andtheappropriatefederalsupervisoryagencywithatleast 90days’notice,beforethedateofaproposedbranchclosing.Thebankalsoisrequiredtoprovidereasonsand othersupportingdatafortheclosure,consistentwiththeinstitution’swrittenpolicyforbranchclosings. 35 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7).

LegalDevelopments:FirstQuarter,2017 211 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.Afterconsummation,Cathaywouldhaveapproximately$15.4billion inconsolidatedassetsand,byanyof anumberof alternativemeasuresof firmsize,would notbelikelytoposesystemicrisks.TheBoardgenerallypresumesthataproposalthat involvesanacquisitionof lessthan$2billioninassets,orthatresultsinafirmwithless than$25billioninconsolidatedassets,willnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthistransaction. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.38Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyCathaywithalltheconditionsimposedinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. 36 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 37 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 38 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.IntheBoard’sview,thecommentershavehadampleopportunitytosubmit commentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtotheBoard’sdecision andthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywritten commentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublic hearingormeetingontheproposalisdenied.

212 FederalReserveBulletin|June2017 Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof SanFrancisco,actingunder delegatedauthority. Byorderof theBoardof Governors,effectiveMarch20,2017 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

LegalDevelopments:FirstQuarter,2017 213 Order Issued Under Bank Merger Act Farmers Bank & Capital Trust Company Frankfort, Kentucky OrderApprovingtheMergerof BanksandtheEstablishmentof Branches FRBOrderNo.2017-02(February3,2017) FarmersBank&CapitalTrustCompany(“FarmersBank”),Frankfort,Kentucky,astate memberbank,hasrequestedtheBoard’sapprovalundersection18(c)of theFederal DepositInsuranceAct1(“BankMergerAct”)tomergewithitsaffiliatedbanks,United Bank&TrustCompany,Versailles(“UnitedBank”),astatenonmemberbank;FirstCitizensBank,Elizabethtown,astatememberbank;andCitizensBankof Northern Kentucky,Inc.,Newport(“CitizensBank”),astatenonmemberbank,allinKentucky.2In addition,FarmersBankhasappliedundersection9of theFederalReserveAct(“FRA”)3 toestablishandoperatebranchesatthelocationsof themainofficesandbranchesof UnitedBank,FirstCitizensBank,andCitizensBank. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.4Thetimeforfilingcommentshasexpired.TheBoardhasconsideredtheapplication andallcommentsreceivedinlightof thefactorssetforthintheBankMergerActand theFRA. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.5TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.6 FarmersBank’sproposalinvolvestheconsolidationof fourbanksthatareaffiliatesinthe samebankingorganization,andtheproposal,therefore,wouldnotlessencompetitionin anyrelevantmarket.TheBoardhasreceivednoobjectiontotheproposalfromtheother federalbankingagencies.Basedontherecord,theBoardconcludesthatconsummationof theproposedtransactionwouldnotbelikelytoresultinasignificantlyadverseeffecton competitionortheconcentrationof bankingresourcesinanybankingmarket,andthat competitivefactorsareconsistentwithapproval. 1 12U.S.C.§1828(c). 2 FarmersBank,UnitedBank,FirstCitizensBank,andCitizensBankarewhollyownedsubsidiariesofFarmers CapitalBankCorporation,Frankfort,Kentucky(“FCBC”). 3 12U.S.C.§321.Thesebranchesarelistedintheappendix. 4 12CFR262.3(b). 5 12U.S.C.§1828(c)(5)(A). 6 12U.S.C.§1828(c)(5)(B).

214 FederalReserveBulletin|June2017 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,earningsprospects,andthe impactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtocompleteeffectivelythe proposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,the Boardconsistentlyconsiderscapitaladequacytobeespeciallyimportant.TheBoard considersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof their financialandmanagerialresourcesandtheproposedbusinessplan. FarmersBankiswellcapitalizedandwouldremainsoonconsummationof theproposal. UnitedBank,FirstCitizensBank,andCitizensBankwouldbemergedintoFarmers Bank.7Theassetquality,earnings,andliquidityof FarmersBankareconsistentwith approval,andFarmersBankappearstohaveadequateresourcestoabsorbthecostsof the proposalandtocompletetheintegrationof theoperationsof FarmersBank,UnitedBank, FirstCitizensBank,andCitizensBank.Inaddition,futureprospectsareconsidered consistentwithapproval.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof FarmersBank,including assessmentsof itsmanagement,risk-managementsystems,andoperations,andhas reviewedtheexaminationrecordsof FarmersBank,UnitedBank,FirstCitizensBank,and CitizensBank.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthose of theFDICandthebanks’recordof compliancewithapplicablebankingandanti-money launderinglaws.TheBoardalsohasconsideredFarmersBank’splansforimplementingthe proposal. FarmersBankisconsideredtobewellmanaged,anditsboardof directorsandsenior managementhavesubstantialbankingexperience.FarmersBankwouldoperatethe acquiredbranchesof UnitedBank,FirstCitizensBank,andCitizensBankunderits existingpoliciesandprocedures,whichareconsideredtobesatisfactory.Inaddition, FarmersBank’smanagementhastheexperienceandresourcesthatshouldallowthe combinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof FarmersBank,aswellasthe recordsof effectivenessof FarmersBank,UnitedBank,FirstCitizensBank,andCitizens Bankincombatingmoney-launderingactivities,areconsistentwithapproval. 7 InadditiontoUnitedBank,FirstCitizensBank,andCitizensBank,FCBServices,Inc.,Frankfort,Kentucky (“FCB”),anonbanksubsidiaryofFCBC,willbemergedintoFarmersBank.FCBprovidesdataprocessing servicesandrelatedsupport.ThemergerofFCBintoFarmersBankissubjecttoapprovalundertheBank MergerActandisbeingreviewedbytheFederalDepositInsuranceCorporation(“FDIC”).

LegalDevelopments:FirstQuarter,2017 215 ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.8Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,9andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods.10Inthisregard,thefederal financialsupervisoryagenciesevaluatetheperformanceof eachinstitutioninthecontext of thebank’sproductofferings,businessstrategy,andinstitutionalcapacityand constraints.11 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair 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 Farmers Bank,UnitedBank,FirstCitizensBank,andCitizensBank,thefairlendingandcompliancerecordsof allfourbanks,thesupervisoryviewsof theFDIC,confidentialsupervisory information,informationprovidedbyFarmersBank,andthepubliccommentsreceived ontheproposal. PublicCommentontheProposal Acommenterontheproposalexpressedconcernthattheproductsandservicesof the involvedbanksmightbereducedasaresultof thebankmergerandthataccesstophysical branchesmightbediminished.Thiscommenteralsoexpressedconcernabouttheplanned changeof nameof FarmersBanktoUnitedBank&CapitalTrustfollowingthe proposedtransaction,suggestingthepotentialforcustomerconfusion. ResponsetotheComment FarmersBankrepresentsthattherewillbenochangetotheproductandserviceofferings of thefourbanksasaresultof theproposedmergerandthatcustomerswillcontinuetobe abletoaccessphysicalbranchesfortheirbankingneeds.FarmersBankalsorepresentsthat thenamechangeisintendedtodistinguishFarmersBankfromseveralcompetitorswith 8 12U.S.C.§1828(c)(5)(B). 9 12U.S.C.§2901(b). 10 12U.S.C.§2903. 11 See,e.g.,12CFR228.21(b).

216 FederalReserveBulletin|June2017 similarnamesandthatadequatenoticeof thenamechangewasprovidedtocustomersof thefourbanks. Recordof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardevaluates aninstitution’sperformancerecordinlightof examinationsbytheappropriatefederal supervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviewsprovidedbytheappropriatefederalsupervisors.12TheCRArequiresthat theappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawritten evaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity, includingLMIneighborhoods.13Aninstitution’smostrecentCRAperformanceevaluation isaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsa detailed,onsiteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’s overallrecordof lendinginitscommunities.Ingeneral,federalfinancialsupervisorsapply alendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutionin helpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecifically evaluatestheinstitution’slending-relatedactivitiestodeterminewhethertheinstitutionis helpingtomeetthecreditneedsof individualsandgeographiesof allincomelevels.Aspart of thelendingtest,examinersreviewandanalyzeaninstitution’savailableHomeMortgageDisclosureActdata,automatedloanreports,andotherreportsgeneratedbytheinstitutiontoassesstheinstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedontheinstitution’sloan-to-deposit(“LTD”)ratio,loanoriginationsforsaletothesecondarymarket, lending-relatedactivitiesinitsassessmentareas,recordof engaginginlending-related activitiesforborrowersof differentincomelevelsandbusinessesandfarmsof different sizes,geographicdistributionof loans,andrecordof takingactioninresponsetowritten complaintsaboutitsperformance.Inadditiontothelendingtest,intermediatesmallinstitutions,suchasFarmersBank,UnitedBank,andFirstCitizensBank,arealsosubjecttoa communitydevelopmenttestthatevaluatesthenumberandamountof theinstitution’s communitydevelopmentloansandqualifiedinvestments,theextenttowhichtheinstitutionprovidescommunitydevelopmentservices,andtheinstitution’sresponsiveness throughsuchactivitiestocommunitydevelopmentlending,investment,andservice needs.14 CRAPerformanceof FarmersBank FarmersBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof St.Louis(“ReserveBank”)in October2014(“FarmersBankEvaluation”).15FarmersBankreceived“Satisfactory” ratingsforboththelendingtestandthecommunitydevelopmenttest.16ExaminersdeterminedthatFarmersBank’sLTDratiowasreasonablegiventhebank’ssize,financial condition,andassessmentareacreditneeds.Examinersfoundthatamajorityof Farmers Bank’sloansandotherlending-relatedactivitieswereundertakenintheassessmentarea. 12 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 13 12U.S.C.§2906. 14 See12CFR228.26. 15 TheFarmersBankEvaluationwasconductedusingtheInteragencyCRAProceduresforIntermediateSmall Institutions,whichconsistsofthelendingandcommunitydevelopmenttestsdescribedabove.TheFarmers BankEvaluationreviewedlendingdatafromJuly1,2013,toDecember31,2013,andcommunitydevelopment activitiesfromMay7,2012,toOctober27,2014. 16 TheFarmersBankEvaluationincludedreviewsofthebank’sactivitiesinFranklin,Anderson,Mercer,and Boylecounties,allofwhicharelocatedinanonmetropolitanstatisticalareaportionofthestateofKentucky.

LegalDevelopments:FirstQuarter,2017 217 Examinersalsofoundthatthegeographicdistributionof loansreflectedreasonabledispersionthroughouttheassessmentareaandareasonablepenetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof different sizes.ExaminersconcludedthatFarmersBank’scommunitydevelopmentloanandinvestmentrecorddemonstratedadequateresponsivenesstothecommunitydevelopmentneeds initsassessmentarea. CRAPerformanceforUnitedBank UnitedBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFDICinJuly2015(“UnitedBankEvaluation”).17UnitedBank received“Satisfactory”ratingsforboththelendingtestandthecommunitydevelopment test.18 ExaminersfoundUnitedBank’sLTDratiotobereasonablegiventheinstitution’ssize, financialcondition,andassessmentareacreditneeds.Examinersnotedthatamajorityof UnitedBank’sloansandotherlending-relatedactivitiesweremadeintheassessmentarea. Examinersfoundthatthegeographicdistributionof loansreflectedreasonabledispersion throughouttheassessmentarea,andthedistributionof borrowersreflectedreasonable penetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof differentsizes.ExaminersconcludedthatUnitedBankdemonstratedadequateresponsivenesstothecommunitydevelopmentneedsof itsassessment areathroughcommunitydevelopmentloansandqualifiedinvestments. CRAPerformanceof FirstCitizensBank FirstCitizensBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceexaminationbytheReserveBankinMay2016(“FirstCitizensBankEvaluation”).19FirstCitizensBankreceived“Satisfactory”ratingsonthelendingtestandthe communitydevelopmenttest.20 ExaminersdeterminedthatFirstCitizensBank’sLTDratiowasreasonablegiventhe bank’ssize,financialcondition,andassessmentareacreditneeds.Examinersnotedthata majorityof FirstCitizensBank’sloansandotherlending-relatedactivitiesweremadein theassessmentarea.Examinersfoundthatthegeographicdistributionof loansreflected reasonabledispersionthroughouttheassessmentareaandareasonablepenetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof differentsizes.ExaminersconcludedthatFirstCitizensBank’scommunitydevelopmentloanandinvestmentrecorddemonstratedadequateresponsivenesstothecommunitydevelopmentneedsinitsassessmentarea. 17 TheUnitedBankEvaluationwasconductedusingtheInteragencyCRAProceduresforIntermediateSmall Institutions,whichconsistsofthelendingandcommunitydevelopmenttestsdescribedabove.TheUnited BankEvaluationreviewedlendingdatafromJanuary1,2014,toMay31,2015,andcommunitydevelopment activitiesfromJuly2,2012,toJuly27,2015. 18 TheUnitedBankEvaluationincludedreviewsofthebank’sactivitiesinFayette,Jessamine,Scott,and Woodfordcounties,Kentucky,allofwhicharelocatedintheLexington-Fayette,Kentuckymetropolitanstatisticalarea(“MSA”). 19 TheFirstCitizensBankEvaluationwasconductedusingtheInteragencyCRAProceduresforIntermediate SmallInstitutions,whichconsistsofthelendingandcommunitydevelopmenttestsdescribedabove.TheFirst CitizensBankEvaluationreviewedlendingdatafromJanuary1,2014,toDecember31,2014,andcommunity developmentactivitiesfromApril16,2012,toMay9,2016. 20 TheFirstCitizensBankEvaluationincludedreviewsofthebank’sactivitiesinHardinCounty,Kentucky, whichislocatedintheElizabethtown-FortKnox,KentuckyMSA,aswellasBullittandJeffersoncounties, Kentucky,whicharelocatedintheLouisville/JeffersonCounty,Kentucky-IndianaMSA.

218 FederalReserveBulletin|June2017 CRAPerformanceof CitizensBank CitizensBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFDICinMay2015(“CitizensBankEvaluation”).21Citizens Bankreceiveda“Satisfactory”ratingforthelendingtest.22 ExaminersfoundCitizensBank’sLTDratiotobereasonablegiventheinstitution’ssize, financialcondition,andassessmentareacreditneeds.Examinersnotedthatamajorityof CitizensBank’sloansandotherlending-relatedactivitiesweremadeintheassessmentarea. Examinersfoundthatthegeographicdistributionof loansreflectedreasonabledispersion throughouttheassessmentarea,andthedistributionof borrowersreflectedreasonable penetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof differentsizes. AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. FarmersBankrepresentsthattheproposedtransactionwouldprovidecustomersof United Bank,FirstCitizensBank,andCitizensBankwithmoreefficientservicesandexpanded bankingaccess.Inaddition,themergerwouldprovideincreasedefficienciesandother savings,particularlyinareasof managementof personnelandoperatingexpenses,risk management,strategicplanning,regulatorycompliance,anddataprocessing.Customersof UnitedBank,FirstCitizensBank,andCitizensBankwillcontinuetohaveaccessto existingbankingservicesineachof thecommunitiescurrentlyservedbythesebanks,and therewouldbenochangetotheaccessibilityof allof thebranchescurrentlyoperatedby thosebanksandFarmersBank. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyFarmersBank,and confidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof FarmersBank,UnitedBank,FirstCitizens Bank,andCitizensBank,itsreviewof examinationreports,anditsconsultationswiththe FDIC,theBoardconcludesthattheconvenienceandneedsfactor,includingtheCRA recordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwith approvalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”23 21 TheCitizensBankEvaluationwasconductedusingtheInteragencyCRAProceduresforSmallInstitutions, whichconsistsofthelendingtestdescribedabove.TheCitizensBankEvaluationreviewedlendingdatafrom January1,2014,toDecember31,2014. 22 TheCitizensBankEvaluationincludedreviewsofthebank’sactivitiesinBoone,Campbell,andKentoncounties,Kentucky,allofwhicharelocatedintheCincinnati-Middleton,Ohio-Kentucky-IndianaMSA. 23 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5).

LegalDevelopments:FirstQuarter,2017 219 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.24These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.25 Inthiscase,theBoardhasconsideredinformationrelevanttorisktothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardgenerallypresumesthatamerger thatrepresentsacorporatereorganizationwillnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthiscase. Basedontheseandallotherfactsof record,theBoardconcludesthatconsiderations relatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches FarmersBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof UnitedBank,FirstCitizensBank,andCitizensBank,andtheBoardhas consideredthefactorsitisrequiredtoconsiderwhenreviewinganapplicationunderthat section.26Specifically,theBoardhasconsideredFarmersBank’sfinancialcondition, management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiesto beserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussed inthisorder,theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditioned oncompliancebyFarmersBankwithallthecommitmentsmadeinconnectionwiththis proposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. 24 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 25 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 26 12U.S.C.§322;12CFR208.6.

220 FederalReserveBulletin|June2017 Acquisitionof UnitedBank,FirstCitizensBank,andCitizensBankmaybeconsummated immediatelyupontheeffectivedateof thisorder27butnotlaterthanthreemonthsafter theeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcausebytheBoard orbytheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary3,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchestoBeAcquiredbyFarmersBankinKentucky 1.BranchestoBeAcquiredfromUnitedBank ‰ 100UnitedDrive,Versailles 146NorthLocustStreet,Versailles 206NorthGrantzStreet,Midway 200EastMainStreet,Georgetown 100NorthBradfordLane,Georgetown 100FarmersBankDrive,Georgetown 3285MainStreet,StampingGround 3098HarrodsburgRoad,Lexington 2509SirBartonWay,Lexington 201NorthMainStreet,Nicholasville 995SouthMainStreet,Nicholasville 986NorthMainStreet,Nicholasville 106SouthLexingtonAvenue,Wilmore 2.BranchestoBeAcquiredfromFirstCitizensBank ‰ 425WestDixieAvenue,Elizabethtown 3030RingRoad,Elizabethtown 111TowneDrive,Elizabethtown 645SouthDixieBoulevard,Radcliff 4810NorthPrestonHighway,Shepherdsville 157EastbrookeCourt,MountWashington 3.BranchestoBeAcquiredfromCitizensBank ‰ 103ChurchillDrive,Newport 7300AlexandriaPike,Alexandria 164FairfieldAvenue,Bellevue 8730U.S.Highway42,Florence 34NorthFortThomasAvenue,FortThomas 2911AlexandriaPike,HighlandHeights 2774TownCenterBoulevard,CrestviewHills 27 12U.S.C.§1828(c)(6).

LegalDevelopments:FirstQuarter,2017 221 Orders Issued Under Federal Reserve Act Farmers Bank & Capital Trust Company Frankfort, Kentucky OrderApprovingtheMergerof BanksandtheEstablishmentof Branches FRBOrderNo.2017-02(February3,2017) FarmersBank&CapitalTrustCompany(“FarmersBank”),Frankfort,Kentucky,astate memberbank,hasrequestedtheBoard’sapprovalundersection18(c)of theFederal DepositInsuranceAct1(“BankMergerAct”)tomergewithitsaffiliatedbanks,United Bank&TrustCompany,Versailles(“UnitedBank”),astatenonmemberbank;FirstCitizensBank,Elizabethtown,astatememberbank;andCitizensBankof Northern Kentucky,Inc.,Newport(“CitizensBank”),astatenonmemberbank,allinKentucky.2In addition,FarmersBankhasappliedundersection9of theFederalReserveAct(“FRA”)3 toestablishandoperatebranchesatthelocationsof themainofficesandbranchesof UnitedBank,FirstCitizensBank,andCitizensBank. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.4Thetimeforfilingcommentshasexpired.TheBoardhasconsideredtheapplication andallcommentsreceivedinlightof thefactorssetforthintheBankMergerActand theFRA. CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.5TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectsof the transactioninmeetingtheconvenienceandneedsof communitiestobeserved.6 FarmersBank’sproposalinvolvestheconsolidationof fourbanksthatareaffiliatesinthe samebankingorganization,andtheproposal,therefore,wouldnotlessencompetitionin anyrelevantmarket.TheBoardhasreceivednoobjectiontotheproposalfromtheother federalbankingagencies.Basedontherecord,theBoardconcludesthatconsummationof theproposedtransactionwouldnotbelikelytoresultinasignificantlyadverseeffecton competitionortheconcentrationof bankingresourcesinanybankingmarket,andthat competitivefactorsareconsistentwithapproval. 1 12U.S.C.§1828(c). 2 FarmersBank,UnitedBank,FirstCitizensBank,andCitizensBankarewhollyownedsubsidiariesofFarmers CapitalBankCorporation,Frankfort,Kentucky(“FCBC”). 3 12U.S.C.§321.Thesebranchesarelistedintheappendix. 4 12CFR262.3(b). 5 12U.S.C.§1828(c)(5)(A). 6 12U.S.C.§1828(c)(5)(B).

222 FederalReserveBulletin|June2017 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,earningsprospects,andthe impactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposalandtocompleteeffectivelythe proposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,the Boardconsistentlyconsiderscapitaladequacytobeespeciallyimportant.TheBoard considersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof their financialandmanagerialresourcesandtheproposedbusinessplan. FarmersBankiswellcapitalizedandwouldremainsoonconsummationof theproposal. UnitedBank,FirstCitizensBank,andCitizensBankwouldbemergedintoFarmers Bank.7Theassetquality,earnings,andliquidityof FarmersBankareconsistentwith approval,andFarmersBankappearstohaveadequateresourcestoabsorbthecostsof the proposalandtocompletetheintegrationof theoperationsof FarmersBank,UnitedBank, FirstCitizensBank,andCitizensBank.Inaddition,futureprospectsareconsidered consistentwithapproval.Basedonitsreviewof therecord,theBoardfindsthattheorganizationhassufficientfinancialresourcestoeffecttheproposal. TheBoardalsohasconsideredthemanagerialresourcesof FarmersBank,including assessmentsof itsmanagement,risk-managementsystems,andoperations,andhas reviewedtheexaminationrecordsof FarmersBank,UnitedBank,FirstCitizensBank,and CitizensBank.Inaddition,theBoardhasconsidereditssupervisoryexperiencesandthose of theFDICandthebanks’recordof compliancewithapplicablebankingandanti-money launderinglaws.TheBoardalsohasconsideredFarmersBank’splansforimplementingthe proposal. FarmersBankisconsideredtobewellmanaged,anditsboardof directorsandsenior managementhavesubstantialbankingexperience.FarmersBankwouldoperatethe acquiredbranchesof UnitedBank,FirstCitizensBank,andCitizensBankunderits existingpoliciesandprocedures,whichareconsideredtobesatisfactory.Inaddition, FarmersBank’smanagementhastheexperienceandresourcesthatshouldallowthe combinedorganizationtooperateinasafeandsoundmanner. Basedonallthefactsof record,theBoardconcludesthatconsiderationsrelatingtothe financialandmanagerialresourcesandfutureprospectsof FarmersBank,aswellasthe recordsof effectivenessof FarmersBank,UnitedBank,FirstCitizensBank,andCitizens Bankincombatingmoney-launderingactivities,areconsistentwithapproval. 7 InadditiontoUnitedBank,FirstCitizensBank,andCitizensBank,FCBServices,Inc.,Frankfort,Kentucky (“FCB”),anonbanksubsidiaryofFCBC,willbemergedintoFarmersBank.FCBprovidesdataprocessing servicesandrelatedsupport.ThemergerofFCBintoFarmersBankissubjecttoapprovalundertheBank MergerActandisbeingreviewedbytheFederalDepositInsuranceCorporation(“FDIC”).

LegalDevelopments:FirstQuarter,2017 223 ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.8Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,9andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods.10Inthisregard,thefederal financialsupervisoryagenciesevaluatetheperformanceof eachinstitutioninthecontext of thebank’sproductofferings,businessstrategy,andinstitutionalcapacityand constraints.11 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair 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 Farmers Bank,UnitedBank,FirstCitizensBank,andCitizensBank,thefairlendingandcompliancerecordsof allfourbanks,thesupervisoryviewsof theFDIC,confidentialsupervisory information,informationprovidedbyFarmersBank,andthepubliccommentsreceived ontheproposal. PublicCommentontheProposal Acommenterontheproposalexpressedconcernthattheproductsandservicesof the involvedbanksmightbereducedasaresultof thebankmergerandthataccesstophysical branchesmightbediminished.Thiscommenteralsoexpressedconcernabouttheplanned changeof nameof FarmersBanktoUnitedBank&CapitalTrustfollowingthe proposedtransaction,suggestingthepotentialforcustomerconfusion. ResponsetotheComment FarmersBankrepresentsthattherewillbenochangetotheproductandserviceofferings of thefourbanksasaresultof theproposedmergerandthatcustomerswillcontinuetobe abletoaccessphysicalbranchesfortheirbankingneeds.FarmersBankalsorepresentsthat thenamechangeisintendedtodistinguishFarmersBankfromseveralcompetitorswith 8 12U.S.C.§1828(c)(5)(B). 9 12U.S.C.§2901(b). 10 12U.S.C.§2903. 11 See,e.g.,12CFR228.21(b).

224 FederalReserveBulletin|June2017 similarnamesandthatadequatenoticeof thenamechangewasprovidedtocustomersof thefourbanks. Recordof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardevaluates aninstitution’sperformancerecordinlightof examinationsbytheappropriatefederal supervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviewsprovidedbytheappropriatefederalsupervisors.12TheCRArequiresthat theappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawritten evaluationof theinstitution’srecordof meetingthecreditneedsof itsentirecommunity, includingLMIneighborhoods.13Aninstitution’smostrecentCRAperformanceevaluation isaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsa detailed,onsiteevaluationbytheinstitution’sprimaryfederalsupervisorof theinstitution’s overallrecordof lendinginitscommunities.Ingeneral,federalfinancialsupervisorsapply alendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutionin helpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecifically evaluatestheinstitution’slending-relatedactivitiestodeterminewhethertheinstitutionis helpingtomeetthecreditneedsof individualsandgeographiesof allincomelevels.Aspart of thelendingtest,examinersreviewandanalyzeaninstitution’savailableHomeMortgageDisclosureActdata,automatedloanreports,andotherreportsgeneratedbytheinstitutiontoassesstheinstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedontheinstitution’sloan-to-deposit(“LTD”)ratio,loanoriginationsforsaletothesecondarymarket, lending-relatedactivitiesinitsassessmentareas,recordof engaginginlending-related activitiesforborrowersof differentincomelevelsandbusinessesandfarmsof different sizes,geographicdistributionof loans,andrecordof takingactioninresponsetowritten complaintsaboutitsperformance.Inadditiontothelendingtest,intermediatesmallinstitutions,suchasFarmersBank,UnitedBank,andFirstCitizensBank,arealsosubjecttoa communitydevelopmenttestthatevaluatesthenumberandamountof theinstitution’s communitydevelopmentloansandqualifiedinvestments,theextenttowhichtheinstitutionprovidescommunitydevelopmentservices,andtheinstitution’sresponsiveness throughsuchactivitiestocommunitydevelopmentlending,investment,andservice needs.14 CRAPerformanceof FarmersBank FarmersBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFederalReserveBankof St.Louis(“ReserveBank”)in October2014(“FarmersBankEvaluation”).15FarmersBankreceived“Satisfactory” ratingsforboththelendingtestandthecommunitydevelopmenttest.16ExaminersdeterminedthatFarmersBank’sLTDratiowasreasonablegiventhebank’ssize,financial condition,andassessmentareacreditneeds.Examinersfoundthatamajorityof Farmers Bank’sloansandotherlending-relatedactivitieswereundertakenintheassessmentarea. 12 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 13 12U.S.C.§2906. 14 See12CFR228.26. 15 TheFarmersBankEvaluationwasconductedusingtheInteragencyCRAProceduresforIntermediateSmall Institutions,whichconsistsofthelendingandcommunitydevelopmenttestsdescribedabove.TheFarmers BankEvaluationreviewedlendingdatafromJuly1,2013,toDecember31,2013,andcommunitydevelopment activitiesfromMay7,2012,toOctober27,2014. 16 TheFarmersBankEvaluationincludedreviewsofthebank’sactivitiesinFranklin,Anderson,Mercer,and Boylecounties,allofwhicharelocatedinanonmetropolitanstatisticalareaportionofthestateofKentucky.

LegalDevelopments:FirstQuarter,2017 225 Examinersalsofoundthatthegeographicdistributionof loansreflectedreasonabledispersionthroughouttheassessmentareaandareasonablepenetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof different sizes.ExaminersconcludedthatFarmersBank’scommunitydevelopmentloanandinvestmentrecorddemonstratedadequateresponsivenesstothecommunitydevelopmentneeds initsassessmentarea. CRAPerformanceforUnitedBank UnitedBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFDICinJuly2015(“UnitedBankEvaluation”).17UnitedBank received“Satisfactory”ratingsforboththelendingtestandthecommunitydevelopment test.18ExaminersfoundUnitedBank’sLTDratiotobereasonablegiventheinstitution’s size,financialcondition,andassessmentareacreditneeds.Examinersnotedthatamajority of UnitedBank’sloansandotherlending-relatedactivitiesweremadeintheassessment area.Examinersfoundthatthegeographicdistributionof loansreflectedreasonable dispersionthroughouttheassessmentarea,andthedistributionof borrowersreflected reasonablepenetrationof loansamongindividualsof differentincomelevels,including LMIindividuals,andbusinessesof differentsizes.ExaminersconcludedthatUnitedBank demonstratedadequateresponsivenesstothecommunitydevelopmentneedsof its assessmentareathroughcommunitydevelopmentloansandqualifiedinvestments. CRAPerformanceof FirstCitizensBank FirstCitizensBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceexaminationbytheReserveBankinMay2016(“FirstCitizensBankEvaluation”).19FirstCitizensBankreceived“Satisfactory”ratingsonthelendingtestandthe communitydevelopmenttest.20 ExaminersdeterminedthatFirstCitizensBank’sLTDratiowasreasonablegiventhe bank’ssize,financialcondition,andassessmentareacreditneeds.Examinersnotedthata majorityof FirstCitizensBank’sloansandotherlending-relatedactivitiesweremadein theassessmentarea.Examinersfoundthatthegeographicdistributionof loansreflected reasonabledispersionthroughouttheassessmentareaandareasonablepenetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof differentsizes.ExaminersconcludedthatFirstCitizensBank’scommunitydevelopmentloanandinvestmentrecorddemonstratedadequateresponsivenesstothecommunitydevelopmentneedsinitsassessmentarea. 17 TheUnitedBankEvaluationwasconductedusingtheInteragencyCRAProceduresforIntermediateSmall Institutions,whichconsistsofthelendingandcommunitydevelopmenttestsdescribedabove.TheUnited BankEvaluationreviewedlendingdatafromJanuary1,2014,toMay31,2015,andcommunitydevelopment activitiesfromJuly2,2012,toJuly27,2015. 18 TheUnitedBankEvaluationincludedreviewsofthebank’sactivitiesinFayette,Jessamine,Scott,and Woodfordcounties,Kentucky,allofwhicharelocatedintheLexington-Fayette,Kentuckymetropolitanstatisticalarea(“MSA”). 19 TheFirstCitizensBankEvaluationwasconductedusingtheInteragencyCRAProceduresforIntermediate SmallInstitutions,whichconsistsofthelendingandcommunitydevelopmenttestsdescribedabove.TheFirst CitizensBankEvaluationreviewedlendingdatafromJanuary1,2014,toDecember31,2014,andcommunity developmentactivitiesfromApril16,2012,toMay9,2016. 20 TheFirstCitizensBankEvaluationincludedreviewsofthebank’sactivitiesinHardinCounty,Kentucky, whichislocatedintheElizabethtown-FortKnox,KentuckyMSA,aswellasBullittandJeffersoncounties, Kentucky,whicharelocatedintheLouisville/JeffersonCounty,Kentucky-IndianaMSA.

226 FederalReserveBulletin|June2017 CRAPerformanceof CitizensBank CitizensBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceexaminationbytheFDICinMay2015(“CitizensBankEvaluation”).21Citizens Bankreceiveda“Satisfactory”ratingforthelendingtest.22 ExaminersfoundCitizensBank’sLTDratiotobereasonablegiventheinstitution’ssize, financialcondition,andassessmentareacreditneeds.Examinersnotedthatamajorityof CitizensBank’sloansandotherlending-relatedactivitiesweremadeintheassessmentarea. Examinersfoundthatthegeographicdistributionof loansreflectedreasonabledispersion throughouttheassessmentarea,andthedistributionof borrowersreflectedreasonable penetrationof loansamongindividualsof differentincomelevels,includingLMIindividuals,andbusinessesof differentsizes. AdditionalInformationonConvenienceandNeedsof CommunitiestoBeServedbythe CombinedOrganization Inassessingtheeffectsof aproposalontheconvenienceandneedsof thecommunitiesto beserved,theBoardalsoconsiderstheextenttowhichtheproposalwouldresultinpublic benefits. FarmersBankrepresentsthattheproposedtransactionwouldprovidecustomersof United Bank,FirstCitizensBank,andCitizensBankwithmoreefficientservicesandexpanded bankingaccess.Inaddition,themergerwouldprovideincreasedefficienciesandother savings,particularlyinareasof managementof personnelandoperatingexpenses,risk management,strategicplanning,regulatorycompliance,anddataprocessing.Customersof UnitedBank,FirstCitizensBank,andCitizensBankwillcontinuetohaveaccessto existingbankingservicesineachof thecommunitiescurrentlyservedbythesebanks,and therewouldbenochangetotheaccessibilityof allof thebranchescurrentlyoperatedby thosebanksandFarmersBank. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingreportsof examinationof the CRArecordsof theinstitutionsinvolved,informationprovidedbyFarmersBank,and confidentialsupervisoryinformation.BasedontheBoard’sassessmentof theCRAperformanceandconsumercomplianceprogramsof FarmersBank,UnitedBank,FirstCitizens Bank,andCitizensBank,itsreviewof examinationreports,anditsconsultationswiththe FDIC,theBoardconcludesthattheconvenienceandneedsfactor,includingtheCRA recordsof theinsureddepositoryinstitutionsinvolvedinthistransaction,isconsistentwith approvalof theapplication. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedtheBankMergerActtorequiretheBoardtoconsideramergerproposal’s“risk tothestabilityof theUnitedStatesbankingorfinancialsystem.”23 21 TheCitizensBankEvaluationwasconductedusingtheInteragencyCRAProceduresforSmallInstitutions, whichconsistsofthelendingtestdescribedabove.TheCitizensBankEvaluationreviewedlendingdatafrom January1,2014,toDecember31,2014. 22 TheCitizensBankEvaluationincludedreviewsofthebank’sactivitiesinBoone,Campbell,andKentoncounties,Kentucky,allofwhicharelocatedintheCincinnati-Middleton,Ohio-Kentucky-IndianaMSA. 23 Section604(f)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,codifiedat12U.S.C.§1828(c)(5).

LegalDevelopments:FirstQuarter,2017 227 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.24These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.25 Inthiscase,theBoardhasconsideredinformationrelevanttorisktothestabilityof the UnitedStatesbankingorfinancialsystem.TheBoardgenerallypresumesthatamerger thatrepresentsacorporatereorganizationwillnotposesignificantriskstothefinancial stabilityof theUnitedStatesabsentevidencethatthetransactionwouldresultinasignificantincreaseininterconnectedness,complexity,cross-borderactivities,orotherrisk factors.Suchadditionalriskfactorsarenotpresentinthiscase. Basedontheseandallotherfactsof record,theBoardconcludesthatconsiderations relatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches FarmersBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof UnitedBank,FirstCitizensBank,andCitizensBank,andtheBoardhas consideredthefactorsitisrequiredtoconsiderwhenreviewinganapplicationunderthat section.26Specifically,theBoardhasconsideredFarmersBank’sfinancialcondition, management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiesto beserved,CRAperformance,andinvestmentinbankpremises.Forthereasonsdiscussed inthisorder,theBoardfindsthosefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBankMergerActandtheFRA.Approvalof theapplicationsisspecificallyconditioned oncompliancebyFarmersBankwithallthecommitmentsmadeinconnectionwiththis proposalandtheconditionssetforthinthisorder.Thecommitmentsandconditionsare deemedtobeconditionsimposedinwritingbytheBoardand,assuch,maybeenforcedin proceedingsunderapplicablelaw. 24 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 25 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(Feb.14,2012). 26 12U.S.C.§322;12CFR208.6.

228 FederalReserveBulletin|June2017 Acquisitionof UnitedBank,FirstCitizensBank,andCitizensBankmaybeconsummated immediatelyupontheeffectivedateof thisorder27butnotlaterthanthreemonthsafter theeffectivedateof thisorder,unlesssuchperiodisextendedforgoodcausebytheBoard orbytheReserveBank,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveFebruary3,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchestoBeAcquiredbyFarmersBankinKentucky 1.BranchestoBeAcquiredfromUnitedBank ‰ 100UnitedDrive,Versailles 146NorthLocustStreet,Versailles 206NorthGrantzStreet,Midway 200EastMainStreet,Georgetown 100NorthBradfordLane,Georgetown 100FarmersBankDrive,Georgetown 3285MainStreet,StampingGround 3098HarrodsburgRoad,Lexington 2509SirBartonWay,Lexington 201NorthMainStreet,Nicholasville 995SouthMainStreet,Nicholasville 986NorthMainStreet,Nicholasville 106SouthLexingtonAvenue,Wilmore 2.BranchestoBeAcquiredfromFirstCitizensBank ‰ 425WestDixieAvenue,Elizabethtown 3030RingRoad,Elizabethtown 111TowneDrive,Elizabethtown 645SouthDixieBoulevard,Radcliff 4810NorthPrestonHighway,Shepherdsville 157EastbrookeCourt,MountWashington 3.BranchestoBeAcquiredfromCitizensBank ‰ 103ChurchillDrive,Newport 7300AlexandriaPike,Alexandria 164FairfieldAvenue,Bellevue 8730U.S.Highway42,Florence 34NorthFortThomasAvenue,FortThomas 2911AlexandriaPike,HighlandHeights 2774TownCenterBoulevard,CrestviewHills 27 12U.S.C.§1828(c)(6).

LegalDevelopments:FirstQuarter,2017 229 PlainsCapital Bank Dallas, Texas OrderApprovingtheEstablishmentof Branches FRBOrderNo.2017-05(February24,2017) PlainsCapitalBank,astatememberbanksubsidiaryof HilltopHoldings,Inc.(“Hilltop”), bothof Dallas,Texas,hasrequestedtheBoard’sapprovalundersection9of theFederal ReserveAct(“FRA”)1andtheBoard’sRegulationH2toestablishtwobranchesinFrisco, Texas.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.4Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandthe commentsreceivedinlightof thefactorsspecifiedintheFRA. Hilltopisthe13thlargestdepositoryorganizationinTexaswith63branchesthroughout Texas,controllingapproximately$6.3billionindeposits,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthatstate.5 PlainsCapitalBankoperatesonlyinTexas,andthebank’smainofficeisinDallas,Texas. PlainsCapitalBank’swhollyownednonbanksubsidiary,PrimeLending,APlainsCapital Company(“PrimeLending”),engagesinnationalmortgagelendingandhasapproximately 300officesin42states.6 Undersection208.6of theBoard’sRegulationH,7whichimplementssection9of the FRA,thefactorsthattheBoardmustconsiderinactingonbranchapplicationsinclude (1)thefinancialhistoryandconditionof theapplyingbankandthegeneralcharacterof its management;(2)theadequacyof thebank’scapitalanditsfutureearningsprospects; (3)theconvenienceandneedsof thecommunitytobeservedbythebranch;(4)inthecase of brancheswithdeposit-takingcapability,thebank’sperformanceundertheCommunity ReinvestmentAct(“CRA”);8and(5)whetherthebank’sinvestmentinbankpremisesin establishingthebranchsatisfiescertaincriteria.9 TheBoardhasconsideredtheapplicationinlightof thesefactorsandthepubliccomment receivedontheproposal.Onecommenterobjectstotheproposal,allegingthat PlainsCapitalBankdiscriminatesagainstAfricanAmericansand“redlines”African Americanneighborhoods,particularlyintheDallasandHoustonareas,bothinTexas,with respecttoitsbranching,marketing,lending,andcommunitydevelopmentactivities.10 1 12U.S.C.§321. 2 12CFRpart208. 3 PlainsCapitalBankproposestoestablishonebranchatOneCowboysWayandonebranchat6635Cowboys Way,bothinFrisco,Texas. 4 12CFR262.3(b). 5 StatedepositdataareasofJune30,2015,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsandloanassociations,andsavingsbanks. 6 PlainsCapitalBankrepresentsthatthevastmajorityofitsresidentialmortgagelendingisconductedthrough PrimeLending. 7 12CFR208.6(b). 8 12U.S.C.§2901etseq. 9 12CFR208.21(a). 10 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.SeeInteragencyFairLendingExaminationProcedures(August2009),availableathttps//www.ffiec.gov/pdf/fairlend.pdf.

230 FederalReserveBulletin|June2017 Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof PlainsCapitalBank,theBoardhasreviewedreportsof examination,other supervisoryinformation,publiclyreportedandotherfinancialinformation,information providedbyPlainsCapitalBank,andthecommentreceivedontheproposal.PlainsCapital Bankiswellcapitalizedandwouldremainsouponconsummationof theproposal.The assetquality,earnings,andliquidityof PlainsCapitalBankareconsistentwithapproval, andPlainsCapitalBankappearstohaveadequateresourcestoabsorbthecostsof the proposal.Inaddition,futureearningsprospectsareconsideredconsistentwithapproval. TheBoardalsohasreviewedPlainsCapitalBank’sproposedinvestmentinthebranches andconcludesthatitsinvestmentisconsistentwithregulatorylimitationsoninvestmentin bankpremises.11 InconsideringPlainsCapitalBank’smanagerialresources,theBoardhasreviewedthe bank’sexaminationrecord,includingassessmentsof itsmanagement,risk-management systems,andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswith PlainsCapitalBankandthebank’srecordof compliancewithapplicablebankinglaws, includingconsumerprotectionandanti-money-launderinglaws.PlainsCapitalBankis consideredtobewellmanaged.PlainsCapitalBank’sdirectorsandseniorexecutiveofficers havesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors, andthebank’srisk-managementprogramappearsconsistentwithapproval. Basedonthisreviewandallthefactsof record,theBoardconcludesthatPlainsCapital Bank’smanagement,financialhistoryandcondition,capitaladequacy,andfutureearnings prospects,aswellastheeffectivenessof PlainsCapitalBankincombattingmoneylaunderingactivities,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations Inconsideringtheeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe creditneedsof thecommunitiesitserves,aswellasotherpotentialeffectsof theproposal ontheconvenienceandneedsof thecommunitiestobeserved.12Inthisevaluation,the Boardplacesparticularemphasisontherecordof therelevantdepositoryinstitutionunder theCRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,13andrequiresthe appropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods.14 Inaddition,theBoardconsidersthebank’soverallcompliancerecordandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors, thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovided bytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe 11 12CFR208.21(a). 12 12CFR208.6(b)(3). 13 12U.S.C.§2901(b). 14 12U.S.C.§2903.

LegalDevelopments:FirstQuarter,2017 231 institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof PlainsCapitalBank;thefairlendingandcompliancerecordsof thebank;confidential supervisoryinformation;informationprovidedbyPlainsCapitalBank;andthepublic commentreceivedontheproposal.Onecommenterobjectstotheproposal,allegingthat PlainsCapitalBankhasengagedindiscriminatorypracticesinDallasandHouston. Specifically,thecommenterallegesthatPlainsCapitalBankengagesinredlininginthese areas.ThecommenterallegesthatPlainsCapitalBankdisfavorscertainAfricanAmerican neighborhoodsinDallasandHoustonandhaslimiteditslending,marketingactivities, communitydevelopmentactivities,andbranchinginthoseneighborhoods. PlainsCapitalBankdeniesthecommenter’sallegations,arguingthatithasastrong commitmenttoensuringcompliancewithconsumerlawsandastronglendingrecord undertheHomeMortgageDisclosureAct(“HMDA”),andthatthebankand PrimeLendingbothhavecomprehensivepoliciesandprocedurestoensurethattheydonot engageindiscriminatorypractices.PlainsCapitalBankrepresentsthatthesepoliciesand proceduresincludecontrolstodetermineif disparitiesexistregardingpricingandfees, analysisof approvedanddeniedloans,andfrequentfairlendingreviews.PlainsCapital Bankalsorepresentsthatitsboardof directorshasadesignatedCRA/Compliance Committeethatprovidesenhancedoversighttoboththebank’sandPrimeLending’s complianceprograms. PlainsCapitalBanknotesthatitisarelativelyrecententranttotheHoustonareaandonly hastwobranchesinthearea,asitenteredthemarketinlate2013throughtheacquisition of afailedbank.PlainsCapitalBankrepresentsthatoneof thosetwobranchesislocatedin amajority-minorityarea.WhileHoustoniscurrentlyitssmallestmarket,PlainsCapital Bankrepresentsthatitisactivelyworkingtoexpandthebank’spresenceinthecommunity. PlainsCapitalBankassertsthat,overthelasttwoyears,ithasassembledastrongteamof lenders,creditunderwritersandloanadministrationstaff,anditrecentlyhiredanew Houstonmarketpresident.PlainsCapitalBankrepresentsthat,asaresultof theseefforts, thebankhasexpandeditsloanportfoliointheHoustonareabyapproximately73percent in2015and31percentin2016,andcontinuouslyevaluatesopportunitiestofurtherexpand itspresenceinthemarket.Further,PlainsCapitalBankrepresentsthatitandPrimeLending engageinmarketingandoutreach,includingtargetedradioandadvertisingcampaigns,to achievelendingpenetrationinLMIandminoritycensustracts. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performanceinlightof examinationsandothersupervisoryinformationandinformation andviewsprovidedbytheappropriatefederalsupervisors.15Inthiscase,theBoardconsideredtheinformationcollectedbyandfindingsof examinersfromtheFederalReserveBank of Dallas(“ReserveBank”),whoconductedanon-siteCRAperformanceevaluationof PlainsCapitalBank. 15 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016).

232 FederalReserveBulletin|June2017 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.16Aninstitution’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,includingforhomemortgageloans,thenumber andamountsof loanstolow-,moderate-,middle-,andupper-incomeindividuals;17(4)the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloans,andtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies. TheBoardisconcernedwhencommentersassertthatdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnic groupsinlocalareas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesandprogramsataninstitutionformeetingitsobligationstoextendcreditfairly. However,otherinformationcriticaltoaninstitution’screditdecisionstypicallyisnotavailabletocommenters.18Consequently,theseallegeddisparitiesmustbeevaluatedinthe contextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof PlainsCapitalBank PlainsCapitalBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRA performanceevaluationbytheReserveBank,asof July7,2015(“PlainsCapitalBank 16 12U.S.C.§2906. 17 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloansmadetobusinesses andfarmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamount atorigination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals. See,e.g.,12CFR228.22(b)(3). 18 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

LegalDevelopments:FirstQuarter,2017 233 Evaluation”).19PlainsCapitalBankreceiveda“HighSatisfactory”ratingfortheLending Testanda“LowSatisfactory”ratingforboththeInvestmentTestandtheServiceTest.20 ExaminersfoundthatPlainsCapitalBank’soveralllendingactivityreflectedgoodresponsivenesstocreditneedsinitsassessmentareasandthatthebankmadeahighpercentageof itsloansinsideitsassessmentareas.Accordingtoexaminers,thebank’sgeographicdistributionof loansreflectedadequatepenetrationthroughouttheassessmentareas.Examiners alsofoundthat,overall,thebank’sdistributionof borrowersreflectedgoodpenetration amongcustomersof differentincomelevelsandbusinessesof differentsizes.Further, examinersnotedthatthebankmadearelativelyhighlevelof communitydevelopment loans,themajorityof whichwereforaffordablehousingandeconomicdevelopment. Communitydevelopmentloanswerealsomadetoorganizationsprovidingservicestargeted toLMIindividuals. IntheDallasassessmentarea,anareawherethecommenterfocused,examinersdeterminedthatPlainsCapitalBankexhibitedgoodlendingperformance.Thebank’sgeographic distributionof loanswasjudgedtoreflectadequatepenetrationthroughouttheassessment area,withnoconspicuouslendinggaps.Examinersalsofoundthatthebank’slending performancereflectedgoodpenetrationamongindividualsof differentincomelevelsand businessesof differentsizes.Further,examinersnotedthatPlainsCapitalBankmadearelativelyhighlevelof communitydevelopmentloansintheassessmentarea,whichweretoa varietyof projectsforaffordablehousingandtherevitalizingandstabilizingof LMIareas. PlainsCapitalBankhasonlyrecentlyenteredtheHoustonbankingmarketandhasa limitedpresenceintheHoustonassessmentarea,anotherareaof concerntothe commenter.Examinersnotedthatthebankmaintainsonly3percentof itstotalnumberof branchesandholdsonly3.5percentof itstotaldepositsinthemarket.ThePlainsCapital BankEvaluationincludedalimited-scopereviewof lendingactivitybyPlainsCapitalBank intheHoustonassessmentarea.ExaminersconcludedthatPlainsCapitalBank’slending performanceintheHoustonassessmentareawasbetterthanitslendingperformancein otherassessmentareas.Thebank’sgeographicdistributionof loanswasjudgedtoreflect goodpenetrationthroughouttheassessmentarea.Examinersalsofoundthatthebank’s lendingperformancereflectedgoodpenetrationamongborrowersof differentincome levelsandbusinessesof differentsizes.Further,examinersfoundthatthebankmadeahigh levelof communitydevelopmentloansintheassessmentarea. 19 ThePlainsCapitalBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.ExaminersreviewedHMDA,smallbusiness,andsmallfarmlendingactivitiesreportedbythebankfromJanuary1, 2013,throughDecember31,2014,exceptforthosereportedbySouthwestSecurities,FSB,abankthatwas mergedintoPlainsCapitalBankonJanuary1,2015,andwhichhadanevaluationperiodfromJuly1,2013, throughDecember31,2014.Theevaluationperiodforcommunitydevelopmentlending,investments,and serviceswasJune3,2013,throughJuly7,2015. 20 ThePlainsCapitalBankEvaluationincludedafull-scopereviewofthebank’sassessmentareaswithinthe followingMetropolitanStatisticalAreas(“MSAs”):theDallas-FortWorth-Arlington,Texas,MSA(“Dallas assessmentarea”);theLubbock,Texas,MSA;theMcAllen-Edinburg-Mission,Texas,MSA;andthe Brownsville-Harlingen,Texas,MSA.Alimited-scopereviewwasconductedinthebank’sassessmentareas withintheAustin-RoundRock,Texas,MSA;theSanAntonio-NewBraunfels,Texas,MSA;theHouston-The Woodlands-SugarLand,Texas,MSA(“Houstonassessmentarea”);theElPaso,Texas,MSA;theCorpus Christi,Texas,MSA;theLaredo,Texas,MSA;theVictoria,Texas,MSA;JimWellsCounty,Texas;and MaverickCounty,Texas. ThecommenterallegedthatPlainsCapitalBank’sdefinitionsoftheHoustonandDallasassessmentareasarbitrarilyexcludeAfricanAmericanneighborhoodsintheHoustonandDallasareas.TheBoard’sregulations prohibitthedelineationofaCRAassessmentareathatreflectsillegaldiscrimination.12CFR228.41(e)(2). Assessmentareasgenerallyshouldincludeentirepoliticalsubdivisions.InteragencyQuestionsandAnswers RegardingCommunityReinvestment,81FederalRegister48506,48549(July25,2016).TheHoustonassessmentareacomprisestheentiretyofHarrisandMontgomerycounties.TheDallasassessmentareacomprises theentiretyofCollin,Denton,Dallas,Parker,andTarrantcounties.ReserveBankexaminersfoundthatthe bank’sassessmentareaswereappropriateandofferedopportunitiestolendinmajority-minoritygeographies.

234 FederalReserveBulletin|June2017 ExaminersfoundthatPlainsCapitalBankprovidedanadequatelevelof qualifiedcommunitydevelopmentinvestmentsanddonationsinitsassessmentareas.Examinersnotedthat PlainsCapitalBank’sinvestmentsdemonstratedadequateresponsivenesstocreditand communitydevelopmentneedsthroughoutitsassessmentareas.However,examinersfound thatPlainsCapitalBank’sinvestmentperformancevariedamongitsassessmentareas,with themajorityof itsinvestmentsconcentratedintheDallasassessmentarea. IntheDallasassessmentarea,examinersdeterminedthatPlainsCapitalBankprovidedan excellentlevelof qualifiedcommunitydevelopmentinvestmentsandresponsivenessto creditandcommunityneeds.Examinersnotedthattheinvestmentsprovidedsupportfor smallbusinessesandaffordablehousing,andthatcommunitycontactshadidentifiedthe needforandopportunitiestomakesuchinvestments.Examinersalsofoundthatthebank madedonationstovariousorganizationsthatprovidesupportservicestoLMIindividuals. IntheHoustonassessmentarea,examinersconcludedthatPlainsCapitalBank’sinvestmentperformancewasconsistentwithitsbank-wideinvestmentperformance. ExaminersfoundthatPlainsCapitalBank’sretaildeliverysystemswerereasonablyaccessibletothegeographiesandindividualsof differentincomelevelsinitsassessmentareas. ExaminersfurthernotedthatPlainsCapitalBank’sopeningandclosingof branchesdid notadverselyaffecttheaccessibilityof bankingservices,particularlytoLMIgeographies and/orindividuals.Further,examinersfoundthatthebankingservicesandbusinesshours didnotvaryinawaythatinconveniencedanyportionof thebank’sassessmentareas, particularlyLMIgeographiesandindividuals.However,examinersfoundthat PlainsCapitalBankprovidedonlyalimitedlevelof communitydevelopmentservicesthat benefitedallof itsassessmentareasandthatsuchserviceswereconcentratedintheDallas assessmentarea. IntheDallasassessmentarea,examinersconcludedthatPlainsCapitalBankprovideda relativelyhighlevelof communitydevelopmentservices.Examinersalsofoundthat PlainsCapitalBank’sdeliverysystemswereaccessibletothebank’sgeographiesandto individualsof differentincomelevelsintheassessmentareaandservicesdidnotvaryina waythatwouldinconvenienceLMIgeographiesorindividuals.IntheHoustonassessment area,examinersconcludedthatPlainsCapitalBank’sserviceperformancewasconsistent withitsbank-wideserviceperformance. PlainsCapitalBank’sEffortssincethe2015CRAEvaluation PlainsCapitalBankrepresentsthatsincethePlainsCapitalBankEvaluation,ithas continuedtoofferseverallendinganddepositproductsspecificallydesignedforLMIpopulationsthatareutilizedbyindividualsandbusinessesinLMIand/orminoritycensustracts, includinginitsHoustonandDallasassessmentareas.Suchproductsincludeaclosing-cost assistanceprogramofferedbyPrimeLendingandits“SimplyFree”and“BusinessFree” checkingaccounts,whichareconsumerandbusinesscheckingaccountswithnominimum balanceormonthlyfees.PlainsCapitalBankalsoparticipatesintheFederalHomeLoan Bankof DallasHomebuyerEquityLeveragePartnership,whichprovideslow-income, qualifiedfirst-timehomebuyerswithdown-paymentassistance. PlainsCapitalBankrepresentsthatithascontinueditsstrongcommitmenttoservingthe bankingneedsof itsassessmentareas,includingtheHoustonandDallasassessmentareas, throughcommunitydevelopmentlending,investments,andservices.Forexample,thebank representsthatithasmadecommunitydevelopmentloansthatprovidedfundingforsmall businessesandsupportedaffordablehousingprojects,includingaloantosupportan affordablehousingcomplexinanLMI,majority-minoritycensustractwithintheHouston assessmentarea.PlainsCapitalBankalsorepresentsthatithasmadeanumberof

LegalDevelopments:FirstQuarter,2017 235 communitydevelopmentinvestmentsthatsupportedaffordablehousingdevelopmentsin LMIareas,includingwithintheDallasandHoustonassessmentareas.Thebankrepresents thatithascontinuedtomakedonationstoorganizationsthatfocusonprovidingservicesto LMIandminorityindividualsandcommunities.Additionally,PlainsCapitalBankrepresentsthatbankemployeeshaveactivelyparticipatedinavarietyof volunteeractivitiesin itsassessmentareas,suchasfinancialliteracyclassesatlocalschoolsinDallasand Houston,includingschoolswithprimarilyLMIandminoritystudents. AdditionalSupervisoryViews TheBoardhasconsideredtheresultsof arecentconsumercomplianceexamination conductedbyReserveBankexaminers,whichincludedareviewof thebank’scompliance riskmanagementprogramandthebank’scompliancewithconsumerprotectionlawsand regulations.Aspartof theconsumercomplianceexamination,ReserveBankexaminers alsoevaluatedPlainsCapitalBank’sfairlendingcompliancemanagementprogram,which includedanevaluationof thebank’sfairlending-relatedpolicies,procedures,andlimits; boardandseniormanagementoversightof thebank’sfairlendingmanagementprogram; fairlendingrisk-monitoringandmanagementinformationsystems;andinternalcontrols relatingtofairlending. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.PlainsCapitalBankrepresentsthattheproposed brancheswouldprovidebenefitstothebank’scurrentcustomersandtothecommunityas awhole.BothbrancheswillbeinCollinCounty,Texas,wherethebankcurrentlyonlyhas asinglebranch.Thebankassertsthattheproposedbrancheswillbeinapedestrianfriendlyareaandwillincreasetheaccessibilityof thebank’sproductsandservices,particularlytoretailcustomers. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordof PlainsCapitalBankanditsrecententryintotheHoustonbankingmarket;thebank’s recordof compliancewithfairlendingandotherconsumerprotectionlaws;confidential supervisoryinformation;informationprovidedbyPlainsCapitalBank;thepublic commentsontheproposal;andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthat theconvenienceandneedsfactorisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.TheBoard’sapprovalisspecificallyconditionedon PlainsCapitalBank’scompliancewithallthecommitmentsmadetotheBoardinconnectionwiththeproposalaswellasallconditionsimposedinthisorder.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranches withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBank,actingunderauthoritydelegatedbytheBoard.

236 FederalReserveBulletin|June2017 Byorderof theBoardof Governors,effectiveFebruary24,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard

237 Federal Reserve BULLETIN October 2017 Vol. 103, No. 4 Legal Developments: Second Quarter, 2017 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act United Bankshares, Inc. Charleston, West Virginia OrderApprovingtheAcquisitionof aBankHoldingCompany,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2017–10(April6,2017) UnitedBankshares,Inc.(“UBI”),Charleston,WestVirginia,anditssubsidiary,UBV HoldingCompany,LLC(“UBV”,andtogetherwithUBI,“United”),Fairfax,Virginia, bothbankholdingcompanieswithinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1haverequestedtheBoard’sapprovalundersection3of theBHCAct2 toacquireCardinalFinancialCorporation(“Cardinal”)andtherebyindirectlyacquire CardinalBank,bothof McLean,Virginia. Inaddition,United’ssubsidiarystatememberbank,UnitedBank(“UnitedBank- Virginia”),Fairfax,Virginia,hasrequestedtheBoard’sapprovalundersection18(c)of the FederalDepositInsuranceAct(“BankMergerAct”)tomergewithCardinalBank,with UnitedBank-Virginiaasthesurvivingentity.3UnitedBank-Virginiaalsohasappliedunder section9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthemain officeandbranchesof CardinalBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister74803(October27,2016)).5Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). UBI,withconsolidatedassetsof approximately$14.3billion,isthe99thlargestinsured depositoryorganizationintheUnitedStates.6UBIcontrolsapproximately$10.6billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedintheAppendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofSeptember30,2016,unlessotherwisenoted.Stateasset data,marketshare,andrankingdataareasofJune30,2016,unlessotherwisenoted.

238 FederalReserveBulletin|October2017 of insureddepositoryinstitutionsintheUnitedStates.7UBIcontrolstwosubsidiarybanks, UnitedBank-VirginiaandUnitedBank,Inc.(“UnitedBank-WestVirginia”),Parkersburg, WestVirginia,8whichoperateintheDistrictof Columbia,Maryland,Ohio,Pennsylvania, Virginia,andWestVirginia.UBIisthe10thlargestinsureddepositoryorganizationinthe Districtof Columbia,controllingdepositsof approximately$1.1billionintheDistrictof Columbia,whichrepresent2.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatjurisdiction.Inaddition,UBIisthe18thlargestinsureddepositoryorganizationinMaryland,controllingdepositsof approximately$761.1millioninMaryland,which represent0.6percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate, andthe8thlargestinsureddepositoryorganizationinVirginia,controllingdepositsof approximately$4.1billioninVirginia,whichrepresent1.5percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Cardinal,withconsolidatedassetsof approximately$4.2billion,isthe228thlargest insureddepositoryorganizationintheUnitedStates.Cardinalcontrolsapproximately $3.2billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Cardinal controlsCardinalBank,whichoperatesintheDistrictof Columbia,Maryland,and Virginia.Cardinalisthe19thlargestinsureddepositoryorganizationintheDistrictof Columbia,controllingdepositsof approximately$133.8millionintheDistrictof Columbia,whichrepresent0.3percentof thetotaldepositsof insureddepositoryinstitutionsinthatjurisdiction.Inaddition,Cardinalisthe43rdlargestinsureddepositoryorganizationinMaryland,controllingdepositsof approximately$188.6millioninMaryland, whichrepresent0.2percentof thetotaldepositsof insureddepositoryinstitutionsinthat state,andthe10thlargestinsureddepositoryorganizationinVirginia,controllingdeposits of approximately$3.0billioninVirginia,whichrepresent1.1percentof thetotaldeposits of insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,UBIwouldbecomethe86thlargestinsureddepository organizationintheUnitedStates,withconsolidatedassetsof approximately$18.6billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.UBIwouldcontrolconsolidateddepositsof approximately$13.8billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.IntheDistrictof Columbia,UBIwouldbecomethe9th largestinsureddepositoryorganization,controllingdepositsof approximately$1.2billion intheDistrictof Columbia,whichrepresent2.7percentof thetotaldepositsof insured depositoryinstitutionsinthatjurisdiction.InMaryland,UBIwouldbecomethe16th largestinsureddepositoryorganization,controllingdepositsof approximately $949.7millioninMaryland,whichrepresent0.7percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.InVirginia,UBIwouldbecomethe7thlargestinsured depositoryorganization,controllingdepositsof approximately$7.1billioninVirginia, whichrepresent2.6percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsassociations, andsavingsbanks. 8 UnitedBank-VirginiaisawhollyownedsubsidiaryofUBV,andUBVisawhollyownedsubsidiaryofUBI. UBIcontrolsUnitedBank-WestVirginia,astatememberbank,throughaseparatemid-tierholdingcompany, UBCHoldingCompany,Inc.,Charleston,WestVirginia.

LegalDevelopments:SecondQuarter,2017 239 banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.9Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforthe lesserof thestatestatutoryminimumperiodof timeorfiveyears.10Inaddition,theBoard maynotapproveaninterstateapplicationif thebankholdingcompanycontrols,orwould uponconsummationof theproposedtransactioncontrol,morethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates11or,incertaincircumstances,if thebankholdingcompanywoulduponconsummationcontrol30percentor moreof thetotaldepositsof insureddepositoryinstitutionsinanystateinwhichthe acquirerandtargethaveoverlappingbankingoperations.12 Forpurposesof theBHCAct,thehomestateof UBIisWestVirginia,andthehomestate of bothUBVandCardinalBankisVirginia.13CardinalBankisalsolocatedintheDistrict of ColumbiaandMaryland.UBIandUBVarewellcapitalizedandwellmanagedunder applicablelaw,andUnitedBank-Virginiahasan“Outstanding”CommunityReinvestment Act(“CRA”)14rating.Therearenominimumagerequirementsunderthelawsof the Districtof Columbia,Maryland,orVirginiathatwouldapplytoUnited’sacquisitionof Cardinal,andCardinalBankhasbeeninexistenceformorethanfiveyears.15 Onconsummationof theproposedtransaction,UBIwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.Inaddition,thecombinedorganizationwouldcontrollessthan30percentof the totalamountof depositsof insureddepositoryinstitutionsintheDistrictof Columbia, Maryland,andVirginia,theonlystatesinwhichUnitedandCardinalhaveoverlapping bankingoperations.TheBoardhasconsideredallotherrequirementsundersection3(d)of theBHCAct,includingUnited’srecordof meetingtheconvenienceandneedsof the communitiesitserves.Accordingly,inlightof allthefactsof record,theBoardmay approvetheproposalundersection3(d)of theBHCAct.16 9 12U.S.C.§1842(d)(1)(A). 10 12U.S.C.§1842(d)(1)(B). 11 Similarly,theBankMergerActprovidesthat,ingeneral,theBoardmaynotapproveabankmergerifthe transactioninvolvesinsureddepositoryinstitutionswithdifferenthomestatesandtheresultingbankwould controlmorethan10percentofthetotalamountofdepositsofinsureddepositoryinstitutionsintheUnited States.12U.S.C.§1828(c)(13).ForpurposesoftheBankMergerAct,thehomestateofbothUnitedBank- VirginiaandCardinalBankisVirginia.12U.S.C.§1828(c)(13)(C)(ii)(II).Accordingly,thedepositcaprequirementoftheBankMergerActdoesnotapplytotheproposedbankmerger. 12 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). 13 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 14 12U.S.C.§2901etseq. 15 SeeD.C.Code§26-737;Md.CodeAnn.,Fin.Inst.§§5-901to5-910;Va.CodeAnn.§6.1-44.18. 16 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).ThehomestateofbothUnitedBank-VirginiaandCardinalBankisVirginia; therefore,section102oftheRiegle-NealActdoesnotapplytotheproposedbankmerger.Id.

240 FederalReserveBulletin|October2017 CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.17 UBIandCardinalhavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Washington,Districtof Columbia,bankingmarket(“Washingtonmarket”)andthe Fredericksburg,Virginia,bankingmarket(“Fredericksburgmarket”).18TheBoardhas consideredthecompetitiveeffectsof theproposalinthesebankingmarketsinlightof all thefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthemarkets;therelativesharesof totaldepositsininsureddepository institutionsinthemarkets(“marketdeposits”)thatUBIwouldcontrol;19theconcentration levelsof marketdepositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”);20andothercharacteristicsof the markets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheWashingtonandFredericksburg markets.Onconsummationof theproposal,theWashingtonmarketwouldremain unconcentratedandtheFredericksburgmarketwouldremainmoderatelyconcentrated,as measuredbytheHHI.ThechangeintheHHIinthesemarketswouldbesmall,and numerouscompetitorswouldremaininthemarkets.21 17 12U.S.C.§1842(c)(1)and1828(c)(5). 18 TheWashingtonmarketisdefinedastheDistrictofColumbia;Calvert,Charles,Frederick,Montgomery,and PrinceGeorge’scounties,allinMaryland;District7inAnneArundelCounty,Maryland;theClarksvilleand SavagedistrictsinHowardCounty,Maryland;Arlington,Culpeper,Fairfax,Fauquier,Loudoun,Prince William,Rappahannock,Stafford,andWarrencountiesinVirginia;thecitiesofAlexandria,Fairfax,Falls Church,Manassas,andManassasPark,allinVirginia;andJeffersonCounty,WestVirginia.The FredericksburgmarketisdefinedasthecityofFredericksburg,Virginia;andCaroline,KingGeorge,Orange, Spotsylvania,andWestmorelandcounties,allinVirginia. 19 DepositandmarketsharedataareasofJune30,2016,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). 20 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. 21 UBIoperatesthe8thlargestdepositoryinstitutionintheWashingtonmarket,controllingapproximately $5.5billionindeposits,whichrepresentapproximately2.9percentofmarketdeposits.Cardinaloperatesthe 11thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$3.2billion,which represent1.7percentofmarketdeposits.Onconsummationoftheproposedtransaction,UBIwouldbecome the7thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$8.7billion,which representapproximately4.6percentofmarketdeposits.TheHHIfortheWashingtonmarketwouldincreaseby 10pointsto995,and81competitorswouldremaininthemarket.

LegalDevelopments:SecondQuarter,2017 241 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe WashingtonandFredericksburgmarkets.Inaddition,theappropriatebankingagencies havebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheWashingtonorFredericksburgbankingmarketsorinanyotherrelevant bankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsare consistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders thefinancialandmanagerialresourcesandthefutureprospectsof theinstitutions involved.22Initsevaluationof 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 theproposalandtocompleteeffectivelytheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapital adequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesand theproposedbusinessplan. UBIandCardinalarewellcapitalized,andthecombinedentitywouldremainsoon consummationof theproposedtransaction.Theproposedtransactionisabankholding companymergerthatisstructuredasashareexchange,withasubsequentmergerof UnitedBank-VirginiaandCardinalBank.23Theassetquality,earnings,andliquidityof UnitedBank-VirginiaandCardinalBankareconsistentwithapproval,andUnitedappears tohaveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegration of theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords UBIoperatesthe9thlargestdepositoryinstitutionintheFredericksburgmarket,controllingapproximately $55.4millionindeposits,whichrepresentapproximately1.8percentofmarketdeposits.Cardinaloperatesthe 10thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$43.9million, whichrepresent1.4percentofmarketdeposits.Onconsummationoftheproposedtransaction,UBIwould becomethe8thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $99.3million,whichrepresentapproximately3.2percentofmarketdeposits.TheHHIfortheFredericksburg marketwouldincreaseby5pointsto1749,and16competitorswouldremaininthemarket. 22 12U.S.C.§§1842(c)(2),(5),and(6);and1828(c)(5)and(11). 23 ApplicantswouldmergeCardinalwithandintoUBV(withUBVasthesurvivor).Atthetimeofthemerger, eachshareofCardinalcommonstockwouldbeconvertedintoarighttoreceiveUBIcommonstock,basedon anexchangeratio;holdersoffractionalshareswouldbeentitledtoacashequivalent.Unitedhasthefinancial resourcestofundthecashportionoftheexchange.

242 FederalReserveBulletin|October2017 of United,Cardinal,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyUnited;theBoard’ssupervisoryexperiencesandthose of otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’ recordsof compliancewithapplicablebanking,consumerprotection,andanti-moneylaunderinglaws. UBI,UBV,Cardinal,andtheirsubsidiarydepositoryinstitutionsareconsideredtobewell managed.Unitedhasarecordof successfullyintegratingorganizationsintoitsoperationsandrisk-managementsystemsafteracquisitions.United’sdirectorsandseniorexecutiveofficershaveknowledgeof andexperienceinthebankingandfinancialservicesectors, andUnited’srisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredUnited’splansforimplementingtheproposal.Unitedhas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.With certainexceptions,Unitedwouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,United’smanagementhastheexperienceandresourcesto operatethecombinedorganizationinasafeandsoundmanner,andUnitedplanstointegrateCardinal’sexistingmanagementandpersonnelinamannerthataugmentsUnited’s management.24 Basedonallthefactsof record,includingUnited’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof UnitedandCardinalincombattingmoney-launderingactivities, areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.25Initsevaluationof theeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCRA.TheCRArequiresthefederalfinancial supervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,26andrequirestheappropriatefederalfinancialsupervisoryagencytoassessa depositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, 24 Onconsummation,theUBIboardofdirectorswouldbeincreasedbyone,andanindividualcurrentlyserving asanexecutivedirectorontheboardofdirectorsofCardinalandCardinalBankwouldserveontheUBI board.Additionally,theUnitedBank-Virginiaboardofdirectorswouldbeincreasedbytwoindividualsthat wouldbechosenbyCardinal. 25 12U.S.C.§§1842(c)(2)and1828(c)(5). 26 12U.S.C.§2901(b).

LegalDevelopments:SecondQuarter,2017 243 includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.27 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair 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 United Bank-VirginiaandCardinalBank;thefairlendingandcompliancerecordsof bothbanks; thesupervisoryviewsof theFDIC;confidentialsupervisoryinformation;information providedbyUnited;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal TheBoardreceivedcommentsfromtwocommentersopposingtheproposal.28Both commentersobjectedtotheproposalonthebasisof allegeddisparitiesinthenumberof residentialrealestateloansmadetominorityborrowers,ascomparedtowhiteborrowers, byUnitedBank-VirginiaintheWashington,Districtof Columbia,MetropolitanStatistical Area(“WashingtonMSA”),asreflectedindatareportedundertheHomeMortgage DisclosureAct(“HMDA”)29fortheyears2013through2015.Onecommenteralso assertedthat,intheWashingtonMSA,UnitedBank-Virginiamadeadisproportionately lownumberof homepurchaseloanstomajority-minorityandLMIcensustracts,and UnitedBank-WestVirginiamadeadisproportionatelylownumberof homepurchaseloans toLMIborrowers,asreportedunderHMDAfor2013through2015.Additionally,a commentercriticizedtherateatwhichGeorgeMasonMortgage,LLC(“GeorgeMason”), asubsidiaryof CardinalBank,deniedapplicationsbyAfricanAmericansandHispanics, comparedtotherateof denialsforwhites,forconventionalhomepurchaseloansinthe WashingtonMSA,asreportedunderHMDAfor2015. OnecommenteralsogenerallyallegedthatUnitedBank-VirginiaandUnitedBank-West Virginiahaveinadequaterecordsof helpingtomeettheconvenienceandneedsof the communitieswheretheydobusinessbecauseUnitedBank-Virginiareceiveda“LowSatisfactory”ratingonitsServiceTestintheCommonwealthof VirginiaandUnitedBank- WestVirginiareceiveda“LowSatisfactory”ratingonitsInvestmentTestfortheoverall bankandintheWheeling,WestVirginia-OhioMultistateMetropolitanStatisticalArea, theStateof WestVirginia,andtheCommonwealthof Pennsylvania,inthebanks’most recentCRAexaminations,bothasof 2015. 27 12U.S.C.§2903. 28 OnecommenterrequestedthattheBoardnotapprovetheproposaluntilUnitedentersintoacommunity benefitsplanthatoutlineshowthebankplanstohelpmeettheconvenienceandneedsofthecommunitiesit serves.TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganizations.See,e.g.,HuntingtonBancsharesInc.,FRBOrderNo.2016-13at32n.50(July29,2016);CITGroup, Inc.,FRBOrderNo.2015-20at24n.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485(2002); FifthThirdBancorp,80FederalReserveBulletin838,841(1994).Initsevaluation,theBoardreviewsthe existingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethe creditneedsofitsCRAassessmentareas. 29 12U.S.C.§2801etseq.

244 FederalReserveBulletin|October2017 Businessof theInvolvedInstitutionsandResponsetoComments UnitedBank-Virginiaoffersabroadrangeof retailandcommercialbankingproductsand servicestoconsumersandbusinesses.Throughitsnetworkof 54brancheslocatedinthe Districtof Columbia,Maryland,andVirginia,UnitedBank-Virginiaoffersavarietyof bankingproducts,includingcommercial,residential,agricultural,andconsumerloans. CardinalBankoffersasimilarrangeof retailandcommercialproductsthrough29 brancheslocatedintheDistrictof Columbia,Maryland,andVirginia.Itsproductsinclude checkingandsavingsaccounts,certificatesof deposit,residentialmortgages,treasury managementservices,commercialandconsumerloans,andbrokerageservices.Cardinal Bankalsoprovidesresidentialmortgagesthroughitssubsidiary,GeorgeMason. Inresponsetothecomments,UnitedrepresentsthatUnitedBank-VirginiaandCardinal Bankarecurrentlymeetingthecreditneedsof theircommunities,includingLMIand minorityindividuals,thattheproposalwouldbenefittheexistingcustomersof bothUnited Bank-VirginiaandCardinalBank,andthatthecombinedinstitutionwouldcontinueto meetthecreditneedsof itsentirecommunityfollowingconsummationof theproposal. UnitedrepresentsthatbothUnitedBank-VirginiaandCardinalBankhaveinstitutedpoliciesandprocedurestohelpensurecompliancewithallfairlendingandotherconsumer protectionlawsandregulations. WithrespecttoUnitedBank-Virginia’slendingintheWashingtonMSA,Unitedrepresents thatithastakenanumberof steps,includingcreatingapositionsolelydedicatedtoitsfair lendingprogram,tobetterserveminoritycommunities.UnitedalsonotesthatUnited Bank-Virginia’srecordof lendingintheWashingtonMSAshowsapositivetrendinthe numberof homepurchaseloanslocatedinmajority-minoritycensustracts.Additionally, Unitednotesthat,whenUnitedBank-Virginia’slendinginallHMDAcategoriesisconsidered,thebankoutperformedpeerlendersinlendinginLMIareasin2014.Unitedalso assertsthatthehousingmarketisrelativelyexpensiveintheWashingtonMSA,which hinderstheabilityof low-incomeborrowerstopurchasehomesinthearea,meaningthat UnitedBank-Virginiahasfewpotentiallow-incomemortgagecustomers.Inaddition, Unitedrepresentsthatasubstantialamountof itssmallbusinesslendingwithintheWashingtonMSAismadetobusinesseslocatedinmajority-minoritycensustracts. UnitedarguesthatUnitedBank-Virginia’soverallCRAratingof “Outstanding”and UnitedBank-WestVirginia’soverallCRAratingof “Satisfactory”areconsistentwith approval,notwithstandingthespecificratingsnotedbyacommenter.Unitednotesthat UnitedBank-Virginiareceivedanoverallbankwide“HighSatisfactory”ratingonthe ServiceTestandthat,intheCommonwealthof Virginia,examinersfoundthatthebank’s deliverysystemsandbranchlocationswereaccessibletoallsegmentsof theassessment areasandthatthebankhadanadequatelevelof participationinqualifiedcommunity developmentservicesthatgenerallybenefitaffordablehousingandmicro-enterprise development. Withrespecttoacommenter’sallegationregardingUnitedBank-WestVirginia’srecordof lendingtoLMIindividualswithintheWashingtonMSA,UnitednotesthatUnitedBank- WestVirginiaoutperformedpeerlenders,whenconsideringallcategoriesof HMDAloans, inLMIareaswithintheWashingtonMSA.Additionally,UnitednotesthatUnitedBank- WestVirginia’sdistributionof HMDAloansbylevelof borrowerincomefortheyears 2013through2015wassimilartothatof theaggregateof lendersintheWashingtonMSA, andthatthebank’slendingtoLMIborrowersintheWashingtonMSAasreportedin 2015HMDAdataoutperformedpeerlenders.

LegalDevelopments:SecondQuarter,2017 245 Inresponsetoonecommenter’scriticismof UnitedBank-WestVirginia’s“LowSatisfactory”CRAratingontheInvestmentTestfortheoverallbankandinseveralof thebank’s assessmentareas,UnitednotesthatUnitedBank-WestVirginiahassignificantlyincreased itslevelof communitydevelopmentinvestmentsincethebank’smostrecentCRAexamination.UnitedalsorepresentsthatUnitedBank-WestVirginiaistakingstepstoimproveits investmentperformanceinPennsylvaniaandWestVirginia,includingcreatingnewpartnershipswithcommunitydevelopmentfinanceinstitutions,startingarelationshipwitha companythatisawaitingaSmallBusinessInvestmentCompanydesignationfromthe UnitedStatesSmallBusinessAdministration,andmakinganinvestmentinaschool districtinwhichamajorityof studentsqualifyforafreeorreduced-pricelunch. WithrespecttoGeorgeMason’slendingintheWashingtonMSA,Unitedrepresentsthat GeorgeMasonoutperformedpeerlendersinlendinginLMIareas.Additionally,United assertsthatGeorgeMasonconductsvariousactivitiesthatarefocusedonservingminority andLMIcommunities,includingmarketingandoutreachtohistoricallyunderserved neighborhoodsandpopulations;periodicreviewsof GeorgeMason’spolicies,procedures, andlendingoutcomestoensurethatlenderdiscretionisclearlyoutlinedandtoconfirm compliancewithfairlendinglaws;andcommunityoutreacheffortstosupportlendingin LMIandminorityareas.UnitedrepresentsthatGeorgeMason’sfairlendingpolicieswith respecttofirstmortgagelendingwouldbeadoptedinthecombinedentity. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheapplicant’sresponsetocomments.Inparticular,theBoardevaluates aninstitution’sperformanceinlightof examinationsbytheappropriatefederalsupervisors of theCRAperformancerecordsof therelevantinstitutions,aswellasinformationand viewsprovidedbytheappropriatefederalsupervisors.30Inthiscase,theBoardconsidered thesupervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserve Bankof Richmond(“ReserveBank”)andtheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.31Aninstitution’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 30 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 31 12U.S.C.§2906.

246 FederalReserveBulletin|October2017 farm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)the geographicdistributionof theinstitution’slendinginitsassessmentareasandthenumber andamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)the distributionof loansbasedonborrowercharacteristics,including,forhomemortgage loans,thenumberandamountof loanstolow-,moderate-,middle-,andupper-income individuals;32(4)theinstitution’scommunitydevelopmentlending,includingthenumber andamountof communitydevelopmentloansandtheircomplexityandinnovativeness; and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecredit needsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDA data.33Consequently,HMDAdatamustbeevaluatedinthecontextof otherinformation regardingthelendingrecordof aninstitution. CRAPerformanceof UnitedBank-Virginia UnitedBank-Virginiawasassignedanoverallratingof “Outstanding”atitsmostrecent CRAperformanceevaluationbytheReserveBank,asof October19,2015(“UnitedBank- VirginiaEvaluation”).34Thebankreceivedan“Outstanding”ratingfortheLendingTest, and“HighSatisfactory”ratingsforboththeInvestmentTestandtheServiceTest. Examinersconcludedthatthebank’soveralllendingactivitywasexcellentrelativetothe bank’scapacitytolendandtheeconomicconditionswithinthebank’smarketareas. Examinersnotedthatasubstantialmajorityof thebank’sloansweremadetoborrowers withinitsassessmentareas.Overall,examinersfoundthatthegeographicdistributionof thebank’sloansreflectedgoodpenetrationthroughoutitsassessmentareasandthatthe distributionof itsborrowersreflectedgoodpenetrationamongborrowersof different incomelevelsandbusinessesof differentsizes.Additionally,examinersfoundthatUnited Bank-Virginiawasaleaderincommunitydevelopmentlending. IntheWashington,D.C.,assessmentarea,anareaof concernforthecommenters,United Bank-Virginia’sperformanceundertheLendingTestwasrated“Outstanding.”Examiners foundthatthebank’slendingactivityintheassessmentareawasconsistentwiththebank’s capacityandhelpedtomeetidentifiedcommunitycreditneeds.Additionally,examiners foundthatthegeographicdistributionof thebank’sloansintheWashington,D.C.,assessmentareawasexcellent,whiletheoverallborrowerdistributionwasgood.Examinersalso 32 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 33 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 34 TheUnitedBank-VirginiaEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. Examinersreviewedhomemortgageloansreported,pursuanttoHMDA,andsmallbusinessandsmallfarm loansreportedunderCRAdatacollectionrequirementsfor2013and2014.Theevaluationperiodforcommunitydevelopmentlending,investments,andserviceswasJune4,2013,throughOctober19,2015. TheUnitedBank-VirginiaEvaluationincludedfull-scopeevaluationsoftheWashington-Baltimore-Arlington, D.C.-Maryland-Virginia-WestVirginia-Pennsylvania,CombinedStatisticalArea(“WashingtonCSA”)andthe Harrisonburg-Staunton-Waynesboro,Virginia,CSA.Limitedscopeevaluationswereperformedinthe Charlottesville,Virginia,MSAandinShenandoahCounty,Virginia.

LegalDevelopments:SecondQuarter,2017 247 notedthatUnitedBank-Virginiawasaleaderinprovidingcommunitydevelopmentloans intheassessmentarea. IntheCommonwealthof Virginia,anotherareaof concerntoacommenter,UnitedBank- Virginia’sperformanceundertheLendingTestwasrated“HighSatisfactory.”Examiners foundthatthebank’slendingactivitywithinthestatewidemarketwasconsistentwiththe bank’scapacityandthatthebankofferedabroadrangeof loanproductstomeettheneeds of thestatewidearea.Examinersalsonotedthatthebank’sborrowerdistribution throughoutthestatewasgoodandthegeographicdistributionof itsloanswasadequate. WithrespecttotheInvestmentTest,examinersfoundthatthebankhadahighlevelof participationincommunitydevelopmentinvestments,showingresponsivenesstocommunitycreditneeds.Examinersnotedthatthebankmadeanumberof investmentstosupport affordablehousinginitiatives,aswellascharitabledonationstoavarietyof community developmentorganizationsthatfacilitatesmallbusinessdevelopment,revitalizeorstabilize LMIgeographies,andfocusonlocaljobcreationwithinthebank’sassessmentareas.In boththeWashington,D.C.,assessmentareaandVirginia,UnitedBank-Virginia’sperformanceundertheInvestmentTestwasrated“HighSatisfactory.”Examinersinbothareas foundthatthebankmaintainedasignificantlevelof qualifiedinvestmentsthatbenefitthe bank’smarketareas. ExaminersfoundUnitedBank-Virginia’sdeliverysystemsandbranchlocationstobe accessibletoallsegmentsof thebank’sassessmentareas.Examinersnotedthatbranch closingsbythebankhadnotadverselyaffectedLMIneighborhoods.Additionally,examinersnotedthatthebankengagedinahighlevelof communitydevelopmentservices withinitsprimarymarketareas.Overall,examinersnotedthatthebankshowedahighlevel of supportforaffordablehousingefforts,communityservices,andeconomicdevelopment withinitsassessmentareas. IntheWashington,D.C.,assessmentarea,examinersratedUnitedBank-Virginia’sperformanceontheServiceTestas“HighSatisfactory.”Examinersnotedthatthebank’sdelivery systemsandbranchlocationswereaccessibletoallsegmentsof theassessmentareaand thatthebankhadarelativelyhighlevelof participationinqualifiedcommunitydevelopmentservicesbenefitingtheassessmentarea. InVirginia,UnitedBank-Virginia’sperformanceontheServiceTestwasratedas“Low Satisfactory.”Examinersfoundthatthebank’sdeliverysystemsinVirginiawerereasonably accessibletoallportionsof UnitedBank-Virginia’smarketareasandtopeopleof various incomelevels.Additionally,examinersnotedthattheproductsandservicesofferedby UnitedBank-VirginiawithinVirginiawererepresentativeof thoseofferedbytheinstitution overallandthatthebank’semployeesparticipatedinanadequatelevelof community developmentactivitiesinvolvingtheprovisionof financialexpertisetoorganizations assistinginsmallbusinessfunding. UnitedBank-Virginia’sEffortssincethe2015CRAEvaluation UnitedrepresentsthatUnitedBank-VirginiahastakenstepstofurtherstrengthenitsCRA performancesincetheUnitedBank-VirginiaEvaluation.UnitedBank-Virginiaasserts thatithascontinuedtoofferseveralspecialloanprogramsthroughoutitsassessmentareas thatbenefitLMIborrowers,smallbusinesses,affordablehousingprojects,andother communitydevelopmentinitiatives.Additionally,UnitedBank-Virginiarepresentsthatit hasincreasedthenumberanddollaramountof donationstocommunitydevelopment activitiesandsocialserviceorganizationsinitsassessmentareas,andthatthebank’s employeeshavevolunteeredbyteachingfinancialliteracytostudentsat75localschools.

248 FederalReserveBulletin|October2017 CRAPerformanceof UnitedBank-WestVirginia UnitedBank-WestVirginiareceiveda“Satisfactory”CRAperformanceratingonitsmost recentCRAexaminationbytheReserveBank,asof October19,2015(“UnitedBank-West VirginiaEvaluation”).35Thebankreceivedratingsof “HighSatisfactory”fortheLending Test,“LowSatisfactory”fortheInvestmentTest,and“Outstanding”fortheServiceTest. ExaminersfoundthatUnitedBank-WestVirginia’soveralllendinglevelswereconsistent withthebank’scapacityandmarketpresence.Accordingtoexaminers,ahighpercentage of theinstitution’sreportedHMDAandsmallbusinessloanswasoriginatedwithinthe bank’sassessmentareas.Additionally,examinersnotedthatthegeographicdistributionof thebank’slendingwasexcellentoverall.Examinersalsofoundthatthebank’sborrower distributionperformancewasgoodoverall. IntheWashington,D.C.,assessmentarea,Wheelingassessmentarea,theStateof West Virginia,andtheCommonwealthof Pennsylvania,examinersratedUnitedBank-West Virginia’sperformanceontheLendingTestas“HighSatisfactory.”IntheWashington, D.C.,assessmentarea,examinersfoundthatthebank’slendingactivitywasconsistentwith thebank’scapacityandhelpedtomeetidentifiedcommunitycreditneeds.Additionally, examinersnotedthatthegeographicdistributionof thebank’slendingwasexcellent,while theborrowerdistributionof loanswasgood.Examinersalsonotedthatthebankoriginatedarelativelyhighlevelof communitydevelopmentloans. IntheWheelingassessmentarea,examinersfoundthatthebank’slendingactivitywas goodandconsistentwiththebank’scapacityandthatithelpedtomeetidentifiedcredit needs.Examinersnotedthatthegeographicandborrowerlendingdistributionswithinthe assessmentareawasgoodforeachlendingproductreviewed.Additionally,examiners foundthatthebankoriginatedanadequatelevelof communitydevelopmentloanswithin theassessmentarea. InWestVirginiaandPennsylvania,examinersfoundthatthebank’slendingactivityin bothstateswasconsistentwiththebank’scapacityandthatthebankofferedabroadspectrumof loanproductsinanefforttomeetlocalcreditneeds.Examinersnotedthatthe geographicdistributionof thebank’slendingwithinthestateswasexcellentandadequate, respectively,whileborrowerlendingdistributionwasgood.Additionally,examinersfound thatthebankwasaleaderinprovidingcommunitydevelopmentloanswithinthestates. Asnoted,UnitedBank-WestVirginia’soverallperformanceundertheInvestmentTestwas rated“LowSatisfactory.”Examinersnotedthatthebankmaintainedanadequatelevelof qualifiedcommunitydevelopmentinvestmentswhenconsideringtheavailableopportunitiesforsuchinvestments.ExaminersalsonotedthatthebankhadmadecharitabledonationssupportingorganizationswhoseoperationsprimarilysupportLMIindividuals. 35 TheUnitedBank-WestVirginiaEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedhomemortgageloansreported,pursuanttoHMDA,andsmallbusinessandsmall farmloansreportedunderCRAdatacollectionrequirementsfor2013and2014.Examinersreviewedqualified communitydevelopmentloansthatwereoriginatedfromJune3,2013,throughOctober19,2015.TheevaluationperiodforinvestmentsandserviceswasJune3,2013,throughOctober19,2015. TheUnitedBank-WestVirginiaEvaluationincludedfull-scopeevaluationsoftheWashingtonCSA;the Wheeling,WestVirginia-Ohio,CSA(“Wheelingassessmentarea”);theCharleston-Huntington-Ashland,West Virginia-Ohio-Kentucky,CSA;theMorgantown,WestVirginia,MSA;theBraxton,WestVirginia, nonmetropolitanstatisticalarea;andthePittsburgh,Pennsylvania,MSA.Limitedscopeevaluationswere performedintheBeckley,WestVirginia,MSA;theParkersburg-Marietta-Vienna,WestVirginia-Ohio,MSA; theWeirton-Steubenville,WestVirginia-Ohio,MSA;andtheJackson,WestVirginia,nonmetropolitanstatisticalarea.

LegalDevelopments:SecondQuarter,2017 249 ExaminersratedUnitedBank-WestVirginia’sperformanceundertheInvestmentTestas “HighSatisfactory”withintheWashington,D.C.,assessmentarea.Examinersfoundthat thebank’slevelof qualifiedinvestmentsmaintainedgoodresponsivenessintheassessment area.IntheWheelingassessmentarea,theStateof WestVirginia,andtheCommonwealthof Pennsylvania,examinersratedthebank’sperformanceundertheInvestmentTest as“LowSatisfactory.”Ineachof thesegeographicalareas,examinersfoundthatthebank maintainedanadequatelevelof qualifiedinvestments. ExaminersfoundthatUnitedBank-WestVirginia’sdeliverysystemsandbranchlocations werereadilyaccessibletoallsegmentsof thebank’sassessmentareas.Additionally, examinersnotedthatthebankwasaleaderinsupportingcommunitydevelopmentservices throughoutitsassessmentareas. IntheWashington,D.C.,assessmentareaandtheWheelingassessmentarea,examiners ratedUnitedBank-WestVirginia’sperformanceintheServiceTestas“HighSatisfactory.” Examinersnotedthat,inbothareas,thebank’sdeliverysystemsandbranchlocationswere readilyaccessibletoallsegmentsof theassessmentareaandthatthebankhadan adequatelevelof participationinqualifiedcommunitydevelopmentservicesbenefitingthe assessmentarea.InWestVirginia,examinersratedthebank’sperformanceintheService Testas“Outstanding.”Examinersfoundthatthebank’sdeliverysystemsandbranchlocationswerereadilyaccessibletoallsegmentsof thebank’sassessmentareawithinthestate. Additionally,examinersnotedthatthebankwasaleaderwithinitsmarketareasinthe stateinprovidingcommunitydevelopmentservices.InPennsylvania,examinersratedthe bank’sperformanceintheServiceTestas“HighSatisfactory.”Examinersfoundthatthe bank’sdeliverysystemsandbranchlocationswereaccessibletoallsegmentsof thebank’s assessmentareawithinthestate.Additionally,examinersnotedthatthebankandits employeesparticipatedinarelativelyhighlevelof communitydevelopmentactivities. UnitedBank-WestVirginia’sEffortssincethe2015CRAEvaluation Unitedrepresentsthat,sincetheUnitedBank-WestVirginiaEvaluation,thebankhas significantlyincreaseditscommunitydevelopmentinvestmentlevels.Asnoted,United Bank-WestVirginiahasformedpartnershipsinWestVirginiatoexplorenewinvestment opportunitiesandhasmade,orisintheprocessof finalizing,investmentsinWestVirginia tosupportruralhealthdevelopmentandinPennsylvaniatosupporttheeducationof localLMIstudents. CRAPerformanceof CardinalBank CardinalBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFDIC,asof September28,2015(“CardinalBankEvaluation”).36 Thebankreceived“HighSatisfactory”ratingsfortheLendingTest,theInvestmentTest, andtheServiceTest. Examinersfoundthatthebank’soveralllendinglevelsreflectedgoodresponsivenessto creditneedsinitsassessmentarea.Examinersnotedthatasubstantialmajorityof the bank’sloansweremadetoborrowerswithinitsassessmentarea.Overall,examinersfound thatthegeographicdistributionof thebank’sloansreflectedadequatepenetration throughouttheassessmentarea.Examinersfoundthatthebank’sdistributionof 36 TheCardinalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedthebank’sloansreportedpursuanttotheHMDAandtheCRAfor2013,2014,andthefirsttwo quartersof2015.TheevaluationperiodfortheInvestmentTestandtheServiceTestwasApril30,2013, throughSeptember29,2015.TheCardinalBankEvaluationincludedafull-scopeevaluationoftheWashingtonCSA.

250 FederalReserveBulletin|October2017 borrowersreflectedagoodpenetrationamongretailcustomersof differentincomelevels. Additionally,examinersfoundthatthebankusedflexiblelendingpracticesinorderto servetheassessmentarea’screditneeds.Examinersnotedthatthebankmadearelatively highlevelof communitydevelopmentloansandthattheseloanswereresponsivetothe community’screditneeds. ExaminersfoundthatCardinalBankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsandthatthebankoccasionallyactedinaleadershippositionforsuchinvestments.Examinersnotedthatthebankexhibitedagoodresponsiveness tothecreditandcommunityeconomicdevelopmentneedsof itsassessmentarea. ExaminersfoundCardinalBank’sdeliverysystemstobeaccessibletoessentiallyall portionsof thebank’sassessmentarea.Examinersnotedthatthebank’sopeningand closingof brancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystems. Additionally,examinersnotedthatthebank’sservicesdidnotvaryinawaythatinconveniencedportionsof itsassessmentareaoranygroupof individuals.Examinersalsonoted thatthebankprovidedarelativelyhighlevelof communitydevelopmentservicesinits assessmentarea. AdditionalSupervisoryReviews TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexaminationsof UnitedBank-VirginiaandUnitedBank-WestVirginiaconductedbyReserveBank examiners,whichincludedareviewof thebanks’compliancerisk-managementprogram andthebanks’compliancewithconsumerprotectionlawsandregulations.Aspartof the consumercomplianceexaminations,ReserveBankexaminersalsoevaluatedUnitedBank- Virginia’sandUnitedBank-WestVirginia’sfairlendingcompliancemanagementprogram, includingthebanks’fairlending-relatedpolicies,procedures,andlimits;boardandsenior managementoversightof thebanks’fairlendingmanagementprogram;fairlendingriskmonitoringandmanagementinformationsystems;andinternalcontrolsrelatingtofair lending. TheBoardalsohasconsideredtheresultsof arecentconsumercomplianceexaminationof CardinalBankconductedbyFDICexaminers,whichincludedareviewof thebank’s compliancerisk-managementprogramandthebank’scompliancewithconsumerprotectionlawsandregulations. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Unitedrepresentsthatitplanstocontinueits currentofferingof productsandservicesuponconsummationof theproposal.Unitedalso representsthatexistingcustomersof CardinalBankwouldhaveaccesstoamoreextensivecomplementof productsandservicesthanthosecurrentlyavailabletothem,including neworenhancedproductsandservicesinareassuchasbrokerageservices,custody,trust andestateservices,businesscheckingproductsandservices,cashmanagement,government contractlending,andnonprofitservices.Additionally,Unitedassertsthatcustomersof CardinalBankwouldbenefitfromamoreexpansivebranchandATMnetwork.United alsorepresentsthatexistingcustomersof UnitedBank-Virginiawouldbenefitfromaccess toproductsandservicesofferedbyGeorgeMason.Unitedrepresentsthattheproposal wouldcreateanexpandedproductofferingforfirst-timehomebuyersandprovideadditionalopportunitiesforUnitedBank-Virginia’sLMIcustomers.

LegalDevelopments:SecondQuarter,2017 251 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyUnited,thepubliccommentsontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsconsiderationsareconsistent withapproval. TheBoardalsoexpectsUnitedtocontinuetoimproveitsperformanceundertheinvestmenttestsinWestVirginiaandPennsylvaniaandtoensurethatitseffortstohelpmeetthe convenienceandneedsof thecommunitiesitservesarecommensuratewithitssize, activities,andprominenceinitscommunities. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’srisk“tothestabilityof theUnitedStatesbankingorfinancial system.”37 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.38These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.39 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.40 37 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). 38 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 39 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 40 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition.

252 FederalReserveBulletin|October2017 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominatelyengagedinavarietyof retailcommercialbankingactivities.41Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwould notexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwith otherfirmsorthemarketsthatitwouldposeasignificantrisktothefinancialsysteminthe eventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches UnitedBank-Virginiahasappliedundersection9of theFRAtoestablishbranchesatthe currentlocationsof CardinalBank.42TheBoardhasassessedthefactorsitisrequiredto considerwhenreviewinganapplicationunderthatsection.43Specifically,theBoardhas consideredUnitedBank-Virginia’sfinancialcondition,management,capital,actionsin meetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.44Forthereasonsdiscussedinthisorder,theBoardfinds thesefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.45Inreachingitsconclusion,theBoardhasconsidered allthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHC 41 Ineachoftheactivitiesinwhichitengages,Unitedhas,andasaresultoftheproposalwouldcontinuetohave, asmallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices. 42 12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebranchesonthe sametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthat,understatelaw,maybeestablishedasanew branchoftheresultingbankorretainedasanexistingbranchoftheresultingbank.See 12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofUnitedBank-Virginia’sbrancheswouldbepermissibleunderapplicablestatelaw.SeeD.C.Code§26-735(b);Md.Code,Com.Law§5-1003(a)(3);Va.CodeAnn. §6.2-831. 43 12U.S.C.§322;12CFR208.6. 44 Uponconsummationoftheproposedtransaction,UnitedBank-Virginia’sinvestmentsinbankpremiseswould remainwithinlegalrequirementsunder12CFR208.21. 45 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.NoticeoftheproposalwaspublishedintheFederalRegisteronOctober27, 2016,andinarelevantnewspaperofgeneralcirculation(TheWashingtonPost)onOctober20,October27,and November10,2016.ThecommentperiodendedonNovember25,2016.IntheBoard’sview,thecommenter hashadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthat theBoardhasconsideredinactingontheproposal.Thecommenter’srequestdidnotidentifydisputedissuesof factmaterialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdid notdemonstratewhywrittencommentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingor

LegalDevelopments:SecondQuarter,2017 253 Act,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof this proposalisspecificallyconditionedoncompliancebyUBIandUBVwithalltheconditions setforthinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthe commitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBankactingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveApril6,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchestoBeEstablishedbyUnited ‰ 4115AnnandaleRoad Annandale,Virginia22207 Districtof ColumbiaBranches ‰ 5335LeeHighway ‰ 1776KStreet,NW Arlington,Virginia22207 Washington,DC20006 ‰ ‰ 2100NorthGlebeRoad 1825WisconsinAvenue,NW Arlington,Virginia22207 Washington,DC20007 ‰ 2505WilsonBoulevard MarylandBranches Arlington,Virginia22201 ‰ 7315WisconsinAvenue ‰ 6402WilliamsburgBoulevard Bethesda,Maryland20814 Arlington,Virginia22207 ‰ 1807RockvillePike ‰ 4300WilsonBoulevard Rockville,Maryland20852 Suite102 Arlington,Virginia22203 VirginiaBranches ‰ 1737KingStreet Alexandria,Virginia22207 meetingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord, theBoardhasdeterminedthatapublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingormeetingontheproposalisdenied.

254 FederalReserveBulletin|October2017 Community Bank System, Inc. DeWitt, New York OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2017-12(April26,2017) CommunityBankSystem,Inc.(“Community”),Dewitt,NewYork,afinancialholding companywithinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1 hasrequestedtheBoard’sapprovalundersection3of theBHCAct2toacquireMerchants Bancshares,Inc.(“Merchants”),andtherebyindirectlyacquireMerchant’ssubsidiary bank,MerchantsBank,bothof SouthBurlington,Vermont.Followingtheproposed acquisition,MerchantsBankwouldbemergedintoCommunity’ssubsidiarybank, CommunityBank,N.A.(“CommunityBank”),Canton,NewYork.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister92814(December20,2016)).4Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. Community,withconsolidatedassetsof approximately$8.7billion,isthe142ndlargest insureddepositoryorganizationintheUnitedStates.Communitycontrolsapproximately $7.1billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.5Community controlsCommunityBank,whichoperatesinNewYorkandPennsylvania. Merchants,withconsolidatedassetsof approximately$2.0billion,isthe406thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$1.5billion indeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.MerchantscontrolsMerchantsBank,which operatesinVermontandMassachusetts. Onconsummationof theproposal,Communitywouldbecomethe122ndlargestinsured depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $10.7billion,whichrepresentlessthan1percentof thetotalassetsof insureddepository organizationsintheUnitedStates.Communitywouldcontroltotaldepositsof approximately$8.6billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InVermont,Communitywould becomethe3rdlargestinsureddepositoryorganization,controllingdepositsof approximately$1.3billion,whichrepresentapproximately11.1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.6InMassachusetts,Communitywouldbecome the84thlargestinsureddepositoryorganization,controllingdepositsof approximately $92.7million,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. 1 12U.S.C.§1841etseq. 2 12U.S.C.§§1842. 3 ThemergerofMerchantsBankintoCommunityBankissubjecttoapprovaloftheOfficeoftheComptroller oftheCurrency(“OCC”),pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c). TheOCCapprovedthebankmergeronApril6,2017. 4 12CFR262.3(b). 5 NationwideassetanddepositdataareasofSeptember30,2016,unlessotherwisenoted. 6 StatedepositdataareasofJune30,2016,unlessotherwisenoted.

LegalDevelopments:SecondQuarter,2017 255 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 thebankholdingcompanycontrolsor,upon consummationof theproposedtransaction,wouldcontrolmorethan10percentof the totaldepositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,thebankholdingcompanyuponconsummationwouldcontrol30percentormore of thetotaldepositsof insureddepositoryinstitutionsinanystateinwhichtheacquirer andtargethaveoverlappingbankingoperations.9 Forpurposesof theBHCAct,thehomestateof CommunityisNewYork,andMerchants Bank’shomestateisVermont.10MerchantsBankalsooperatesinMassachusetts. Communityiswellcapitalizedandwellmanagedunderapplicablelaw,andCommunity Bankhasa“Satisfactory”ratingundertheCommunityReinvestmentActof 1977 (“CRA”).11Vermonthasnostatutoryminimumagerequirement,12andMassachusettshas nonethatappliestotheproposedacquisition.13 Onconsummationof theproposedtransaction,Communitywouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Inaddition,therearenostatesinwhichCommunityandMerchants haveoverlappingbankingoperations,suchthatastatedepositcapwouldapply.TheBoard hasconsideredallotherrequirementsundersection3(d)of theBHCAct,including Community’srecordof meetingthecreditneedsof thecommunitiesitserves.Accordingly, inlightof allthefactsof record,theBoardmayapprovetheproposalunder section3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.14TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin 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 SeeVt.Stat.Ann.tit.8,§§1051-1064,17101-17202. 13 SeeMass.Gen.Lawsch.167A,§2. 14 12U.S.C.§1842(c)(1).

256 FederalReserveBulletin|October2017 thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitytobeserved.15 CommunityBankandMerchantsBankdonotcompetedirectlyinanybankingmarket. Basedonthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialcondition of theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellas informationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsand theorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof informationregardingcapitaladequacy,assetquality,andearnings performance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions. Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. CommunityandMerchantsarebothwellcapitalizedandthecombinedorganizationwould remainsoonconsummationof theproposal.Theproposedtransactionisabankholding companymergerthatisstructuredasacashandshareexchange,withasubsequentmerger of thesubsidiarydepositoryinstitutions.16Theassetquality,earnings,andliquidityof bothCommunityBankandMerchantsBankareconsistentwithapproval,andCommunity appearstohaveadequateresourcestoabsorbthecostsof theproposalandtocomplete integrationof theinstitutions’operations.Inaddition,thefutureprospectsof theinstitutionsundertheproposalareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Community,Merchants,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbyCommunity,theBoard’ssupervisoryexperienceswithCommunityandMerchantsandthoseof otherrelevantbanksupervisory agencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andanti-money-launderinglaws,aswellasinformationprovidedbythecommenter. Community,Merchants,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.Communityhasarecordof successfullyintegratingorganizationsintoits 15 12U.S.C.§1842(c)(1)(B). 16 Aspartoftheproposedtransaction,eachshareofMerchantscommonstockwouldbeconvertedintoaright toreceivecashorCommunitycommonstock,oracombinationofthetwo,basedonafixedexchangeratio. Communityhasthefinancialresourcestofundtheacquisition.

LegalDevelopments:SecondQuarter,2017 257 operationsandrisk-managementsystemsafteracquisitions.Thedirectorsandsenior executiveofficersof Communityhavesubstantialknowledgeof andexperienceinthe bankingandfinancialservicessectors,anditsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredCommunity’splansforimplementingtheproposal. Communityhasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialandotherresourcestoaddressallaspectsof thepost-acquisitionintegrationprocess forthisproposal.Communitywouldimplementitsrisk-managementpolicies,procedures, andcontrolsatthecombinedorganization,andtheseareconsideredacceptablefroma supervisoryperspective.Inaddition,Community’smanagementhastheexperienceand resourcestoensurethatthecombinedorganizationoperatesinasafeandsoundmanner, andCommunityplanstointegrateMerchants’existingmanagementandpersonnelina mannerthataugmentsCommunity’smanagement.17 Basedonallof thefactsof record,includingCommunity’ssupervisoryrecord,managerial andoperationalresources,andplansforoperatingthecombinedinstitutionafter consummation,theBoardconcludesthatconsiderationsrelatingtothefinancialand managerialresourcesandthefutureprospectsof theorganizationsinvolvedinthe proposal,aswellastherecordsof effectivenessof CommunityandMerchantsincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.18Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarecurrentlyhelpingtomeet thecreditneedsof thecommunitiestheyserve,aswellasotherpotentialeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation, theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutions undertheCRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourage insureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesin whichtheyoperate,consistentwiththeirsafeandsoundoperation,19andrequiresthe appropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecord of helpingtomeetthecreditneedsof itsentirecommunity,includinglow-and moderate-income(“LMI”)neighborhoods.20 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloan applicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainother characteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. 17 Onconsummation,twoindividualscurrentlyservingasdirectorsofMerchantswillbeaddedtotheboardsof directorsofCommunityandCommunityBank,andthecurrentpresidentandchiefexecutiveofficerof MerchantswillserveastheNewEnglandregionalpresidentofCommunityBank. 18 12U.S.C.§1842(c)(2). 19 12U.S.C.§2901(b). 20 12U.S.C.§2903.

258 FederalReserveBulletin|October2017 Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof CommunityBankandMerchantsBank,thefairlendingandcompliancerecordsof bothbanks, thesupervisoryviewsof theOCC,confidentialsupervisoryinformation,information providedbyCommunity,andthepubliccommentreceivedontheproposal. PublicCommentRegardingtheProposal Inthiscase,acommenterobjectedtotheproposalonthebasisof allegeddisparitiesinthe numberof conventionalhomepurchaseloans,refinancehomepurchaseloans,orhome improvementloansofferedtoAfricanAmericanorHispanicborrowers,ascomparedto whiteborrowers,byCommunityBankintheBuffalo-Cheektowaga-NiagaraFalls,New York,MetropolitanStatisticalArea(“Buffalo/NiagaraMSA”)andtheSyracuse,New York,MetropolitanStatisticalArea(“SyracuseMSA”)asreflectedindatareportedunder theHomeMortgageDisclosureAct(“HMDA”)21for2015.TheOCCconsideredthesame adversecommentinconnectionwithitsreviewof theunderlyingbankmergerapplication.22 Businessof theInvolvedInstitutionsandResponsetoComment CommunityBankisacommunitybankingfranchiseheadquarteredinupstateNewYork. Itisafull-servicebankthatoffersawiderangeof financialservices,withaprimaryfocus onloanstoconsumers.CommunityBank’slendingportfolioincludesresidentialmortgage loans,smallbusinessloans,commercialandindustrialloans,agriculturalloans,and consumerloans.Inadditiontotraditionaldepositandloanproducts,CommunityBank alsooffersinsuranceandinvestmentproducts,andtrustservices.CommunityBank’s branchesaregenerallylocatedinsmallertownsandcitieswithinitsgeographicmarket areas. MerchantsBankmaintains31full-serviceofficesinVermontandonefull-serviceofficein Springfield,Massachusetts.MerchantsBankoffersproductsandservicesforbusiness andretailconsumers,includingresidentialandcommercialrealestateloans,commercial businessloansandleases,wealthmanagementproducts,andotherfinancialservices. Inresponsetothecomment,Communityassertsthatallmortgageapplicationsreceivedby CommunityBankarereviewedinaccordancewiththebank’spoliciesandproceduresfor underwritingandaresubjecttoallof thebank’spoliciesandprocedureswithrespectto fairlending.Communityfurtherassertsthatitslendingpracticesarebasedoncriteriathat ensurebothsafeandsoundlendingandequalaccesstocreditbycreditworthyapplicants, andthatthebankhascomprehensiveproceduresandpoliciesinplacetoaccomplishthese goals,includinga“secondreview”processforanyloandenialof aminorityapplicant; ongoingfairlendingtrainingforthebank’slendingpersonnel;anannualfairlendingrisk assessment;andquarterlyreportsfromthebank’schief complianceofficer,directorof internalaudit,andchief riskofficertotheboardof directorsof thebankregarding consumerprotection,fairlending,CRA,andotherlawsandregulations. CommunityarguesthatitslendingrecordtominoritiesintheBuffalo/NiagaraandSyracuseMSAs,asreflectedinthe2015HMDAdata,isattributabletothelowpopulationof minoritiesinthecommunitiesinwhichitsbranchesarelocatedandisconsistentwiththe 21 12U.S.C.§2801etseq. 22 TheOCCconsideredtheCRAperformanceevaluationofeachbankinvolvedinthetransactionand,ona prospectivebasis,theprobableeffectoftheproposedbankmergerontheconvenienceandneedsofthe communitiestobeserved.

LegalDevelopments:SecondQuarter,2017 259 fairlylowlevelof minoritymortgageloanapplicationsthatareprocessedbyallHMDA reportinginstitutionsinthoseMSAsgenerally.CommunitypointstotheCRAPerformanceEvaluation,conductedbytheOCCinmid-2016,whichreviewedtheBuffalo/ NiagaraandSyracuseMSAsonalimited-scopebasisandfoundthatCommunity’slending performanceinthoseareaswas“notinconsistent”withCommunity’s“good”lending performanceintheassessmentareas(“AAs”)receivingafull-scopereview.Community assertsthatacommentonCommunity’sacquisitionof OneidaFinancialCorp.(“Oneida”) in201523raisedthesameissues,citing2013HMDAdatawithrespecttothesameareas. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews 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’sdatareportedunderHMDA,inadditiontosmallbusiness,smallfarm,and communitydevelopmentloandatacollectedandreportedundertheCRAregulations,to assessaninstitution’slendingactivitieswithrespecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors,including(1)thenumberandamountof homemortgage,smallbusiness,small farm,andconsumerloans(asapplicable)intheinstitution’sAAs;(2)thegeographicdistributionof thecompany’slending,includingtheproportionanddispersionof theinstitution’slendinginitsAAsandthenumberandamountof loansinlow-,moderate-,middle-, andupper-incomegeographies;(3)thedistributionof loansbasedonborrowercharacteristics,including,forhomemortgageloans,thenumberandamountof loanstolow-, moderate-,middle-,andupper-incomeindividuals;26(4)theinstitution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansand theircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexible lendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies. 23 SeeCommunityBankSystem,Inc.,FRBOrderNo.2015-34(November18,2015). 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 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).

260 FederalReserveBulletin|October2017 TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.27 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof CommunityBank CommunityBankwasassignedanoverall“Satisfactory”ratingbytheOCCatitsmost recentCRAperformanceevaluation,asof July27,2016(“CommunityBankEvaluation”).28CommunityBankreceived“HighSatisfactory”ratingsfortheLendingTest, InvestmentTest,andServiceTest.29ExaminersfoundthatCommunityBankprovideda goodlevelof communitydevelopmentservices. ExaminersfoundthatCommunityBank’slendinglevelsreflectedexcellentresponsiveness tocreditneedsandanexcellentratioof loansoriginatedinsideitsAAstoloansoriginated outsideitsAAs.Examinersalsofoundthatthebankhadagooddistributionof lending amongcensustractsandborrowersof differentincomelevelsandbusinessesof different sizes.TheexaminershighlightedthatCommunityBank’sflexiblelendingactivityhada positiveimpactontheevaluationof itslendingperformanceinNewYork.Specifically,in theBuffalo/NiagaraandSyracuseMSAs,whichwereareasof concernforthecommenter, examinersconductedalimited-scopereviewandfoundthatCommunityBank’slending performancewasnotinconsistentwithitsperformanceintheAAsreceivingafull-scope review. ExaminersfoundCommunityBanktohaveinvestmentsthatreflectedgoodresponsiveness tothecreditandcommunitydevelopmentneedsof thebank’sAAs.Examinersnotedthat thebank’sinvestmentsinitsAAsincludedinvestmentsinmortgaged-backedsecurities comprisedof mortgageloansmadetoLMIindividualsortofinanceresidenceslocatedin LMIneighborhoods,aswellasinvestmentsinmunicipalbondsthatsupportedtherevitalizationandstabilizationof LMItracts,middle-incomecensustractsdesignatedas distressedorunderserved,ordesignatedfederaldisasterareas.Intheirlimited-scopereview of theBuffalo/NiagaraandSyracuseMSAs,examinersfoundthatCommunityBank’s investmentperformancewasstrongerinthoseareasthanintheAAsreceivingafull-scope review. Examinersfoundthatthebank’sdeliverysystemswereaccessibletocensustractsandindividualsof differentincomelevelsthroughoutitsAAs.ExaminersalsofoundthatCommunityBank’shoursandservicesofferedthroughoutitsAAsweregood,andservices 27 Otherdatarelevanttocreditdecisionscouldincludecredithistories,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersmayanalyzesuchadditionalinformationbeforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 28 TheCommunityBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. ExaminersreviewedloansreportableunderHMDAandCRAdatacollectionrequirementsfromJanuary1, 2012,throughDecember31,2015.Theevaluationperiodforcommunitydevelopmentloans,investments,and serviceswasfromMarch12,2012,throughJuly26,2016.Asoftheevaluationdate,14ofthebank’s17AAs werelocatedwithinthestateofNewYork.Consequently,thegreatestweightwasgiventoNewYorkStatein thedeterminationofthebank’soverallCRArating. 29 Examinersconductedfull-scopereviewsoftheNorthernRegionNon-MSAandSouthernRegionNon-MSA AAsofthebank,sincethoseareascombinedrepresented79percentofthebank’stotallending,65percentof thebank’stotalnumberofbranches,and64percentofthebank’stotaldepositsinthestateofNewYork.The examinersperformedlimited-scopereviewsofthebank’sperformanceintheMSAportionsofthebank’sAAs, includingtheBuffalo/NiagaraandSyracuseMSAs.

LegalDevelopments:SecondQuarter,2017 261 offeredwerecomparableamongitsbranchlocationsregardlessof theincomelevelof the censustract.Examinersfurthernotedthatthebank’sperformanceinprovidingcommunity developmentserviceswasgood.ExaminershighlightedCommunityBank’slow-costand freebankingserviceproducts,includingitsfreechecking,savings,andonlinebanking products.Intheirlimited-scopereviewof theCommunityBank’sMSAAAs,examiners foundthatCommunityBank’soverallservicetestperformancewasweakerthaninthe non-MSAAAsreceivingafull-scopereview;however,intheBuffalo/NiagaraandSyracuse MSAs,examinersfoundthatCommunityBankhadbranchdistributionsthatwere reasonablyaccessibletoallportionsof thoseAAs. CommunityBank’sActivitiessincetheCommunityBankEvaluation Communitycontendsthat,sincetheCommunityBankEvaluation,ithasmadeeffortsto enhanceitsaffordablehousingproductsandprogramsdesignedtomeettheneedsof LMI individualsinitsassessmentareas.Specifically,Communityassertsthatithasrecently expandeditsU.S.Departmentof Agriculture(“USDA”)GuaranteedRuralHousing ProgramcoverageacrossitsNewYorkfootprint,anditismakingeffortstoextendprogram coverageintoPennsylvania,Massachusetts,andVermont,aswellasNativeAmerican reservations.Communityalsoassertsthatithasexpandedthenumberof loanofficersit employsthatarequalifiedtoofferStateof NewYorkMortgageAgencyaffordablehousing programloansfromfivein2015to39atpresent.Additionally,Communityrepresentsthat itisinthebeginningstagesof participatinginlendingprogramsthroughvariouscommunityorganizations. Communityassertsthatithasexpandedadvertisingeffortsforitsaffordablehousing programsacrossitsfootprintandspecificallywithintheSyracuseMSA.Communityrepresentsthatithasemployedadvertisingcampaignsacrosstraditionalmediaandwithlocal SyracusesportsteamsandtransitsystemsinordertoreachLMIandminoritycommunities.InNovember2016,CommunityBankretainedamortgageloanoriginatorwhosefocus isservingthecreditneedsintheSyracusemarket,includinglocalmarketingandoutreach. Communityalsoassertsthatithasmadeeffortstostrengthenitscommunitydevelopmentoutreach,lending,andinvestmentsacrossitsfootprint.TheseeffortsincludedevelopingrelationshipswithandcommittingtomakedonationstoLMIandminoritycommunityorganizations.Communityalsoassertsthatithasmadeplanstocontinueofferingthe financialliteracyprogramsthatMerchantsoffersinVermontafterconsummationof the proposal. CRAPerformanceof MerchantsBank MerchantsBankwasassignedanoverallCRAratingof “Satisfactory”atitsmostrecent CRAperformanceevaluationbytheFDIC,asof February17,2015(“MerchantsBank Evaluation”).30Thebankreceived“HighSatisfactory”ratingsfortheLendingTest,InvestmentTest,andServiceTest. ExaminersfoundthatMerchantsBank’slendinglevelsreflectedgoodresponsivenessto creditneedswithinitsAAs,consideringthesizeof theinstitution,loanportfoliocomposi- 30 TheMerchantsBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.ExaminersreviewedloansreportableunderHMDAandCRAdatacollectionrequirementsfromJanuary1,2013, throughDecember31,2014.Theevaluationperiodforcommunitydevelopmentloans,investments,and serviceswasfromNovember14,2011,throughFebruary17,2015.TheMerchantsBankEvaluationincludeda full-scopereviewofMerchantsBank’scombinedAA,includingtheMSAandnon-MSAportions.Thebank’s performanceinitsnon-MSAAAreceivedmoreweightintheoverallperformanceconclusionsandratingssince itrepresentedalargergeographicareaandcontainedahigherlendingvolumethantheMSAAA.

262 FederalReserveBulletin|October2017 tion,andlevelof competitionwithinthecombinedAA.Examinersfoundthatthebank hadexcellentdistributionof homemortgagelendingandagooddistributionof smallbusinesslendingamongtheAAs’low-andmoderate-incomecensustracts.Thebankdemonstratedgoodpenetrationof loanstoborrowersof differentincomelevels,particularlylowandmoderate-incomeindividualsandbusinessesof differentsizes,especiallythosewith grossannualrevenuesof $1millionorless.Additionally,examinersnotedthatthebank madearelativelyhighlevelof communitydevelopmentloans.Overall,MerchantsBank exhibitedagoodrecordof servingthecreditneedsof themosteconomicallydisadvantaged areasof itscombinedAA,consistentwithsafeandsoundbusinesspractices. ExaminersfoundMerchantsBanktohavemadeinvestmentsthatreflectedgoodresponsivenesstothecreditandcommunitydevelopmentneedsof thebank’scombinedAA. Examinersnotedthatthebank’sinvestmentsincludedasignificantlevelof qualified communitydevelopmentinvestmentsandgrants.Inadditiontomakingtraditionalequity investments,thebankmadenewinvestmentsinfederalNewMarketTaxCreditsandstate affordablehousingtaxcredits,partneredwithacommunitydevelopmentfinancialinstitutionandasmallbusinessinvestmentcompany,andmadequalifieddonationstoorganizationsinvolvedinaffordablehousingandcommunityandeconomicdevelopment. Examinersfoundthatthebank’sdeliverysystemswereaccessibletoessentiallyallportions of thebank’scombinedAA.ExaminersalsofoundthatMerchantsBank’shourswere comparabletootherlocalinstitutionsanditshoursandservicesdidnotvaryinawaythat inconveniencesanyportionof thecombinedAA,particularlylow-andmoderate-income geographiesandindividuals.Examinersfurthernotedthatthebankprovidedarelatively highlevelof communitydevelopmentservices,particularlyintheareaof financialliteracy. Viewsof theOCC Initsreviewof theproposal,theBoardconsultedwiththeOCCregardingCommunity Bank’sCRA,consumercompliance,andfairlendingrecords.TheOCCreviewedthebank mergerunderlyingthisproposal,includingthecommentreceivedbytheBoard. TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexamination of CommunityBankconductedbyOCCexaminers.TheBoardalsohasconsideredthe resultsof theOCC’smostrecentexaminationof CommunityBank’scompliancewiththe EqualCreditOpportunityAct31andtheFairHousingAct.32 TheBoardalsoconsultedwiththeOCCregardingCommunityBank’scompliancewith conditionsimposedbytheOCCinconnectionwithCommunity’s2015acquisitionof Oneidaandtherelatedmergerof OneidaSavingsBankintoCommunityBank.33Asa conditionof approvalof thebankmergerapplication,theOCCrequiredthatCommunity BankcreateaCRAAADelineationPolicyandmodifyitsAAsinaccordancewiththat policy. TheBoardhastakentheseconsultationswiththeOCCandtheinformationdiscussed aboveintoaccountinevaluatingthisproposal,includinginconsideringwhetherCommunityhastheexperienceandresourcestoensurethattheorganizationeffectivelyimplements 31 15U.S.C.§1692etseq. 32 42U.S.C.§3601etseq. 33 InitsorderapprovingtheOneidaacquisition,theBoardconveyeditsexpectationthatCommunityensurethat CommunityBankcomplywiththeconditionsimposedbytheOCC.SeeCommunityBankSystem,Inc.,FRB OrderNo.2015-34(November18,2015).

LegalDevelopments:SecondQuarter,2017 263 policiesandprogramsthatwouldallowthecombinedorganizationtoserveeffectivelythe creditneedsof allthecommunitieswithinthefirm’sAAs. AdditionalConvenienceandNeedsConsiderations TheBoardalsohasconsideredotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Communityrepresentsthat,asaresultof the proposal,existingcustomersof MerchantsBankwouldhaveaccesstoadditionalor expandedservices,duetoanexpandednetworkof branchandATMlocationsinitsmarket areas.Uponconsummationof thebankmerger,CommunityBankwouldoffertheformer depositorsof MerchantsBankitsproductsandservices.CommunityBankhasrepresented thatsuchproductsandservicesareenhancedwithrespecttoareassuchasconsumerloans, overdraftlinesof credit,agriculturallending,andsmallbusinesslending.Community expectsthatthemergerwouldalsoenableittocompetemoreeffectivelywithnational financialinstitutionsinitsmarketareasandimproveitsabilitytomeettheneedsof its customersandcommunitiesinitsmarketareas.CommunityBankalsorepresentsthat,on balance,nosignificantreductionsinproductsorserviceswouldbeexpectedasaresultof theproposal.34 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyCommunity,thepubliccommentontheproposal,andotherpotential effectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved. Basedonthatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterrisktothestability of 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, 34 MerchantsBankcurrentlyoffersaffordablehousingloansthroughtheFederalHousingAdministrationand theDepartmentofVeteransAffairs.WhileCommunityBankdoesnotplantocontinueofferingsuchloans afterconsummationoftheproposal,itplanstoofferaffordablehousingloansthroughFannieMae,the USDA,anditsownaffordablehousingprogram. 35 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 36 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

264 FederalReserveBulletin|October2017 suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.37 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.38 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominatelyengagedinretailandcommercialbankingactivities.39The proformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibit anorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthat wouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,the organizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirms orthemarketsthatitwouldposesignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.40Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe 37 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 38 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 39 BothCommunityandMerchantsprimarilyengageinretailandcommercialbankingactivities,andCommunity wouldcontinuetohaveasmallmarketsharefollowingtheproposedtransaction. 40 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.IntheBoard’sview,thecommenterhashadampleopportunitytosubmit commentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenter’srequestdidnotidentifydisputedissuesoffactmaterialtotheBoard’sdecision thatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywrittencomments donotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbenecessaryor appropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublic hearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingor meetingontheproposalisdenied.Inaddition,acommenterrequestedanextensionofthecommentperiodfor theproposal.TheBoard’srulescontemplatethatthepubliccommentperiodwillnotbeextendedabsenta cleardemonstrationofhardshiporothermeritoriousreasonforseekingadditionaltime.Thecommenter’s

LegalDevelopments:SecondQuarter,2017 265 BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyCommunitywithalltheconditionsimposedinthisorder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof NewYork,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveApril26,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. AnnE.Misback Secretaryof theBoard requestforadditionaltimetocommentdoesnotidentifycircumstancesthatwouldwarrantanextensionofthe publiccommentperiodforthisproposal.Accordingly,theBoarddeterminesnottoextendthecomment period.

266 FederalReserveBulletin|October2017 Simmons First National Corporation Pine Bluff, Arkansas OrderApprovingtheMergerof BankHoldingCompanies FRBOrderNo.2017–13(April28,2017) SimmonsFirstNationalCorporation(“Simmons”),PineBluff,Arkansas,afinancial holdingcompanywithinthemeaningof theBankHoldingCompanyActof 1956(“BHC Act”),1hasrequestedtheBoard’sapprovalundersection3of theBHCAct2tomergewith HardemanCountyInvestmentCompany,Inc.(“Hardeman”),andtherebyindirectly acquireFirstSouthBank,bothof Jackson,Tennessee. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister86714(December1,2016)).3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. Simmons,withconsolidatedassetsof approximately$8.4billion,isthe147thlargest insureddepositoryorganizationintheUnitedStates.Simmonscontrolsapproximately $6.7billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.4Simmons controlsSimmonsBank,PineBluff,Arkansas,whichoperatesinArkansas,Kansas, Missouri,andTennessee.Simmonsisthe12thlargestinsureddepositoryorganizationin Tennessee,controllingdepositsof approximately$1.9billioninTennessee,whichrepresent 1.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate.5 Hardeman,withconsolidatedassetsof approximately$477.4million,isthe1463rdlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $396.3millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Hardeman controlsFirstSouthBank,whichoperatesonlyinTennessee.Hardemanisthe54thlargest insureddepositoryorganizationinTennessee,controllingdepositsof approximately $379.4million,whichrepresentlessthan0.3percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Simmonswouldbecomethe140thlargestinsured depositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $8.9billion,whichrepresentlessthan1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.Simmonswouldcontrolconsolidateddepositsof approximately$7.1billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.InTennessee,Simmonswouldbecome the9thlargestinsureddepositoryorganization,controllingdepositsof approximately $2.3billioninTennessee,whichrepresent1.7percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12CFR262.3(b). 4 NationalassetanddepositdataareasofDecember31,2016,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2016.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,creditunions,savingsassociations,andsavingsbanks.

LegalDevelopments:SecondQuarter,2017 267 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 maynotapproveaninterstateapplicationif thebankholdingcompanycontrols,orwould uponconsummationof theproposedtransactioncontrol,morethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,if thebankholdingcompanywoulduponconsummationcontrol30percentor moreof thetotaldepositsof insureddepositoryinstitutionsinanystateinwhichthe acquirerandtargethaveoverlappingbankingoperations.8 Forpurposesof theBHCAct,thehomestateof SimmonsisArkansas,andthehomestate of FirstSouthBankisTennessee.9Simmonsiswellcapitalizedandwellmanagedunder applicablelaw,andSimmonsBankhasa“Satisfactory”ratingundertheCommunityReinvestmentActof 1977(“CRA”).10Tennesseehasathree-yearminimumagerequirement, andFirstSouthBankhasbeeninexistenceformorethanthreeyears.11 Onconsummationof theproposedtransaction,Simmonswouldcontrollessthan1percent of thetotalamountof consolidateddepositsininsureddepositoryinstitutionsinthe UnitedStates.Tennesseeimposesa30percentlimitonthetotalamountof in-statedeposits thatasinglebankingorganizationmaycontrol.12Thecombinedorganizationwould controlapproximately1.7percentof thetotalamountof depositsof insureddepository institutionsinTennessee,theonlystateinwhichSimmonsandHardemanhaveoverlapping bankingoperations.TheBoardhasconsideredallotherrequirementsundersection3(d)of theBHCAct,includingSimmons’srecordof meetingthecreditneedsof thecommunities itserves.Accordingly,inlightof allthefactsof record,theBoardmayapprovethe proposalundersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin 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. 11 SeeTenn.CodeAnn.§45-2-1403(a). 12 SeeTenn.CodeAnn.§45-2-1404.

268 FederalReserveBulletin|October2017 thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitiestobeserved.13 SimmonsandHardemanhavesubsidiarydepositoryinstitutionsthatcompetedirectlyin theDyersburg,Tennessee,bankingmarket(“Dyersburgmarket”),theJackson,Tennessee, bankingmarket(“Jacksonmarket”),andtheMemphis,Tennessee,bankingmarket (“Memphismarket”).14TheBoardhasconsideredthecompetitiveeffectsof theproposal inthesebankingmarketsinlightof allthefactsof record.Inparticular,theBoardhas consideredthenumberof competitorsthatwouldremaininthemarkets;therelativeshares of totaldepositsininsureddepositoryinstitutionsinthemarkets(“marketdeposits”)that Simmonswouldcontrol;15theconcentrationlevelsof marketdepositsandtheincreasein theselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);16andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheDyersburg,Jackson,andMemphis markets.AlthoughtheDyersburgmarketwouldremainhighlyconcentratedonconsummationof theproposal,theincreaseintheHHIwouldnotbelarge(91points).Simmons wouldbecomethethirdlargestdepositoryorganizationinthemarket,withamarketshare onlyabout4percentagepointshigherthanHardeman,whichisthethirdlargestdepository organizationpriortoconsummationof theproposal.Fivecompetitorswouldremaininthe market,includingtwodepositoryorganizationswithahighermarketsharethanSimmons. Thelargestdepositoryorganizationinthemarketwouldcontrolover50percentof marketdeposits. Onconsummationof theproposal,theJacksonandMemphismarketswouldremain moderatelyconcentrated,asmeasuredbytheHHI.Numerouscompetitorswouldremain intheJacksonandMemphismarkets.17 13 12U.S.C.§1842(c)(1). 14 TheDyersburgmarketisdefinedasDyerandLakecounties,bothofTennessee.TheJacksonmarketisdefined asChester,Crockett,Gibson,Haywood,Madison,andHenderson(minusDistrict7)counties,allof Tennessee.TheMemphismarketisdefinedasFayette,Shelby,andTiptoncounties,allofTennessee;cityof GrandJunctioninHardemanCounty,Tennessee;CrittendenCounty,Arkansas;Benton,DeSoto,Marshall, Tate,andTunicacounties,allofMississippi;thenorthernpartofCoahomaCounty,Mississippi(includingthe citiesofFriarsPoint,Coahoma,Lula,andJonestown);PanolaCounty,Mississippi(northofStateRoute315 easttoSardisLake,includingthecityofSardis);andQuitmanCounty,Mississippi(northofStateRoute315, includingthecitiesofBirdieandSledge). 15 DepositandmarketsharedataareasofJune30,2016,andunlessotherwisenoted,arebasedoncalculationsin whichthedepositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthat thriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks. See,e.g.,MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70 FederalReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketshare calculationona50percentweightedbasis.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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html. 17 Simmonsoperatesthe5thlargestdepositoryinstitutionintheDyersburgmarket,controllingapproximately $30.3millionindeposits,whichrepresentapproximately4.3percentofmarketdeposits.Hardemanoperates the3rdlargestdepositoryinstitutioninthesamemarket,controllingapproximately$75.3millionindeposits, whichrepresentapproximately10.6percentofmarketdeposits.Onconsummationoftheproposedtransaction,

LegalDevelopments:SecondQuarter,2017 269 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe Dyersburg,Jackson,andMemphismarkets.Inaddition,theappropriatebankingagencies havebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheDyersburg,Jackson,orMemphisbankingmarketsorinanyother relevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof informationincludingcapitaladequacy,assetquality,and earningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthe financialconditionof thecombinedorganization,includingitscapitalposition,asset quality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespecially important.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. SimmonsandHardemanarebothwellcapitalized,andthecombinedentitywouldremain soonconsummationof theproposedtransaction.Theproposedtransactionisabank holdingcompanymergerthatisstructuredasacashandshareexchange.18Theasset quality,earnings,andliquidityof SimmonsBankandFirstSouthBankareconsistentwith approval,andSimmonsappearstohaveadequateresourcestoabsorbthecostsof the Simmonswouldbecomethe3rdlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$105.6million,whichrepresentapproximately15percentofmarketdeposits.TheHHIforthe Dyersburgmarketwouldincreaseby91pointsto3934,and5competitorswouldremaininthemarket. Simmonsoperatesthe5thlargestdepositoryinstitutionintheJacksonmarket,controllingapproximately $274.0millionindeposits,whichrepresentapproximately8percentofmarketdeposits.Hardemanoperatesthe 7thlargestdepositoryinstitutioninthesamemarket,controllingapproximately$191.5millionindeposits, whichrepresentapproximately5percentofmarketdeposits.Onconsummationoftheproposedtransaction, Simmonswouldbecomethe3rdlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately$465.6million,whichrepresentapproximately13percentofmarketdeposits.TheHHIfortheJackson marketwouldincreaseby80pointsto1066,and23competitorswouldremaininthemarket. Simmonsoperatesthe40thlargestdepositoryinstitutionintheMemphismarket,controllingapproximately $77.8millionindeposits,whichrepresentlessthan1percentofmarketdeposits.Hardemanoperatesthe53rd largestdepositoryinstitutioninthesamemarket,controllingapproximately$11.5millionindeposits,which representlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,Simmons wouldbecomethe37thlargestdepositoryinstitutioninthemarket,controllingdepositsofapproximately $89.3million,whichrepresentlessthan1percentofmarketdeposits.TheHHIfortheMemphismarketwould increasebylessthanonepoint,and57competitorswouldremaininthemarket. 18 Atthetimeofthemerger,eachshareofHardemancommonstockwouldbeconvertedintotherighttoreceive cashandSimmonscommonstockbasedonanexchangeratio.Simmonshasthefinancialresourcestofund thetransaction.

270 FederalReserveBulletin|October2017 proposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,future prospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Simmons,Hardeman,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition,the BoardhasconsideredinformationprovidedbySimmons;theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andthe organizations’recordsof compliancewithapplicablebanking,consumerprotection,and anti-money-launderinglaws;aswellasinformationprovidedbythecommenter. Simmons,Hardeman,andtheirsubsidiarydepositoryinstitutionsareeachconsideredto bewellmanaged.Simmonshasarecordof successfullyintegratingorganizationsintoits operationsandrisk-managementsystemsafteracquisitions.Simmons’sdirectorsand seniorexecutiveofficershaveknowledgeof andexperienceinthebankingandfinancial servicessectors,andSimmons’srisk-managementprogramappearsconsistentwith approvalof thisexpansionaryproposal. TheBoardalsohasconsideredSimmons’splansforimplementingtheproposal.19Simmons hasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.Simmons doesnotanticipatemakingsignificantchangestoitsexistingrisk-managementpolicies, procedures,andcontrols.Theseareconsideredacceptablefromasupervisoryperspective andwouldbeimplementedatthecombinedorganization.Inaddition,Simmons’sand Hardeman’smanagementhavetheexperienceandresourcestooperatethecombinedorganizationinasafeandsoundmanner,andSimmonsplanstointegrateHardeman’sexisting managementandpersonnelinamannerthataugmentsSimmons’smanagement.20 Basedonallthefactsof record,includingSimmons’ssupervisoryrecord,managerialand operationalresources,plansforoperatingthecombinedinstitutionafterconsummation, andpubliccommentsontheproposal,21theBoardconcludesthatconsiderationsrelating tothefinancialandmanagerialresourcesandfutureprospectsof theorganizations involvedintheproposal,aswellastherecordsof effectivenessof SimmonsandHardeman incombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.22Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit 19 SimmonsplanstooperateFirstSouthBankasaseparateentityforaninterimperiodfollowingconsummation oftheholdingcompanymerger.Aftertheinterimperiod,SimmonsanticipatesmergingFirstSouthBankwith andintoSimmonsBank. 20 Onconsummation,fourindividualscurrentlyservingasseniormanagementofficialsatHardemanorFirst SouthBankwillserveasseniormanagementofficialsattheSimmonsbankingorganization.Theseindividuals includeHardeman’scurrentpresidentandchiefexecutiveofficer,whowillberetainedastheJackson communitychairmanofSimmonsBank. 21 AcommenterquestionedhowSimmonsplanstoreduceHardeman’sannualnon-interestexpensesupon consummationoftheproposal.Asexplainedabove,theBoardconsideredSimmons’splansforoperatingthe combinedorganizationuponconsummationanddeterminedthatthoseplanswouldnotpresentfinancial, managerial,orsafetyandsoundnessconcerns. 22 12U.S.C.§1842(c)(2).

LegalDevelopments:SecondQuarter,2017 271 needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,23andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.24 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair 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 Simmons BankandFirstSouthBank,thefairlendingandcompliancerecordsof bothbanks,the supervisoryviewsof theFederalDepositInsuranceCorporation(“FDIC”)andtheOffice of theComptrollerof theCurrency(“OCC”),confidentialsupervisoryinformation, informationprovidedbySimmons,andthepubliccommentsreceivedontheproposal. Summaryof PublicCommentsonConvenienceandNeeds Inthiscase,theBoardreceivedcommentsfromacommenterobjectingtotheproposalon thebasisof allegeddisparitiesintheratesatwhichSimmonsdeniedapplicationsfor conventionalhomepurchaseloansbyAfricansAmericans,ascomparedtowhites,inthe LittleRock,Arkansas,MetropolitanStatisticalArea(“LittleRockMSA”)andthe Memphis,Tennessee-Mississippi-Arkansas,MetropolitanStatisticalArea(“Memphis MSA”),asreflectedindatareportedundertheHomeMortgageDisclosureAct(“HMDA”) for2015.Inaddition,thecommenterallegedthatSimmons’sHMDAreportingrecordis notcredibleanddoesnotaccuratelyreflectitsloandenialrates.25 Businessesof theInvolvedInstitutionsandResponsetoComments SimmonsBankoffersabroadrangeof retailandcommercialbankingproductsto consumersandbusinesses.Throughitsnetworkof branchesacrossArkansas,Kansas, Missouri,andTennessee,thebankoffersavarietyof bankingproductsincludingcommercial,residential,agricultural,andconsumerloans,personalcheckingandsavingsaccounts, businesscheckingandsavingsaccounts,moneymarketaccounts,cashmanagementproductsandservices,creditcards,merchantservices,andwealthmanagementservices. 23 12U.S.C.§2901(b). 24 12U.S.C.§2903. 25 Thecommenteralsocitedananonymouscustomercomplaintpostedtoapubliconlineforumin2015that allegedproblemswithSimmonsBank’soverdraftandreturnpoliciesandexpressedconcernoverthefeesthat wereallegedlychargedbythebankonthecustomer’saccount.Aspartofitsreviewofthisproposal,theBoard consideredinformationcollectedbytheFederalReserveBankofSt.Louisregardingthecustomercomplaint andSimmonsBank’soverdraftandreturnfeeprograms.

272 FederalReserveBulletin|October2017 FirstSouthBankoffersamorelimitedrangeof retailandcommercialproductsthrough10 branchesinTennessee,includingdepositandloanproducts,debitcards,mobilephone banking,billpay,andinternetbanking. Inresponsetothecomments,SimmonsrepresentsthatitsHMDAandCRAdataintegrity areregularlyverifiedthroughinternalauditingreviewsandregulatoryexaminations,and thatregulatorycomplianceisanintegralcomponentof SimmonsBank’soperatingplan. Simmonsalsorepresentsthatananalysisof SimmonsBank’sgeographicanddemographic lendingactivityisperformedatleastonceannuallyandSimmonsBankretainsappropriatedocumentationrelatingtoitsCRAprogram. Inaddition,Simmonsarguesthatthe2015HMDAdatareferencedbythecommenterdoes notfairlyrepresentSimmonsBank’slendingactivitiesintheLittleRockMSAandthe MemphisMSA,andthatthebank’slendingisfullycompliantwithallapplicableCRAand fairlendingrequirements.Simmonsassertsthatthedenialratesreferencedbythe commenterreflectdeterminationsbasedonanapplicant’scredithistory,debt-to-income ratios,insufficientcollateral,andothernondiscriminatoryfactors.Simmonsassertsthatthe bankcontinuestoenhanceitsCRAprogrambyincreasingitsmarketingeffortstoward LMIborrowersanddevelopingmorelendingproducts,suchastheAffordableAdvantage Mortgageprogram(the“MortgageProgram”).TheMortgageProgram,designedby SimmonsBankin2015,hasflexiblequalifyingandunderwritingguidelinesthattargetLMI censustractsandLMIborrowers,includingthoseintheLittleRockandMemphisMSAs. Simmonsstatesthat,intheLittleRockMSA,ithassignificantlyincreaseditsconventional homepurchaselendingtoAfricanAmericansfrom2015to2016,asreflectedinSimmons Bank’s2016HMDAdata.Simmonsrepresentsthatthenumberof conventionalhome purchaseloanapplicationsreceivedandoriginatedfromAfricanAmericansduringthe 2016HMDAreviewperiodincreasedsubstantially,ascomparedtotheprioryear. SimmonsattributestheseincreasestotheMortgageProgram,whichitbeganofferingin certainmarketsin2015.SimmonsrepresentsthattheMortgageProgramfeaturesflexible qualifyingandunderwritingguidelinesandisspecificallydesignedtoincreasethebank’s homepurchaseandhomerefinancelendingtoLMIborrowersandcommunities. IntheMemphisMSA,SimmonsassertsthatdisparitiesinSimmonsBank’slendingrecord toAfricanAmericans,asreflectedin2015HMDAdata,areattributabletothebank enteringtheMSAin2015throughanacquisition.Asaresult,Simmonsassertsthatithad alimitedpresenceintheMSAduringthe2015HMDAreviewperiodandreceivedfew conventionalhomepurchaseloanapplicationsfromAfricanAmericans.However, SimmonsrepresentsthatithassincetakenstepstoincreaseitslendingtoLMIand minorityborrowersbyextendingtheavailabilityof itsMortgageProgramtothe MemphisMSA. Aspartof Simmons’seffortstocontinuetoenhanceitsCRAprogram,Simmonsrepresentsthatithasestablishedlendingbenchmarksforitsfull-scopeandlimited-scope markets,includingcommunitydevelopmentlendingbenchmarks,anddiversifiedinvestmentgoalsandcommunitydevelopmentservicegoalsatthebranchlevel.Toassistinthe marketingof itsproductstoLMIborrowers,Simmonsrepresentsthatithasemployed CRAmortgagelendersintheLittleRockandMemphisMSAs. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe applicant’sresponsetothecomments.Inparticular,theBoardevaluatesaninstitution’s

LegalDevelopments:SecondQuarter,2017 273 performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.26Inthiscase,theBoardconsideredthe supervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserveBank of St.Louis(“ReserveBank”),theFDIC,andtheOCC. 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.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’slendinginitsassessmentareasandthenumber andamountsof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)the distributionof loansbasedonborrowercharacteristics,including,forhomemortgage loans,thenumberandamountsof loanstolow-,moderate-,middle-,andupper-income individuals;28(4)theinstitution’scommunitydevelopmentlending,includingthenumber andamountsof communitydevelopmentloansandtheircomplexityandinnovativeness; and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecredit needsof LMIindividualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.29 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 27 12U.S.C.§2906. 28 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 29 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

274 FederalReserveBulletin|October2017 CRAPerformanceof SimmonsBank SimmonsBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheOCC,asof January2,2013(“SimmonsBankEvaluation”).30Thebankreceived“LowSatisfactory”ratingsforboththeLendingTestand InvestmentTestanda“HighSatisfactory”ratingfortheServiceTest.31 ExaminersfoundthatSimmonsBank’soveralllendinglevelsreflectedadequateresponsivenesstocreditneedsinitsassessmentareas.Accordingtoexaminers,thebankoriginateda substantialmajorityof loanswithinitsassessmentareas,andthedistributionof itsloans acrossincomelevelsandbusinessesof differentsizeswasadequate.Inparticular,examiners foundthatthebank’soveralldistributionof homemortgageloanstogeographiesof differentincomelevelswasadequate. InArkansas,SimmonsBank’sperformanceundertheLendingTestwasrated“LowSatisfactory.”Examinersfoundthatthebank’soverallgeographicdistributionof homemortgageloanswasadequate,anditsoverallgeographicdistributionof smallloanstobusinessesandfarmswasgood.Thebankwasfoundtoofferflexibleloanprograms,including forhomemortgageandfarmloans.IntheLittleRockMSA,anareaof concernforthe commenter,thebank’slendingvolumewasconsideredadequate. WithrespecttotheInvestmentTest,examinersfoundthatSimmonsBankhadanoverall adequatelevelof qualifiedinvestmentsbasedontheinvestmentopportunitiesanddollar volumeof investmentsmadeinitsassessmentareas.InArkansas,thebankreceiveda “LowSatisfactory”ratingfortheInvestmentTest.IntheLittleRockMSA,examiners concludedthatthebank’slevelof qualifiedinvestmentswaspoor. Asnoted,SimmonsBankreceiveda“HighSatisfactory”ratingfortheServiceTest.Examinersfoundthebank’sdeliverysystemstobeaccessibletoallsectionsof itsassessment areas,includingtoindividualsof differentincomelevels.Examinersnotedthat,overall,the bankprovidedagoodlevelof communitydevelopmentservicesintheareasinwhichthe bankmaintainedanongoingpresence,includingbyprovidingtechnicalassistanceto programsthatsupportaffordablehousing,smallbusinesses,andeconomicdevelopmentin LMIgeographies. InArkansas,SimmonsBankreceiveda“HighSatisfactory”ratingfortheServiceTest. Examinersnotedthatthebank’sretailbranchdistributioninArkansaswasgoodandthat thebankprovidedagoodlevelof communitydevelopmentservices.IntheLittleRock MSA,examinersfoundthebank’sbranchdeliverysystemstobeadequateandreasonably accessibletogeographiesandindividualsof differentincomelevels. SimmonsBank’sEffortssincetheSimmonsBankEvaluation Simmonsrepresentsthat,sincetheSimmonsBankEvaluation,SimmonsBankhasmade significanteffortstoenhanceitsabilitytoservethecreditneedsof thecommunitiesit 30 TheSimmonsBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.The examinersreviewedhomepurchase,homeimprovement,andhomerefinancemortgageloansreported pursuanttotheHMDA,andsmallloansmadetobusinessesandfarmsreportedunderCRAdata-collection requirements,for2009through2011.Theevaluationperiodforcommunitydevelopmentlending,investments, andserviceswasSeptember30,2008,throughJanuary2,2013. 31 TheSimmonsBankEvaluationincludedfull-scopeevaluationsoftheFortSmith,Arkansas-Oklahoma MultistateMSA;theLittleRock-NorthLittleRock,ArkansasMSA;thePineBluff,ArkansasMSA; non-MetropolitanArkansas(comprisedofSearcy,Stone,andVanBurencounties);theKansasCity,Kansas- MissouriMultistateMSA;theWichita,KansasMSA;andtheSpringfield,MissouriMSA.Limited-scope evaluationswereperformedinFultonandSharpcounties,bothofArkansas,andSalineCountyofKansas.

LegalDevelopments:SecondQuarter,2017 275 serves.Theseeffortsincludehiringafull-time,experienced,CRAofficer,completingtwo self-assessmentexaminations,offeringawidervarietyof SmallBusinessAdministration loans,andenhancingitsCRAperformancemonitoringcompliancesystems.Inaddition, SimmonsnotesthatitcreatedaCommunityDevelopmentDepartmentandestablisheda CRAStrategicPlanin2014tobetteraddressitsexpandingCRAobligations. TheCRAStrategicPlanappliestoallmarketsinwhichSimmonsBankoperates,including theLittleRockandMemphisMSAs.Simmonsrepresentsthatitreviewsandrevisesits CRAStrategicPlanannuallytoreflectthebank’sexpandinglineof financialproductsas wellastheincreasednumberof depositandloanproductsbeingofferedbySimmons withinitsmarkets.Forexample,Simmonsnotesthatin2015itcreatedinternalCRA performancebenchmarksandin2016itenhancedthebank’sCRAgoalsbyestablishing specificlendingbenchmarks,communitydevelopmentlendingbenchmarks,adiversified investmentgoal,andcommunitydevelopmentservicesgoalsatthebranchlevel. Inaddition,Simmonsrepresentsthatithasestablishedcommunityadvisorycommittees acrossArkansas,Tennessee,andMissouri.Thesecommitteesarecomprisedof LMIservice providersthatrepresentavarietyof groups,includingpublichousingauthoritiesand non-profitorganizations.Simmonsfurtherrepresentsthattheseadvisorycommittees provideitwithanadditionalplatformtoidentifywaystoservethecommunitiesinwhich Simmonsserves. IntheLittleRockMSA,SimmonsrepresentsthatithasexpandeditsCRAactivitiesas partof broaderimprovementstoitsCRAprogram.Simmonsfurtherrepresentsthatits employeesactivelysupportavarietyof communitydevelopmentinitiativesintheLittle RockMSA,includingthrougheffortstopromoteaffordablehousing,communityeconomic development,andfinancialliteracy.Furthermore,Simmonsnotesthat,in2015and2016, SimmonsBankprovidedseveralgrantstosupportaffordablehousinginitiativesinthe LittleRockMSA.WithrespecttotheMemphisMSA,Simmonsnotesthatitenteredthe marketin2015throughanacquisitionandfirstdevelopedCRAperformancegoalsforthe marketin2016.Theseinitiativesincludedevelopinganaffordablehome-improvement mortgageproductthatwillbemarketedtocommunitiesinMemphisandprovidingfinancialliteracytrainingtosmallbusinesses.Simmonsstatesthatitexpectstocontinueits existingCRAactivitiesintheLittleRockandMemphisMSAsafterconsummationof the proposal.Simmonsnotesthatitcontinuestoevaluateitsmarketingactivitiesinaneffortto identifymoreeffectivewaystoreachLMIindividualsandcommunities. CRAPerformanceof FirstSouthBank FirstSouthBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof September12,2016(“FirstSouthBankEvaluation”),32withratingsof “Satisfactory”fortheLendingTestand“Outstanding”forthe CommunityDevelopmentTest.33 ExaminersconcludedthatFirstSouthBankexhibitedasatisfactoryoverallrecordwith respecttotheLendingTest.Examinersnotedthatamajorityof thebank’ssmallbusiness 32 TheFirstSouthBankEvaluationwasconductedusingtheInteragencyIntermediateSmallInstitutionExaminationProcedures.Examinersreviewedsmallbusinessloansfromthe2015calendaryear.Examinersreviewed homemortgageloansreportedpursuanttoHMDAdata-collectionrequirements(geographicdistributionand borrowerdistribution)from2014throughJune30,2016.Theevaluationperiodforcommunitydevelopment loans,investments,andserviceswasfromMarch4,2014,throughSeptember12,2016. 33 TheFirstSouthBankEvaluationincludedafull-scopeevaluationoftheMadisonCountyassessmentareain theJackson,TennesseeMSA,andalimited-scopeevaluationoftheTennesseeNon-MSA(consistingofDyer, Hardeman,andHaywoodcounties).

276 FederalReserveBulletin|October2017 andhomemortgageloans,bynumberanddollarvolume,weremadeinitsassessment areas.Examinersfoundthatthedistributionof thebank’sborrowersreflectedreasonable penetrationamongindividualsof differentincomelevelsandbusinessesof differentsizes, andthegeographicdistributionof itsloansreflectedreasonabledispersionforthebankas awhole. Inaddition,examinersconcludedthatFirstSouthBankdemonstratedexcellentresponsivenesstocommunitydevelopmentneedsinitsassessmentareasthroughacombinationof communitydevelopmentloans,qualifiedinvestments,andcommunitydevelopment services.Examinersfoundthatthebank’scommunitydevelopmentloansdemonstrated adequateresponsivenesstothecommunitydevelopmentneedsof itsassessmentareas.In addition,examinersfoundthatthebankdemonstratedanexcellentrecordof makingqualifiedinvestments,asreflectedintherelativevolumeof itsinvestmentsandtheresponsivenessof thoseinvestmentsinmeetingcommunitydevelopmentneeds.Examinersalsofound thatthebankprovidedanexcellentlevelof communitydevelopmentservicesrelativetoits resources,includingtocommunityorganizationsthatprimarilyprovideservicestoLMI individuals.ExaminersnotedthatFirstSouthBankmaintainedbankinghoursandservices thataretypicalfortheindustryandareasthatitserves.Inaddition,thebankofferedalternativedeliverysystemssuchasmobileandonlinebanking. AdditionalSupervisoryViews In2016,SimmonsBankchangedfromanationalbanktoastatememberbank,resultingin theReserveBankbecomingthebank’sprimarysupervisor.Aspartof SimmonsBank’s conversion,theReserveBankcarriedoutapre-membershipexamination.SinceSimmons Bankbecameastatememberbank,theReserveBankhasperformedtargetedexamsof the bank’sconsumercomplianceprogram.TheBoardhasconsideredtheresultsof these examinationsaswellasSimmonsBank’srecordof complyingwithfairlendingandother consumerprotectionlaws. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Simmonsrepresentsthatitplanstocontinueits currentofferingof productsandservicesafterconsummationof theproposal.Inaddition, SimmonsrepresentsthatitplanstooperateFirstSouthBankasaseparateentityforan interimperiodof timepriortoschedulingthemergerof FirstSouthBankwithandinto SimmonsBank.Duringtheinterimperiod,Simmonsanticipatesthatbothbankswould continuetooffertheirlegacyproductsandservices.Simmonsnotesthatcustomersof First SouthBankcouldbereferredtobranchesof SimmonsBankforaccesstoSimmons’s broaderofferingof productsandservices.AccordingtoSimmons,suchreferralscould occuruponacustomer’srequestorif acustomerisidentifiedasacandidateforproducts andservicesonlyofferedbySimmons. Uponcompletionof thebankmergerandsystemsconversion,Simmonsrepresentsthatits productsandserviceswouldbecomeavailabletocustomersof FirstSouthBankatthat bank’sformerlocations.Simmonsrepresentsthatmanyof theseproductsandserviceshave moreflexiblefeaturesthanthosecurrentlyofferedbyFirstSouthBank.Theseinclude creditcardproducts,signatureguarantees,andSimmonsBank’s“PositivePay”anti-fraud accountreconciliationservice.Inaddition,Simmonsassertsthatcustomersof First SouthBankwouldbenefitfromamoreexpansivebranchandATMnetworklocatedacross fourstates.

LegalDevelopments:SecondQuarter,2017 277 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbySimmons,thepubliccommentsontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedon thatreview,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsideraproposal’srisk“to thestabilityof theUnitedStatesbankingorfinancialsystem.”34 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.35These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.36 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.37 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthathaslessthan $10billioninassetsandaproformaorganizationof lessthan$100billioninassets.Both theacquirerandthetargetarepredominantlyengagedinavarietyof retailcommercial 34 Section604(d)oftheDodd-FrankAct,Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C. §1842(c)(7). 35 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 36 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 37 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition.

278 FederalReserveBulletin|October2017 bankingactivities.38Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complexinterrelationships,or uniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financial distress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.39Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.Approvalof thisproposalisspecificallyconditionedoncompliancebySimmonswithalltheconditionssetforthinthisOrder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeproposal.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrder,orlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveApril28,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. AnnE.Misback Secretaryof theBoard 38 Ineachoftheactivitiesinwhichitengages,Simmonshas,andasaresultoftheproposalwouldcontinueto have,asmallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices. 39 ThecommenterrequestedthattheBoardholdapublichearingormeetingontheproposal.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 thatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdidnotdemonstratewhywrittencomments donotpresentthecommenter’sviewsadequatelyorwhyahearingormeetingotherwisewouldbenecessaryor appropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublic hearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingon theproposalisdenied.

LegalDevelopments:SecondQuarter,2017 279 Sunflower Reincorporation Sub, Inc. Salina, Kansas OrderApprovingtheFormationof aBankHoldingCompany,theAcquisitionof aBank HoldingCompany,andDeterminationonaFinancialHoldingCompanyElection FRBOrderNo.2017-14 (June2,2017) SunflowerReincorporationSub,Inc.(“FirstSun”),1awhollyownedsubsidiaryof SunflowerFinancial,Inc.(“Sunflower”),afinancialholdingcompany,hasrequestedthe Board’sapprovalundersection3of theBankHoldingCompanyActof 1956(“BHC Act”)2tobecomeabankholdingcompanybymergingwithSunflowerandtherebyindirectlyacquiringSunflowerBank,NationalAssociation(“SunflowerBank”),allof Salina, Kansas.3 Inaddition,FirstSunhasrequestedtheBoard’sapprovalundersection3of theBHCAct toacquireStrategicGrowthBankIncorporatedandStrategicGrowthBancorpIncorporated(collectively,“Strategic”),bothfinancialholdingcompaniesof ElPaso,Texas,and therebyindirectlyacquireCapitalBank,SSB(“CapitalBank”),ElPaso,Texas,andFirst NationalBankof SantaFe(“FirstNationalBank”),Albuquerque,NewMexico.Following theproposedholdingcompanymergers,CapitalBankandFirstNationalBankwouldbe mergedintoSunflowerBank.4FirstSunalsohasfiledwiththeBoardanelectiontobecome afinancialholdingcompanypursuanttosections4(k)and(l)of theBHCActand section225.82of theBoard’sRegulationY.5 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister72055(October19,2016))inaccordancewiththe Board’srules.6Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlightof thefactorssetforthinsection3of theBHCAct. Sunflower,withconsolidatedassetsof approximately$1.9billion,isthe411thlargest insureddepositoryorganizationintheUnitedStates.Sunflowercontrolsapproximately $1.5billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.7Sunflower controlsSunflowerBank,whichoperatesinColorado,Kansas,andMissouri.Sunflower Bankisthe32ndlargestinsureddepositoryinstitutioninColorado,controllingdepositsof approximately$349.7million,whichrepresent0.29percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.8 Strategic,withconsolidatedassetsof approximately$2.2billion,isthe374thlargest insureddepositoryorganizationintheUnitedStates.Strategiccontrolsapproximately 1 Theapplicationwassubmitted,andnoticeoftheproposalpublished,underthenameSunflower ReincorporationSub,Inc.Subsequently,thenameofthisentitywaschangedtoFirstSunCapitalBancorp. 2 12U.S.C.§1842. 3 FirstSunwouldsurvivethemerger. 4 ThemergerofCapitalBankandFirstNationalBankwithandintoSunflowerBankissubjecttotheapproval oftheOfficeoftheComptrolleroftheCurrency(“OCC”)pursuanttosection18(c)oftheFederalDeposit InsuranceAct.12U.S.C.§1828(c).TheOCCapprovedthemergeronNovember10,2016. 5 12U.S.C.§§1843(k)and(l);12CFR225.82. 6 12CFR262.3(b). 7 NationalassetanddepositdataareasofDecember31,2016,unlessotherwisenoted. 8 StatedepositdataareasofJune30,2016.Inthiscontext,insureddepositoryinstitutionsincludecommercial banks,creditunions,savingsassociations,andsavingsbanks.

280 FederalReserveBulletin|October2017 $1.7billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Strategic controlsCapitalBank,whichoperatesinTexas,andFirstNationalBank,whichoperatesin ColoradoandNewMexico.FirstNationalBankisthe31stlargestinsureddepository institutioninColorado,controllingdepositsof approximately$356.6million,whichrepresent0.29percentof thetotaldepositsinthatstate. Onconsummationof thisproposal,FirstSunwouldbecomethe240thlargestdepository organizationintheUnitedStates,withconsolidatedassetsof approximately$4.0billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryorganizations intheUnitedStates.FirstSunwouldcontrolconsolidateddepositsof approximately $3.2billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryorganizationsintheUnitedStates.InColorado,FirstSunwouldbecomethe 25thlargestdepositoryinstitution,controllingdepositsof approximately$706.2million, whichrepresent0.58percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. InterstateandDepositCapAnalysis Section3(d)of theBHCActgenerallyprovidesthat,if certainconditionsaremet,the Boardmayapproveanapplicationbyabankholdingcompanytoacquirecontrolof a banklocatedinastateotherthanthehomestateof thebankholdingcompanywithout regardtowhetherthetransactionisprohibitedunderstatelaw.9Underthissection,the Boardmaynotapproveanapplicationthatwouldpermitanout-of-statebankholding companytoacquireabankinahoststateif thebankhasnotbeeninexistenceforless thanthestatestatutoryminimumperiodof timeorfiveyears.10Inaddition,theBoardmay notapproveaninterstateapplicationif thebankholdingcompanycontrolsor,upon consummationof theproposedtransaction,wouldcontrolmorethan10percentof the totaldepositsof insureddepositoryinstitutionsintheUnitedStatesor,incertaincircumstances,thebankholdingcompanyuponconsummationwouldcontrol30percentormore of thetotaldepositsof insureddepositoryinstitutionsinthetargetbank’shomestateor inanystateinwhichtheacquirerandtargethaveoverlappingbankingoperations.11 Forpurposesof theBHCAct,thehomestateof FirstSunisKansas,thehomestateof CapitalBankisTexas,andthehomestateof FirstNationalBankisNewMexico.12Upon consummationof thetransactions,FirstSunwouldbewellcapitalizedandwellmanaged underapplicablelaw,andSunflowerBankhasa“Satisfactory”ratingundertheCommunityReinvestmentActof 1977(“CRA”).13Therearenominimumagerequirementsunder thelawsof TexasorNewMexicothatapplytoFirstSun’sacquisitionof Strategic’ssubsidiarybanks.14 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.Anationalbank’shomestateisthestateinwhichthemain officeofthebankislocated. 13 12U.S.C.§2901etseq. 14 SeeTex.Fin.CodeAnn.§203.003;N.M.Stat.Ann.§58-26-4.

LegalDevelopments:SecondQuarter,2017 281 Onconsummationof theproposedtransactions,FirstSunwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsin theUnitedStates.Inaddition,thecombinedorganizationwouldcontrollessthan 30percentof thetotalamountof depositsof insureddepositoryinstitutionsinColorado, theonlystateinwhichFirstSunandStrategichaveoverlappingbankingoperations.The Boardhasconsideredallotherrequirementsapplicableundersection3(d)of theBHCAct, includingSunflower’srecordof meetingtheconvenienceandneedsof thecommunitiesit serves.Accordingly,inlightof allthefactsof record,theBoardmayapprovetheproposal undersection3(d)of theBHCAct. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.15TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitytobeserved.16 SunflowerandStrategichavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Denver-Boulder,Colorado,bankingmarket(“Denvermarket”).17TheBoardhasconsideredthecompetitiveeffectsof theproposalinthisbankingmarket.Inparticular,theBoard hasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;the relativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)thatFirstSunwouldcontrol;18theconcentrationlevelsof marketdepositsand theincreaseintheselevels,asmeasuredbytheHerfindahl-HirschmanIndex(“HHI”) undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”);19andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheDenvermarket.Onconsummation of theproposal,theDenvermarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,accordingtotheDOJBankMergerGuidelines.ThechangeintheHHIinthis marketwouldbesmall,andnumerouscompetitorswouldremaininthebankingmarket.20 15 12U.S.C.§1842(c)(1). 16 12U.S.C.§1842(c)(1)(B). 17 TheDenvermarketisdefinedastheDenvermetropolitanareainBoulderCounty,portionsofAdamsand Arapahoecounties,andthetownsofFrederickandKeenesburginWeldCounty,allinColorado. 18 LocaldepositandmarketsharedataareasofJune30,2016,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html. 20 Sunfloweroperatesthe48thlargestdepositoryinstitutionintheDenvermarket,controllingapproximately $56.6millionindeposits,whichrepresent0.07percentofmarketdeposits.Strategicoperatesthe23rdlargest

282 FederalReserveBulletin|October2017 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheDenvermarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.21Inits evaluationof financialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,the Boardconsidersavarietyof informationregardingcapitaladequacy,assetquality,and earningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthe financialconditionof thecombinedorganization,includingitscapitalposition,asset quality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtocompletetheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant. TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalin lightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. SunflowerandStrategicarebothwellcapitalized,andFirstSunwouldbecomesoon consummationof theproposedtransactions.Theproposedtransactionsarestructured primarilyasstockexchanges.22Theassetquality,earnings,andliquidityof Sunflower Bank,CapitalBank,andFirstNationalBankareconsistentwithapproval,andFirstSun appearstohaveadequateresourcestoabsorbthecostsof theproposalsandtocomplete integrationof theinstitutions’operations.Inaddition,futureprospectsareconsidered consistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization,aswellaspubliccommentsreceivedonthe proposals.Inthiscase,theBoardreceivedtwocommentsobjectingtotheproposalsbased onconcernsregardingthemanagementof SunflowerandStrategicandthefuturemanagedepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$333.1million,whichrepresentabout0.40percentofmarketdeposits.Onconsummationoftheproposedtransaction,FirstSunwould becomethe23rdlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $389.7million,whichrepresentapproximately0.47percentofmarketdeposits.TheHHIfortheDenvermarket wouldincreasebylessthan1pointandremainat1295,and75competitorswouldremaininthemarket. 21 12U.S.C.§§1842(c)(2),(5),and(6). 22 Toeffectthetransactions,SunflowerwouldfirstmergewithandintoFirstSun,withsharesofSunflower primarilybeingconvertedintotherighttoreceivesharesofFirstSun,basedonanexchangeratio.Immediately followingSunflower’smergerwithFirstSun,StrategicwouldmergewithandintoFirstSun.Toeffectthis transaction,sharesofStrategicwillprimarilybeconvertedintotherighttoreceivesharesofFirstSun,basedon anexchangeratio.BecausethesharesissuedaspartofthemergerswillnotberegisteredundertheSecurities Actof1933,shareholderswhoarenotaccreditedinvestors,asdefinedinsection4(a)(2)oftheActandRule 506oftheSecuritiesExchangeCommission’sRegulationD,wouldreceivecashratherthanstock.FirstSunhas thefinancialresourcestofundthetransaction.

LegalDevelopments:SecondQuarter,2017 283 mentof FirstSun.Thecommentersprimarilyfocusedontherolesandmanagerialabilities of twoindividuals,bothof whomwouldbemembersof thefuturemanagementof FirstSun. Inparticular,commentersexpressedconcernsregardinganindividualwhocurrentlyserves asaconsultanttoSunflower,allegingthatthisindividualhasexceededtheirroleasa consultantandhasbeenresponsibleformajordecisionsatSunflower.Basedonthisindividual’sexperiencewithotherfinancialinstitutions,commentersalsoexpressedconcerns regardingthisindividual’smanagerialabilities.Commentersalsoexpressedconcerns regardingthemanagerialabilitiesandcharacterof acurrentexecutiveofficerof Sunflower. Onecommenteralsoexpressedconcernthatthemanagementof Sunflowerhastaken controlof StrategicpriortotheBoard’sapproval. Inconsideringthemanagerialresourcesof theinstitutionsinvolved,theBoardconsidered informationprovidedbycommenters,therelevantinstitutions,andtheindividuals. SunflowerandStrategicrepresentthattheofficersanddirectorsof Strategichave continuedtocarryouttheirdutiesatStrategicduringthependencyof theapplication withoutcontrolbySunflower.Themanagementof Sunfloweralsoassertsthatitsmanagement,andnottheconsultant,hasretainedallauthoritytomakedecisionsatSunflower, includingtheauthoritytocommitSunflowertoanytransactionsandtoapproverisk managementlimitsandcontrols.Sunflowerrepresentsthattheconsultant’sroleisconfined tosupportingoperationalandstrategicplanningatSunflower. Inevaluatingthemanagerialresourcesandcharacterof theproposedmanagementof FirstSun,theBoardalsohastakenaccountof confidentialsupervisoryinformation regardingSunflowerandStrategicandtheindividuals,aswellasotherregulators’supervisoryexperienceswiththeprincipalsof SunflowerandStrategic.TheBoardalsohasconsideredtheinstitutions’recordsof compliancewithapplicablebanking,consumerprotection, andanti-money-launderinglaws.Inparticular,theBoardhasreviewedtheexamination recordsof Sunflower,Strategic,andtheirsubsidiarydepositoryinstitutions,including assessmentsof theirmanagement,riskmanagementsystems,andoperations.Inaddition, theBoardhasconsideredbothitssupervisoryexperienceswiththeindividualsreferenced bythecommenters,aswellasthesupervisoryexperiencesof otherrelevantbanksupervisoryagencieswiththeseindividuals. FirstSun’sdirectorsandofficerswouldhavetheexperienceandresourcestoensurethatthe combinedorganizationoperatesinasafeandsoundmanner.Sunflower’sdirectorsand seniorexecutiveofficers,whowouldfillthemajorityof thedirectorandofficerpositionsat FirstSun,havesubstantialknowledgeof andexperienceinthebankingandfinancial servicessectors.Strategic’sdirectorsandseniorofficers,whowouldfilltheremaining directorandofficerpositionsatFirstSun,alsohavesubstantialknowledgeof andexperienceinthebankingandfinancialservicessectors.Further,FirstSun’srisk-management programappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredFirstSun’splansforimplementingtheproposal.FirstSun hasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.FirstSun representsthat,followingconsummationof theanticipatedbankmergers,itwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombinedorganization. Thesepolicies,procedures,andcontrolsareconsideredsatisfactoryfromasupervisory perspective. Basedonallthefactsof record,includingthesupervisoryrecordsof Sunflower,Strategic, andtheirsubsidiarybanks,managerialandoperationalresources,andplansforoper-

284 FederalReserveBulletin|October2017 atingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerialresourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellastherecordsof effectivenessof Sunflowerand Strategicincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.23Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,24andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.25 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair 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 Sunflower Bank,CapitalBank,andFirstNationalBank;theconsumercompliancerecordsof the involvedbanks;confidentialsupervisoryinformation;andinformationprovidedby FirstSun. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardevaluates aninstitution’sperformancerecordinlightof examinationsbytheappropriatefederal supervisorsof theCRAperformancerecordsof therelevantinstitutions.26TheCRA requiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitution prepareawrittenevaluationof theinstitution’srecordof meetingthecreditneedsof its entirecommunity,includingLMIneighborhoods.27Aninstitution’smostrecentCRA performanceevaluationisaparticularlyimportantconsiderationintheapplications 23 12U.S.C.§1842(c)(2). 24 12U.S.C.§2901(b). 25 12U.S.C.§2903. 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 27 12U.S.C.§2906.

LegalDevelopments:SecondQuarter,2017 285 processbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’sprimary federalsupervisorof theinstitution’soverallrecordof lendinginitscommunities.28 Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sdatareportedundertheHomeMortgageDisclosureAct(“HMDA”),29in additiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollected andreportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonavarietyof factors,including(1)thenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof theinstitution’slendinginits assessmentareasandthenumberandamountsof loansinlow-,moderate-,middle-,and upper-incomegeographies;(3)thedistributionof loansbasedonborrowercharacteristics, including,forhomemortgageloans,thenumberandamountsof loanstolow-,moderate-, middle-,andupper-incomeindividuals;30(4)theinstitution’scommunitydevelopment lending,includingthenumberandamountof communitydevelopmentloansandtheir complexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelending practicestoaddressthecreditneedsof LMIindividualsandgeographies. Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sdatareportedundertheHomeMortgageDisclosureAct(“HMDA”),31in additiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollected andreportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonavarietyof factors,including(1)thenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof theinstitution’slendinginits assessmentareasandthenumberandamountsof loansinlow-,moderate-,middle-,and upper-incomegeographies;(3)thedistributionof loansbasedonborrowercharacteristics, including,forhomemortgageloans,thenumberandamountsof loanstolow-,moderate-, middle-,andupper-incomeindividuals;32(4)theinstitution’scommunitydevelopment lending,includingthenumberandamountof communitydevelopmentloansandtheir 28 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 29 12U.S.C.§2801etseq. 30 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 31 12U.S.C.§2801etseq. 32 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3).

286 FederalReserveBulletin|October2017 complexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelending practicestoaddressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof SunflowerBank SunflowerBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheOCC,asof March31,2014(“SunflowerBankEvaluation”).33Thebankreceiveda“HighSatisfactory”ratingfortheServiceTest,a“LowSatisfactory”ratingfortheLendingTest,anda“NeedstoImprove”fortheInvestmentTest. ExaminersfoundthatSunflowerBank’soverallhomemortgagelendingactivitywasgood andthattheborrowerdistributionof theseloanswasadequate.Accordingtoexaminers, thebank’slevelandborrowerdistributionof smallloanstofarmswasgood,butthe geographicdistributionof theseloanswaspoor.Examinersfurthernotedthatthebank’s levelof smallloanstobusinesseswasadequateandthatthegeographicdistributionof theseloanswasexcellent.Examinersobservedthattheborrowerdistributionof smallloans tobusinesseswasgood.Althoughexaminersobservedanoverallpoorlevelof qualified investmentsanddonations,examinersnotedthatthebank’sdeliverysystemsprovided goodaccesstoLMIgeographiesandindividuals.Examinersalsonotedthat,overall,the bank’slevelof communitydevelopmentserviceswasadequate. SunflowerBankwasassignedanoverallratingof “Satisfactory”inthestateof Kansas,the areaweightedmostheavilybyexaminersduetoSunflowerBank’slevelof activityinthat state.InKansas,SunflowerBank’sperformanceontheLendingTestwasrated“Satisfactory.”Examinersfoundthatthebank’soveralllendingactivityinthebank’s non-metropolitanassessmentareawasexcellentandthattheoverallborrowerdistribution wasadequate.OntheInvestmentTest,SunflowerBankwasrated“NeedstoImprove” basedonthebank’slevelof qualifiedinvestmentsanddonations,whileontheServiceTest, examinersratedthebank’sperformanceas“HighSatisfactory.”Inthebank’s non-metropolitanassessmentarea,examinersnotedthatthebank’sservicedelivery systemswerereadilyaccessibletogeographiesandindividualsof differentincomelevels andthatthebankprovidedagoodlevelof communitydevelopmentservices. CRAPerformanceof FirstNationalBank FirstNationalBankwasassignedanoverallratingof “Satisfactory”atitsmostrecent CRAperformanceevaluationbytheOCC,asof March31,2016(“FirstNationalBank Evaluation”).34Thebankreceived“HighSatisfactory”ratingsforboththeServiceTest andInvestmentTestanda“LowSatisfactory”ratingfortheLendingTest. 33 TheSunflowerBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedhomepurchase,homeimprovement,andhomerefinancemortgageloans,andsmallbusinessand smallfarmloans,fortheperiodbetweenJanuary1,2010,andDecember31,2012.Theevaluationperiodfor communitydevelopmentlending,investments,andserviceswasJuly20,2011,throughMarch31,2014. TheSunflowerBankEvaluationincludedfull-scopeevaluationsofthebank’snon-metropolitanassessment areasinKansas,Missouri,andColorado.Ineachofthesestates,datafornon-metropolitanareaswasaggregatedtoformonenon-metropolitanassessmentareaforthepurposeofanalysisinthatstate.TheSunflower BankEvaluationalsoincludedfull-scopeevaluationsofthePueblo,Colorado,MetropolitanStatisticalArea (“MSA”).Limited-scopeevaluationswereperformedinfourmetropolitanassessmentareasinKansas:Wichita, Manhattan,Lawrence;andTopeka. 34 TheFirstNationalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. Examinersreviewedhomepurchase,homeimprovement,andhomerefinancemortgageloansreported pursuanttoHMDA,andsmallbusinessloansreportedunderCRAdatacollectionrequirements,fortheperiod betweenJanuary1,2014,andDecember31,2015.Theevaluationperiodforcommunitydevelopmentlending, investments,andserviceswasMarch31,2013,throughMarch31,2016. TheFirstNationalBankEvaluationincludedfull-scopereviewsofthebank’sAlbuquerque(Bernalillo County),SantaFeMSAandDenver-Aurora-LakewoodMSAassessmentareas.Limited-scopereviewswere

LegalDevelopments:SecondQuarter,2017 287 ExaminersfoundthattheFirstNationalBankoriginatedasubstantialmajorityof loans insideitsassessmentareas.Examinersalsofoundthatthebankmadearelativelyhighlevel of communitydevelopmentloansinthestatesof NewMexicoandColorado,whichhada positiveimpactonthebank’sCRAperformanceinthosestates.Accordingtoexaminers, thevolumeof thebank’squalifiedinvestmentswassignificantrelativetotheinvestment opportunitiesandidentifiedneedsof thebank’sassessmentareas.Examinersnotedthat theborrowerdistributionof HMDAloansinthebank’sAlbuquerqueandSantaFeassessmentareaswaspoor.However,examinersfoundthatFirstNationalBank’sbrancheswere accessibletogeographiesandindividualsof allincomelevelsandthatthebankprovideda relativelyhighlevelof communitydevelopmentservices. ExaminersweightedtheFirstNationalBank’sperformanceintheSantaFeassessment areamostheavily,giventhelevelof thebank’sactivitiesinthatarea.IntheSantaFe assessmentarea,examinersconsideredFirstNationalBank’scommunitydevelopment lendingtobeexcellent.Inaddition,examinersconsideredthebank’sbranchesinthisarea tobereasonablyaccessibletogeographiesandindividualsof allincomes.Although examinersfoundthebank’slendingactivityintheSantaFeassessmentareatobepoor, examinersalsonotedthatthebank’spoorrecordof lendingactivitythroughoutNew Mexicowasmitigatedbytheeconomicconditionsandthebank’sstrategicinitiatives duringtheevaluationperiod. CRAPerformanceof CapitalBank CapitalBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFederalDepositInsuranceCorporation,asof April4,2011 (“CapitalBankEvaluation”).35 ExaminersdeterminedthatCapitalBank’sloan-to-depositratiowasreasonablegiventhe institution’ssizeandfinancialcondition.Examinersfurthernotedthat,despiteeconomic conditionsinthearea,CapitalBankcontinuedtomeetthecreditneedsof itscommunity byextendingloans.Accordingtoexaminers,thebankexhibitedanexcellentrecordof concentratingitsloansinsideitsassessmentarea,particularlywithrespecttosmallbusiness andresidentialmortgageloans.Examinersalsofoundthatthegeographicdistributionof thebank’sloansreflectedreasonabledispersionthroughoutthebank’sassessmentarea.In particular,examinersconsideredthebank’srecordsof smallbusinessandhomemortgage lendinginLMIgeographiestobereasonable.Likewise,examinersfoundthatborrower distributionof smallbusinessandresidentialmortgageloansreflectedareasonable penetrationtoborrowersof differentincomelevels.Further,examinersnotedthatCapital BankdidnotreceiveanyCRAcomplaintsduringtheassessmentperiod. conductedofthebank’sLasCrucesMSA,BoulderMSA,FortCollinsMSA,andofitsLosAlamosCounty andLincolnCountyassessmentareas. 35 TheCapitalBankEvaluationwasconductedusingSmallInstitutionCRAExaminationProcedures,which evaluate(1)theinstitution’sloan-to-depositratioandotherlending-relatedactivities,suchasloanoriginations forsaletothesecondarymarkets,communitydevelopmentloans,orqualifiedinvestments;(2)thepercentageof loansandotherlending-relatedactivitieslocatedinthebank’sassessmentareas;(3)thebank’srecordof lendingtoandengaginginotherlending-relatedactivitiesforborrowersofdifferentincomelevelsandbusinessesandfarmsofdifferentsizes;(4)thegeographicdistributionofthebank’sloans;and(5)thebank’s recordoftakingactioninresponsetowrittencomplaintsaboutitsperformanceinhelpingtomeetcreditneeds initsassessmentareas.See,e.g.,12CFR228.26(b).TheCapitalBankEvaluationreviewedthebank’sCRA activitiesfortheperiodbetweenJuly17,2006,andApril4,2011.Inparticular,examinersalsoconsidereda sampleofsmallbusinessloansoriginatedduringtheperiodbetweenMay22,2008,andJanuary27,2011,as wellashomemortgageloansrecordedonthebank’s2009and2010HMDALoanApplicationRegisters.The CapitalBankEvaluationincludedafull-scopereviewofthebank’sElPasoMSA(ElPasoCounty)assessment area.

288 FederalReserveBulletin|October2017 AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.FirstSunrepresentsthatuponconsummationof the proposals,existingcustomersof CapitalBankandFirstNationalBankwouldhaveaccess toamoreexpansivelineof productsandservices.FirstSunalsorepresentsthattheacquisitionwouldmakeavailableexpandedresourcestothecommunitiescurrentlyservedby SunflowerBank,CapitalBank,andFirstNationalBank.FirstSunalsorepresentsthatthe proposedtransactionswouldexpandtheretailoutletsavailabletocustomersof allthree institutions. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithconsumer protectionlaws,confidentialsupervisoryinformation,informationprovidedbyFirstSun, thepubliccommentsontheproposal,andotherpotentialeffectsof theproposalonthe convenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsideraproposal’srisk“to thestabilityof theUnitedStatesbankingorfinancialsystem.”36 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.37These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.38 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof 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. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

LegalDevelopments:SecondQuarter,2017 289 thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.39 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthathaslessthan $10billioninassetsandaproformaorganizationof lessthan$100billioninassets.The acquirerwouldbeandthetargetsarepredominatelyengagedinretailcommercialbanking activities.40Theproformaorganizationwouldhaveminimalcross-borderactivitiesand wouldnotexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financialdistress.In addition,theorganizationwouldnotbeacriticalservicesproviderorbesointerconnectedwithotherfirmsorthemarketsthatitwouldposesignificantrisktothefinancial systemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. FinancialHoldingCompanyElection Asnoted,FirstSunhaselectedtobecomeafinancialholdingcompanyinconnectionwith theproposals.FirstSunhascertifiedthat,uponconsummationof theproposals,FirstSun andthedepositoryinstitutionsitwouldcontrolwouldbewellcapitalizedandwell managed,andhasprovidedalltheinformationrequiredundertheBoard’sRegulationY.41 Basedonallthefactsof record,theBoarddeterminesthatFirstSun’selectionwillbecome effectiveuponconsummationof theproposalif,onthatdate,FirstSuniswellcapitalized andwellmanagedandalldepositoryinstitutionsitcontrolsarewellcapitalized,well managed,andhaveCRAratingsof atleast“Satisfactory.” Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyFirstSunwithallof theconditionsimposedinthisOrder,includingreceipt of allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeproposal.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithits findingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. 39 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthese presumptions,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anyacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 40 Sunflowerprimarilyofferscommercialandretailbankingservices,mortgagebankingservices,commercialreal estatelending,investmentadvisoryandmanagementservices,trustservicesandoperations,wealthmanagementservices,andtreasuryservices.Strategicalsoofferscommercialandretailbankingservices,aswellas treasurymanagementservices,privatebanking,mortgagebankingservices,andwealthmanagementservices. Ineachoftheseactivities,theinvolvedinstitutionshave,andasaresultoftheproposalwouldcontinuetohave, asmallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices. 41 SeeDodd-FrankAct§606(a),124Stat.at1607,amending12U.S.C.§1843(l)(1).

290 FederalReserveBulletin|October2017 Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof KansasCity,actingunder delegatedauthority. Byorderof theBoardof Governors,effectiveJune2,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard.

LegalDevelopments:SecondQuarter,2017 291 Canadian Imperial Bank of Commerce Toronto, Canada CIBC Holdco Inc. New York, New York OrderApprovingtheFormationof aBankHoldingCompanyandtheAcquisitionof aBank HoldingCompany FRBOrderNo.2017-15 (June7,2017) CanadianImperialBankof Commerce(“CIBC”),Toronto,Canada,aforeignbanking organizationthathaselectedtobetreatedasafinancialholdingcompanywithinthe meaningof theBankHoldingCompanyActof 1956(“BHCAct”),1anditssubsidiary, CIBCHoldcoInc.(“CIBCHoldco,”andtogetherwithCIBC,“Applicants”),NewYork, NewYork,haverequestedtheBoard’sapprovalundersection3of theBHCAct2to acquirePrivateBancorp,Inc.(“PrivateBancorp”),andtherebyindirectlyacquireThe PrivateBankandTrustCompany(“PrivateBank”),bothof Chicago,Illinois.Aspartof the proposal,CIBCHoldcowouldbecomeabankholdingcompany. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister60355(September1,2016)).3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. CIBC,withconsolidatedassetsof approximately$381billion,isthefifthlargestinsured depositoryorganizationinCanada.4CIBCprovidesretailandcommercialbanking,wealth management,insurance,andinvestmentbankingproductsandservices,anditoperatesin NorthAmerica(includingtheUnitedStates),Europe,andAsia.IntheUnitedStates, CIBCalsooperatesbranchesinNewYorkandIllinoisandrepresentativeofficesinTexas andCalifornia.CIBCdoesnotcontrolabankwithintheUnitedStates.5CIBCisaqualifyingforeignbankingorganizationand,uponconsummationof theproposal,would continuetomeettherequirementsforaqualifyingforeignbankingorganizationunderthe Board’sRegulationK.6 PrivateBancorp,withconsolidatedassetsof approximately$20.1billion,isthe82ndlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately $16.1billionindeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.7PrivateBancorpcontrols PrivateBank,whichoperatesinIllinois,Michigan,Missouri,andWisconsin. 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12CFR262.3(b). 4 AssetandrankingdataforCIBConaconsolidatedbasisareasofApril30,2016,andarebasedonthe exchangerateasofthatdate. 5 CIBCalsocontrolsAtlanticTrustCompany,NationalAssociation,Atlanta,Georgia,anondepositorytrust companythatisnota“bank”forpurposesoftheBHCAct.See12U.S.C.§1841(c)(2)(D). 6 12CFR211.23(a). 7 U.S.assetanddepositdataareasofDecember31,2016,unlessotherwisenoted.

292 FederalReserveBulletin|October2017 Onconsummationof thisproposal,CIBC’sU.S.operationswouldhaveassetsthatrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnited States.8 CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.9TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposalare clearlyoutweighedinthepublicinterestbytheprobableeffectof theproposalinmeeting theconvenienceandneedsof thecommunitytobeserved.10 CIBCdoesnotcurrentlycontrolacommercialbankintheUnitedStates,andCIBCand PrivateBancorpdonotdirectlycompeteinanyretailbankingmarket.TheDepartmentof JusticehasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthat competitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.11Inits evaluationof financialfactors,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.TheBoardalsohasconsultedwiththeOffice of theSuperintendentof FinancialInstitutions(“OSFI”),theagencywithprimary 8 UndertheBoard’sRegulationYY,aforeignbankingorganizationwithU.S.non-branchassetsof$50billion ormoreisrequiredtoestablishaU.S.intermediateholdingcompany(“IHC”).12CFR252.153.Onconsummationofthisproposal,CIBCwouldhavelessthan$50billioninU.S.non-branchassetsandthereforewould notberequiredtoestablishaU.S.IHC. 9 12U.S.C.§1842(c)(1)(A). 10 12U.S.C.§1842(c)(1)(B). 11 12U.S.C.§1842(c)(2),(5),and(6).

LegalDevelopments:SecondQuarter,2017 293 responsibilityforthesupervisionandregulationof federallyregisteredCanadianbanking organizations,includingCIBC. Thecapitallevelsof CIBCexceedtheminimumlevelsthatwouldberequiredunderthe BaselCapitalAccordandareconsideredtobeequivalenttothecapitallevelsthatwouldbe requiredof aU.S.bankingorganization.12Theproposedtransactionisamergerthatis structuredasacashandshareexchange.13Theassetquality,earnings,andliquidityof both CIBCandPrivateBancorpareconsistentwithapproval,andCIBCappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of CIBC’sU.S.operations,PrivateBancorp,andPrivateBank,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbyCIBC,theBoard’ssupervisoryexperiencesandthose of otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’ recordsof compliancewithapplicablebanking,consumerprotection,andanti-moneylaunderinglaws,aswellasinformationprovidedbycommenters.Asnoted,theBoardalso hasconsultedwiththeOSFI. CIBC,PrivateBancorp,andPrivateBankareeachconsideredtobewellmanaged.CIBC’s directorsandseniorexecutiveofficershaveknowledgeof andexperienceinthebanking andfinancialservicessectors,anditsrisk-managementprogramappearsconsistentwith approvalof thisexpansionaryproposal. TheBoardalsohasconsideredCIBC’splansforimplementingtheproposal.CIBChas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.CIBC wouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthecombined organization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,themanagementof CIBCandPrivateBancorphavetheexperienceandresourcesto operatethecombinedorganizationinasafeandsoundmanner,andCIBCplanstointegratePrivateBancorp’sexistingmanagementandpersonnelinamannerthataugments CIBC’smanagement.14 Section3of theBHCActalsoprohibitstheBoardfromapprovingaproposalunlessthe applicantprovidesadequateassurancesthatitwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseof itsaffiliatesthattheBoarddeems appropriatetodetermineandenforcecompliancewiththeBHCAct.15TheBoardhas 12 TheBoardconsideredthetotalrisk-basedcapitalratio,tier1risk-basedcapitalratio,commonequitytier1 risk-basedcapitalratio,andtheratiooftier1tototalassetsofCIBCandCIBCHoldco. 13 ApplicantswouldeffecttheacquisitionbymergingPrivateBancorpwithandintoCIBCHoldco(withCIBC Holdcoasthesurvivor).Atthetimeofthemerger,eachshareofPrivateBancorpcommonstockwouldbe convertedintoarighttoreceiveCIBCcommonstockandcash,basedonanexchangeratio.CIBChasthe financialresourcestofundthecashportionoftheexchange. 14 Onconsummation,CIBCwilladdonedirector,nominatedbyPrivateBancorp,toitsboard.Theboardof CIBCHoldcowillbecomposedofninedirectors,ofwhichthreeindependentdirectorsandone nonindependentdirectorwillbeselectedbyPrivateBancorpandtheotherfivedirectorsselectedbyCIBC. Similarly,theboardofPrivateBankwillbecomposedofninedirectors,ofwhichthreeindependentdirectors andonenonindependentdirectorwillbeselectedbyPrivateBancorpandtheotherfivedirectorsselectedby CIBC.Inaddition,certainkeyexecutivesofPrivateBancorpandPrivateBankwillbeemployedbyCIBCand CIBCHoldcoafterconsummationoftheproposal. 15 12U.S.C.§1842(c)(3)(A).

294 FederalReserveBulletin|October2017 reviewedtherestrictionsondisclosureof informationintherelevantjurisdictionsinwhich CIBCoperatesandhascommunicatedwithrelevantgovernmentauthoritiesconcerning accesstoinformation.Inaddition,CIBChascommittedthat,totheextentnotprohibited byapplicablelaw,itwillmakeavailabletotheBoardsuchinformationonitsoperations andtheoperationsof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeBHCAct,theInternationalBankingActof 1978,16andotherapplicablefederallaws.CIBCalsohascommittedtocooperatewiththeBoardtoobtainany waiversorexemptionsthatmaybenecessarytoenableitoritsaffiliatestomakesuchinformationavailabletotheBoard. Basedonallthefactsof record,includingCIBC’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof CIBCandPrivateBancorpincombattingmoney-laundering activities,areconsistentwithapproval. SupervisionorRegulationonaConsolidatedBasis Asrequiredbysection3of theBHCAct,theBoardconsiderswhetherCIBCissubjectto comprehensivesupervisionorregulationonaconsolidatedbasisbyappropriateauthorities initshomecountry.17TheBoardpreviouslyhasdeterminedthatCIBCissubjectto comprehensivesupervisiononaconsolidatedbasisbyitshomecountrysupervisor,the OSFI.18CIBCremainssupervisedbytheOSFIonsubstantiallythesametermsandconditions.Basedonthisfindingandallthefactsof record,theBoardconcludesthatCIBC continuestobesubjecttocomprehensivesupervisiononaconsolidatedbasisbyitshome countrysupervisor. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.19Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit 16 12U.S.C.§3101etseq. 17 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 conditionofthebankanditssubsidiariesandofficesthroughregulationexaminationreports,auditreports,or otherwise;(iii)obtaininformationonthedealingswithandrelationshipsbetweenthebankanditsaffiliates, bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedonaworldwide basis,orcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwide, consolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure,ona worldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 18 CanadianImperialBankofCommerce,87FederalReserveBulletin678(2001);CanadianImperialBankof Commerce,85FederalReserveBulletin733(1999).Inaddition,in2009and2013,itwasdeterminedthatCIBC wassubjecttocomprehensivesupervisiononaconsolidatedbasisbytheOSFI.BoardlettertoDavidR.Sahr, Esq.,MayerBrownLLP(March26,2013);CanadianImperialBankofCommerce,95FederalReserveBulletin B101(2009). 19 12U.S.C.§1842(c)(2).

LegalDevelopments:SecondQuarter,2017 295 needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentActof 1977(“CRA”).20TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation,21andrequirestheappropriatefederalfinancialsupervisoryagencyto assessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentire community,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluating bankexpansionaryproposals.22 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheirrecentfair 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 PrivateBank andJuniperBank,Wilmington,Delaware;23thefairlendingandcompliancerecordsof PrivateBank;thesupervisoryviewsof theFederalDepositInsuranceCorporation (“FDIC”);confidentialsupervisoryinformation;informationprovidedbyCIBC;andthe publiccommentsreceivedontheproposal. TheBoardplacedadditionalemphasisonPrivateBank’srecordinmeetingtheconvenience andneedsof thecommunitiesitservesbecausePrivateBankwillremainaseparateentity andcontinueitsexistingCRAprogramafterconsummationof theproposedtransaction. PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromtwocommentersexpressingconcernsabout theproposal.OnecommentercriticizedPrivateBank’srecordof lendingtosmallbusinessesinLMIcommunitieswithintheSt.Louis,Missouri,area.Thecommenteralso allegedthatPrivateBank’sbankservicesarenotsufficientlyaccessibletoLMIcommunities intheSt.Louisarea,aswellasthroughoutthebank’sfootprintinIllinoisandotherareas. OnecommenterexpressedconcernsregardingwhetherPrivateBank’slendingtoLMI borrowersandcommunitieswouldcontinuetoincreaseatitspriorrateafterconsummationof theproposal.TwocommentersurgedCIBCtodevelopacommunityreinvestment plan,24andthesecommentersurgedtheBoardtoapprovetheapplicationonthecondition thatCIBCsuccessfullyimplementsuchaplan.25 20 12U.S.C.§2901etseq. 21 12U.S.C.§2901(b). 22 12U.S.C.§2903. 23 CIBCcontrolledJuniperBankfrom2001until2004. 24 FollowingCIBC’ssubmissionoftheapplications,PrivateBankdevelopedacommunitybenefitsplaninconsultationwithcommentersandotherorganizations. 25 TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,CITGroup,Inc.,FRBOrderNo.2015-20at24n.54(July19,2015);CitigroupInc.,88Federal

296 FederalReserveBulletin|October2017 Businessesof theInvolvedInstitutionsandResponsetoComments CIBCprovidesretailandcommercialbanking,wealthmanagement,insurance,andinvestmentbankingproductsandservices,anditoperatesinNorthAmerica,Europe,andAsia. IntheUnitedStates,manyof CIBC’sactivitiesareconductedthroughAtlanticTrust Group,LLC,Atlanta,Georgia,whichprovideswealthmanagementservices;CIBCInc., NewYork,NewYork,acommercialfinancecompany;andCIBCWorldMarketsCorp., NewYork,NewYork,aregisteredbroker-dealerprovidingcapitalmarketsandinvestment bankingservices.CIBCmaintainstwobranchesinNewYork,NewYork,whichprovide corporatebankingproductsandservices,andabranchinChicago,Illinois,whichengages intheoriginationandservicingof realestatecreditfacilities.CIBCHoldcodoesnot currentlyengageinanyactivities. PrivateBank’sprimaryfocusisoncommerciallending,includingtomedium-sizedcompanieswithannualrevenuesbetween$10millionand$2billion.PrivateBankalsoprovides privatebanking,residentialmortgagebanking,financialadvisory,wealthmanagement,and asset-managementservicestoitscustomers.AlthoughPrivateBankdoesoffertraditional retaildepositandcreditproducts,themajorityof thebank’sbusinessisgeneratedfrom commercialclients. Inresponsetothecommenters’allegations,CIBCstatesthatitwillbecommittedto continuingtosupportthecommunitieswithintheCRAassessmentareasof PrivateBank. CIBCrepresentsthat,inrecentyears,PrivateBankhassignificantlyincreaseditslendingto smallbusinessesinLMIcensustractsintheSt.Louisareaasapercentageof itstotal smallbusinesslendinginthatarea.CIBCalsorepresentsthat,inrecentyears,PrivateBank hasincreasedthepercentageof itshomemortgagelendingintheSt.Louisareathatwas originatedinLMIcensustracts,aswellasthepercentagethatwasoriginatedtoLMI borrowers.Withregardtotheaccessibilityof PrivateBank’sservicestoLMIcommunities intheSt.Louisarea,CIBCrepresentsthat,althoughPrivateBankdoesnothaveabranch presenceinLMIcensustractsintheSt.Louisarea,PrivateBankleasesofficespaceina low-incomecensustractthatprovidesclientmeetingspaceforthebank’sCommunity DevelopmentLenderteaminSt.Louis. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.26 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.27Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities. ReserveBulletin485(2002);FifthThirdBancorp,80FederalReserveBulletin838,8412(1994).Initsevaluation, theBoardreviewstheexistingCRAperformancerecordofanapplicantandtheprogramsthattheapplicant hasinplacetoservethecreditneedsofitsCRAassessmentareas. 26 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 27 12U.S.C.§2906.

LegalDevelopments:SecondQuarter,2017 297 Ingeneral,federalfinancialsupervisorsapplylending,investment,andserviceteststo evaluatetheperformanceof alargeinsureddepositoryinstitutioninhelpingtomeetthe creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’sdatareportedundertheHomeMortgageDisclosureActof 1975,28inadditiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollectedand reportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonavarietyof factors,including(1)thenumberandamountof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof theinstitution’slending, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountsof loansinlow-,moderate-,middle-,andupper-income geographies;(3)thedistributionof suchloansbasedonborrowercharacteristics,including, forhomemortgageloans,thenumberandamountsof loanstolow-,moderate-,middle-, andupper-incomeindividuals;29(4)theinstitution’scommunitydevelopmentlending, includingthenumberandamountsof communitydevelopmentloansandtheircomplexity andinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpractices toaddressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof PrivateBank PrivateBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof August17,2015(“PrivateBankEvaluation”),30 withratingsof “HighSatisfactory”fortheLendingTest,InvestmentTest,andServiceTest. ExaminersfoundthatPrivateBank’slendinglevelsreflectedgoodresponsivenesstocredit needsinitsassessmentareas,andthatthebankexhibitedagoodrecordof servingthe creditneedsof LMIgeographiesandindividualswithinitsassessmentareas.Examiners alsofoundthebank’sgeographicdistributionof loansreflectedgoodpenetrationof small businessandhomemortgageloansthroughouttheassessmentareas.Further,examiners notedthatPrivateBankwasaleaderinmakingcommunitydevelopmentloansandthatthe bankmadeextensiveuseof innovativeandflexiblelendingpracticesinordertoserve creditneedsinitsassessmentareas. IntheSt.Louisassessmentarea,anareaof concernforcommenters,examinersfoundthat PrivateBank’slendinglevelsreflectedgoodresponsivenesstoassessmentareacreditneeds. Examinersalsonotedthatthegeographicdistributionof PrivateBank’sloansreflected goodpenetrationthroughouttheSt.Louisassessmentarea,andthatthedistributionof loansreflectedadequatepenetrationamongborrowersof differentincomelevels.However, examinersfoundthatthedistributionof loansreflectedpoorpenetrationamongbusi- 28 12U.S.C.§2801etseq. 29 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 30 ThePrivateBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.TheevaluationperiodfortheLendingTest,InvestmentTest,andServiceTestwasfromApril8,2013,throughAugust17, 2015.ThePrivateBankEvaluationincludedafull-scopereviewofthebank’sassessmentareaswithinthe followingareas:theChicago–Naperville–Elgin,Illinois–Indiana–Wisconsin,MetropolitanStatisticalArea (“MSA”);theDetroit–Warren–Dearborn,Michigan,MSA;theSt.Louis,Missouri–Illinois,MSA(“St.Louis assessmentarea”);andtheMilwaukee–Waukesha–WestAllis,Wisconsin,MSA.

298 FederalReserveBulletin|October2017 nessesof differentsizeswithintheassessmentarea.Examinersnotedthatthebankmadea relativelyhighlevelof communitydevelopmentloansintheSt.Louisassessmentarea duringthereviewperiod. ExaminersfoundthatPrivateBankmadeasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrants,occasionallyinaleadershipposition.Examinersnotedthat PrivateBankexhibitedgoodresponsivenesstothecreditandcommunityeconomicdevelopmentneedsof itsassessmentareas.Additionally,examinersnotedthatPrivateBank madesignificantuseof innovativeandcomplexinvestmentstosupportcommunitydevelopmentinitiatives.IntheSt.Louisassessmentarea,examinersnotedthatthebankhadan excellentlevelof qualifiedcommunitydevelopmentinvestmentsandgrants,ofteninaleadershipposition,particularlythosethatarenotprovidedbyprivateinvestors. Examinersfoundthatthebank’sretaildeliverysystemswereaccessibletolimitedportions of itsassessmentareas,butthatitsopeningandclosingof brancheshadnotadversely affectedtheaccessibilityof itsdeliverysystems,particularlyinLMIgeographiesandto LMIindividuals.Examinersnotedthatthebankwasaleaderinprovidingcommunity developmentservices.Additionally,examinersnotedthatPrivateBank’sservicesdidnot varyinawaythatinconveniencedportionsof itsassessmentareas,particularlyLMIgeographiesandindividuals. IntheSt.Louisassessmentarea,examinersfoundthatPrivateBank’sdeliverysystemswere accessibletolimitedportionsof theassessmentarea.Examinersnotedthatthebank’s branchesintheassessmentareawerelocatedinupper-incomecensustracts,butthatthe bank’sloanproductionofficeintheassessmentareawaslocatedinalow-incomecensus tract.Additionally,examinersfoundthatPrivateBank’sservicesdidnotvaryinawaythat inconveniencedportionsof theassessmentarea,particularlyLMIgeographiesand individuals. InIllinois,anotherareaof concernforcommenters,examinersfoundthatPrivateBank’s deliverysystemswereaccessibletolimitedportionsof theassessmentarea,includingone moderate-incomegeography,anddidnotarbitrarilyinconvenienceanyportionsof the assessmentarea.ExaminersalsonotedthatPrivateBankwasaleaderinprovidingcommunitydevelopmentservices. PrivateBank’sEffortssincethe2015CRAEvaluation CIBCrepresentsthatPrivateBankhastakenstepstoimproveitsidentificationof and responsivenesstocommunityneeds.CIBCrepresentsthatPrivateBankhasbegunoffering anewsuiteof smallbusinessloanproductsdesignatedforsmallbusinesseslocatedin LMIgeographies.Additionally,CIBCrepresentsthatPrivateBankhasmadeadditional investmentsinlow-incomehousingtaxcreditfundsandjob-creationprojectsinLMIgeographiesandhasmadeadditionalcommunitydevelopmentloans. IntheSt.Louisassessmentarea,CIBCrepresentsthatPrivateBankhascontinuedto increasethepercentageof itshomemortgagelendingthatisoriginatedinLMIcensus tractsandthepercentagethatisoriginatedtoLMIborrowers.CIBCrepresentsthat PrivateBankhascontinuedtoincreasethepercentageof thebank’ssmallbusinesslending intheSt.LouisareathatisoriginatedtosmallbusinessesinLMIcensustracts.Additionally,CIBCrepresentsthatPrivateBank’sabilitytolendtosmallbusinessesinLMIcensus tractsintheSt.Louisareawasstrengthenedbytheintroductionin2016of asuiteof proprietaryaffordablesmallbusinessloanprograms.CIBCrepresentsthatPrivateBankhas takenstepstoexpandthemarketingandoutreachforitshomemortgageandsmallbusinesslendingprogramsintheSt.Louisarea,includingthroughnewspaperadvertisements

LegalDevelopments:SecondQuarter,2017 299 andcommunitybusinessevents.CIBCalsorepresentsthatPrivateBankhascontinuedto supportthecreditneedsof theSt.Louisassessmentareathroughcommunitydevelopment loans,investments,anddonations. CRAPerformanceof JuniperBank CIBCdoesnotcurrentlycontrolabankintheUnitedStates.ThemostrecentCRAperformanceevaluationof aU.S.bankcontrolledbyCIBCwastheevaluationof JuniperBank bytheFDIC,asof May13,2003(“JuniperBankEvaluation”),inwhichJuniperBankwas assignedanoverall“Satisfactory”rating.31Examinersnotedthatthebankoriginatedan adequateamountof communitydevelopmentloansandqualifiedcommunitydevelopment investments.ExaminersalsofoundthatJuniperBankemployeesprovidedahighlevelof communitydevelopmentservicesthatdemonstratedanexcellentresponsivenesstoavailable opportunities.WhileCIBCnolongercontrolsJuniperBank,CIBC’srecordof maintainingsatisfactoryCRAratingsandperformanceatJuniperBankindicatesthatCIBChas experienceandresourcestoensurethatPrivateBankisoperatedinamannerthathelps servethecreditandotherbankingneedsof itscommunitiesinasatisfactorymanner. Viewsof theFDIC Initsreviewof theproposal,theBoardconsultedwiththeFDICregardingPrivateBank’s CRA,consumercompliance,andfairlendingrecords.TheBoardhasconsideredtheresults of arecentconsumercomplianceexaminationof PrivateBankconductedbyFDICexaminers,whichincludedareviewof thebank’scompliancerisk-managementprogramandthe bank’scompliancewithconsumerlawsandregulations.TheBoardalsohasconsideredthe resultsof arecentexaminationof PrivateBank’scompliancewiththeFairHousingAct (“FHA”),32whichincludedareviewof thebank’slendingdataanditspoliciesandprocedurestoensurecompliancewiththeFHA. TheBoardhastakentheseconsultationswiththeFDICandtheinformationdiscussed aboveintoaccountwhenevaluatingthisproposal,includinginconsideringwhetherCIBC hastheexperienceandresourcestoensurethattheorganizationeffectivelyimplements policiesandprogramsthatwouldallowthecombinedorganizationtoserveeffectivelythe creditneedsof allthecommunitieswithinthefirm’sassessmentareas. AdditionalConvenienceandNeedsConsiderations TheBoardalsohasconsideredotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.CIBCrepresentsthattheproposalwould providecustomersof thecombinedorganizationaccesstoadditionalorexpandedservices, includingretailbankingservicesnotcurrentlyofferedtocustomersof CIBC’sU.S. subsidiariesandanexpandedrangeof wealthmanagementandadvisoryservicesnot offeredtocurrentPrivateBankcustomers.Inaddition,CIBCstatesthatthecombined organizationwillbestrengthenedbythecomplementaryaspectsof thetwoentities’businesses,aswellasthecombinedexperienceandexpertiseof theirrespectivemanagement andemployees,resultinginastrongerandmorediversifiedfinancialinstitution. 31 JuniperBankwasalimitedpurposebankforpurposesoftheJuniperBankEvaluationandwasevaluated undertheCommunityDevelopmentTest.TheevaluationperiodfortheJuniperBankEvaluationwasfrom May24,2001,throughMay12,2003.ExaminersreviewedthelevelofJuniperBank’squalifiedcommunity developmentloans,investments,grants,andservicesinthebank’sdesignatedassessmentareaofNewCastle County,Delaware. 32 42U.S.C.§3601etseq.

300 FederalReserveBulletin|October2017 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyCIBC,thepubliccommentsontheproposal,andotherpotentialeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyCIBC,thepubliccommentsontheproposal,andotherpotentialeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. 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.IntheUnitedStates,CIBCprimarilyengagesinsecurities brokerageandwealthmanagementthroughvariousentitiesunderCIBCUSAHoldings, Inc.,andincorporatebankingthroughitsU.S.branches.PrivateBancorpprimarily engagesincommercialbankingandwealthmanagement.Ineachof itsactivities,CIBC has,andasaresultof theproposalwouldcontinuetohave,asmallmarketshareona 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 2012-2(February14,2012).

LegalDevelopments:SecondQuarter,2017 301 nationwidebasis,andnumerouscompetitorswouldremain.Thecombinedorganization wouldnotexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldposeasignificantrisktothefinancialsystemintheeventof financial distress.Thereislittleevidencethatthisproposalwouldmateriallyincreasetheextentof CIBC’scross-borderlinkages.Inaddition,theorganizationwouldnotbeacriticalservices providerorbesointerconnectedwithotherfirmsormarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationsshouldbe,andherebyare,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditioned oncompliancebyApplicantswithalltheconditionsimposedinthisorder,including receiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardin connectionwiththeapplications.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwith itsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof Chicago,actingunderdelegated authority. Byorderof theBoardof Governors,effectiveJune7,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard.

302 FederalReserveBulletin|October2017 Order Issued Under Federal Reserve Act United Bankshares, Inc. Charleston, West Virginia OrderApprovingtheAcquisitionof aBankHoldingCompany,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2017–10(April6,2017) UnitedBankshares,Inc.(“UBI”),Charleston,WestVirginia,anditssubsidiary,UBV HoldingCompany,LLC(“UBV”,andtogetherwithUBI,“United”),Fairfax,Virginia, bothbankholdingcompanieswithinthemeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1haverequestedtheBoard’sapprovalundersection3of theBHCAct2 toacquireCardinalFinancialCorporation(“Cardinal”)andtherebyindirectlyacquire CardinalBank,bothof McLean,Virginia. Inaddition,United’ssubsidiarystatememberbank,UnitedBank(“UnitedBank- Virginia”),Fairfax,Virginia,hasrequestedtheBoard’sapprovalundersection18(c)of the FederalDepositInsuranceAct(“BankMergerAct”)tomergewithCardinalBank,with UnitedBank-Virginiaasthesurvivingentity.3UnitedBank-Virginiaalsohasappliedunder section9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthemain officeandbranchesof CardinalBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister74803(October27,2016)).5Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). UBI,withconsolidatedassetsof approximately$14.3billion,isthe99thlargestinsured depositoryorganizationintheUnitedStates.6UBIcontrolsapproximately$10.6billionin consolidateddeposits,whichrepresentlessthan1percentof thetotalamountof deposits of insureddepositoryinstitutionsintheUnitedStates.7UBIcontrolstwosubsidiarybanks, UnitedBank-VirginiaandUnitedBank,Inc.(“UnitedBank-WestVirginia”),Parkersburg, WestVirginia,8whichoperateintheDistrictof Columbia,Maryland,Ohio,Pennsylvania, Virginia,andWestVirginia.UBIisthe10thlargestinsureddepositoryorganizationinthe Districtof Columbia,controllingdepositsof approximately$1.1billionintheDistrictof Columbia,whichrepresent2.4percentof thetotaldepositsof insureddepositoryinstitutionsinthatjurisdiction.Inaddition,UBIisthe18thlargestinsureddepositoryorganizationinMaryland,controllingdepositsof approximately$761.1millioninMaryland,which 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedintheAppendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofSeptember30,2016,unlessotherwisenoted.State assetdata,marketshare,andrankingdataareasofJune30,2016,unlessotherwisenoted. 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsassociations, andsavingsbanks. 8 UnitedBank-VirginiaisawhollyownedsubsidiaryofUBV,andUBVisawhollyownedsubsidiaryofUBI. UBIcontrolsUnitedBank-WestVirginia,astatememberbank,throughaseparatemid-tierholdingcompany, UBCHoldingCompany,Inc.,Charleston,WestVirginia.

LegalDevelopments:SecondQuarter,2017 303 represent0.6percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate, andthe8thlargestinsureddepositoryorganizationinVirginia,controllingdepositsof approximately$4.1billioninVirginia,whichrepresent1.5percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Cardinal,withconsolidatedassetsof approximately$4.2billion,isthe228thlargest insureddepositoryorganizationintheUnitedStates.Cardinalcontrolsapproximately $3.2billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Cardinal controlsCardinalBank,whichoperatesintheDistrictof Columbia,Maryland,and Virginia.Cardinalisthe19thlargestinsureddepositoryorganizationintheDistrictof Columbia,controllingdepositsof approximately$133.8millionintheDistrictof Columbia,whichrepresent0.3percentof thetotaldepositsof insureddepositoryinstitutionsinthatjurisdiction.Inaddition,Cardinalisthe43rdlargestinsureddepositoryorganizationinMaryland,controllingdepositsof approximately$188.6millioninMaryland, whichrepresent0.2percentof thetotaldepositsof insureddepositoryinstitutionsinthat state,andthe10thlargestinsureddepositoryorganizationinVirginia,controllingdeposits of approximately$3.0billioninVirginia,whichrepresent1.1percentof thetotaldeposits of insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,UBIwouldbecomethe86thlargestinsureddepository organizationintheUnitedStates,withconsolidatedassetsof approximately$18.6billion, whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsin theUnitedStates.UBIwouldcontrolconsolidateddepositsof approximately$13.8billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.IntheDistrictof Columbia,UBIwouldbecomethe9th largestinsureddepositoryorganization,controllingdepositsof approximately$1.2billion intheDistrictof Columbia,whichrepresent2.7percentof thetotaldepositsof insured depositoryinstitutionsinthatjurisdiction.InMaryland,UBIwouldbecomethe16th largestinsureddepositoryorganization,controllingdepositsof approximately $949.7millioninMaryland,whichrepresent0.7percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.InVirginia,UBIwouldbecomethe7thlargestinsured depositoryorganization,controllingdepositsof approximately$7.1billioninVirginia, whichrepresent2.6percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. 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 thebankholdingcompanycontrols,orwould uponconsummationof theproposedtransactioncontrol,morethan10percentof thetotal depositsof insureddepositoryinstitutionsintheUnitedStates11or,incertaincircum- 9 12U.S.C.§1842(d)(1)(A). 10 12U.S.C.§1842(d)(1)(B). 11 Similarly,theBankMergerActprovidesthat,ingeneral,theBoardmaynotapproveabankmergerifthe transactioninvolvesinsureddepositoryinstitutionswithdifferenthomestatesandtheresultingbankwould controlmorethan10percentofthetotalamountofdepositsofinsureddepositoryinstitutionsintheUnited

304 FederalReserveBulletin|October2017 stances,if thebankholdingcompanywoulduponconsummationcontrol30percentor moreof thetotaldepositsof insureddepositoryinstitutionsinanystateinwhichthe acquirerandtargethaveoverlappingbankingoperations.12 Forpurposesof theBHCAct,thehomestateof UBIisWestVirginia,andthehomestate of bothUBVandCardinalBankisVirginia.13CardinalBankisalsolocatedintheDistrict of ColumbiaandMaryland.UBIandUBVarewellcapitalizedandwellmanagedunder applicablelaw,andUnitedBank-Virginiahasan“Outstanding”CommunityReinvestment Act(“CRA”)14rating.Therearenominimumagerequirementsunderthelawsof the Districtof Columbia,Maryland,orVirginiathatwouldapplytoUnited’sacquisitionof Cardinal,andCardinalBankhasbeeninexistenceformorethanfiveyears.15 Onconsummationof theproposedtransaction,UBIwouldcontrollessthan1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnited States.Inaddition,thecombinedorganizationwouldcontrollessthan30percentof the totalamountof depositsof insureddepositoryinstitutionsintheDistrictof Columbia, Maryland,andVirginia,theonlystatesinwhichUnitedandCardinalhaveoverlapping bankingoperations.TheBoardhasconsideredallotherrequirementsundersection3(d)of theBHCAct,includingUnited’srecordof meetingtheconvenienceandneedsof the communitiesitserves.Accordingly,inlightof allthefactsof record,theBoardmay approvetheproposalundersection3(d)of theBHCAct.16 CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitioninany relevantbankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearly outweighedinthepublicinterestbytheprobableeffectof theproposalinmeetingthe convenienceandneedsof thecommunitytobeserved.17 UBIandCardinalhavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe Washington,Districtof Columbia,bankingmarket(“Washingtonmarket”)andthe States.12U.S.C.§1828(c)(13).ForpurposesoftheBankMergerAct,thehomestateofbothUnitedBank- VirginiaandCardinalBankisVirginia.12U.S.C.§1828(c)(13)(C)(ii)(II).Accordingly,thedepositcaprequirementoftheBankMergerActdoesnotapplytotheproposedbankmerger. 12 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). 13 See12U.S.C.§1841(o)(4).Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofall bankingsubsidiariesofsuchcompanywerethelargestonJuly1,1966,orthedateonwhichthecompany becameabankholdingcompany,whicheverislater.Astatebank’shomestateisthestateinwhichthebankis chartered. 14 12U.S.C.§2901etseq. 15 SeeD.C.Code§26-737;Md.CodeAnn.,Fin.Inst.§§5-901to5-910;Va.CodeAnn.§6.1-44.18. 16 Section102oftheRiegle-NealInterstateBankingandBranchingEfficiencyActof1994(“Riegle-NealAct”) permitstheBoard,incertaincircumstances,toapproveinterstatemergertransactionsthatwouldotherwisebe prohibitedunderstatelaw.12U.S.C.§1831u(a)(1).ForpurposesoftheRiegle-NealAct,an“interstatemerger transaction”isoneinwhichtheinsuredbanksproposingtomergehavedifferenthomestates.See12U.S.C. §1831u(g)(4)and(6).ThehomestateofbothUnitedBank-VirginiaandCardinalBankisVirginia;therefore, section102oftheRiegle-NealActdoesnotapplytotheproposedbankmerger.Id. 17 12U.S.C.§1842(c)(1)and1828(c)(5).

LegalDevelopments:SecondQuarter,2017 305 Fredericksburg,Virginia,bankingmarket(“Fredericksburgmarket”).18TheBoardhas consideredthecompetitiveeffectsof theproposalinthesebankingmarketsinlightof all thefactsof record.Inparticular,theBoardhasconsideredthenumberof competitorsthat wouldremaininthemarkets;therelativesharesof totaldepositsininsureddepository institutionsinthemarkets(“marketdeposits”)thatUBIwouldcontrol;19theconcentration levelsof marketdepositsandtheincreaseintheselevels,asmeasuredbytheHerfindahl- HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitive Reviewguidelines(“DOJBankMergerGuidelines”);20andothercharacteristicsof the markets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheWashingtonandFredericksburg markets.Onconsummationof theproposal,theWashingtonmarketwouldremain unconcentratedandtheFredericksburgmarketwouldremainmoderatelyconcentrated,as measuredbytheHHI.ThechangeintheHHIinthesemarketswouldbesmall,and numerouscompetitorswouldremaininthemarkets.21 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe WashingtonandFredericksburgmarkets.Inaddition,theappropriatebankingagencies havebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. 18 TheWashingtonmarketisdefinedastheDistrictofColumbia;Calvert,Charles,Frederick,Montgomery,and PrinceGeorge’scounties,allinMaryland;District7inAnneArundelCounty,Maryland;theClarksvilleand SavagedistrictsinHowardCounty,Maryland;Arlington,Culpeper,Fairfax,Fauquier,Loudoun,Prince William,Rappahannock,Stafford,andWarrencountiesinVirginia;thecitiesofAlexandria,Fairfax,Falls Church,Manassas,andManassasPark,allinVirginia;andJeffersonCounty,WestVirginia.The FredericksburgmarketisdefinedasthecityofFredericksburg,Virginia;andCaroline,KingGeorge,Orange, Spotsylvania,andWestmorelandcounties,allinVirginia. 19 DepositandmarketsharedataareasofJune30,2016,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). 20 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. 21 UBIoperatesthe8thlargestdepositoryinstitutionintheWashingtonmarket,controllingapproximately $5.5billionindeposits,whichrepresentapproximately2.9percentofmarketdeposits.Cardinaloperatesthe 11thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$3.2billion,which represent1.7percentofmarketdeposits.Onconsummationoftheproposedtransaction,UBIwouldbecome the7thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately$8.7billion,which representapproximately4.6percentofmarketdeposits.TheHHIfortheWashingtonmarketwouldincreaseby 10pointsto995,and81competitorswouldremaininthemarket. UBIoperatesthe9thlargestdepositoryinstitutionintheFredericksburgmarket,controllingapproximately $55.4millionindeposits,whichrepresentapproximately1.8percentofmarketdeposits.Cardinaloperatesthe 10thlargestdepositoryinstitutioninthesamemarket,controllingdepositsofapproximately$43.9million, whichrepresent1.4percentofmarketdeposits.Onconsummationoftheproposedtransaction,UBIwould becomethe8thlargestdepositoryorganizationinthemarket,controllingdepositsofapproximately $99.3million,whichrepresentapproximately3.2percentofmarketdeposits.TheHHIfortheFredericksburg marketwouldincreaseby5pointsto1749,and16competitorswouldremaininthemarket.

306 FederalReserveBulletin|October2017 Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheWashingtonorFredericksburgbankingmarketsorinanyotherrelevant bankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsare consistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBHCActandtheBankMergerAct,theBoardconsiders thefinancialandmanagerialresourcesandthefutureprospectsof theinstitutions involved.22Initsevaluationof 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 theproposalandtocompleteeffectivelytheproposedintegrationof the operationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapital adequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerialresourcesand theproposedbusinessplan. UBIandCardinalarewellcapitalized,andthecombinedentitywouldremainsoon consummationof theproposedtransaction.Theproposedtransactionisabankholding companymergerthatisstructuredasashareexchange,withasubsequentmergerof UnitedBank-VirginiaandCardinalBank.23Theassetquality,earnings,andliquidityof UnitedBank-VirginiaandCardinalBankareconsistentwithapproval,andUnitedappears tohaveadequateresourcestoabsorbthecostsof theproposalandtocompleteintegration of theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of United,Cardinal,andtheirsubsidiarydepositoryinstitutions,includingassessments of theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoard hasconsideredinformationprovidedbyUnited;theBoard’ssupervisoryexperiencesand thoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewithapplicablebanking,consumerprotection,andantimoney-launderinglaws. UBI,UBV,Cardinal,andtheirsubsidiarydepositoryinstitutionsareconsideredtobewell managed.Unitedhasarecordof successfullyintegratingorganizationsintoitsoperationsandrisk-managementsystemsafteracquisitions.United’sdirectorsandseniorexecutiveofficershaveknowledgeof andexperienceinthebankingandfinancialservicesectors, 22 12U.S.C.§§1842(c)(2),(5),and(6);and1828(c)(5)and(11). 23 ApplicantswouldmergeCardinalwithandintoUBV(withUBVasthesurvivor).Atthetimeofthemerger, eachshareofCardinalcommonstockwouldbeconvertedintoarighttoreceiveUBIcommonstock,basedon anexchangeratio;holdersoffractionalshareswouldbeentitledtoacashequivalent.Unitedhasthefinancial resourcestofundthecashportionoftheexchange.

LegalDevelopments:SecondQuarter,2017 307 andUnited’srisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredUnited’splansforimplementingtheproposal.Unitedhas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-integrationprocessforthisproposal.With certainexceptions,Unitedwouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,United’smanagementhastheexperienceandresourcesto operatethecombinedorganizationinasafeandsoundmanner,andUnitedplanstointegrateCardinal’sexistingmanagementandpersonnelinamannerthataugmentsUnited’s management.24 Basedonallthefactsof record,includingUnited’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandfutureprospectsof theorganizationsinvolvedintheproposal,aswellasthe recordsof effectivenessof UnitedandCardinalincombattingmoney-launderingactivities, areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.25Initsevaluationof theeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCRA.TheCRArequiresthefederalfinancial supervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecredit needsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsound operation,26andrequirestheappropriatefederalfinancialsupervisoryagencytoassessa depositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.27 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splansafter consummation,andanyotherinformationtheBoarddeemsrelevant. 24 Onconsummation,theUBIboardofdirectorswouldbeincreasedbyone,andanindividualcurrentlyserving asanexecutivedirectorontheboardofdirectorsofCardinalandCardinalBankwouldserveontheUBI board.Additionally,theUnitedBank-Virginiaboardofdirectorswouldbeincreasedbytwoindividualsthat wouldbechosenbyCardinal. 25 12U.S.C.§§1842(c)(2)and1828(c)(5). 26 12U.S.C.§2901(b). 27 12U.S.C.§2903.

308 FederalReserveBulletin|October2017 Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof United Bank-VirginiaandCardinalBank;thefairlendingandcompliancerecordsof bothbanks; thesupervisoryviewsof theFDIC;confidentialsupervisoryinformation;information providedbyUnited;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal TheBoardreceivedcommentsfromtwocommentersopposingtheproposal.28Both commentersobjectedtotheproposalonthebasisof allegeddisparitiesinthenumberof residentialrealestateloansmadetominorityborrowers,ascomparedtowhiteborrowers, byUnitedBank-VirginiaintheWashington,Districtof Columbia,MetropolitanStatistical Area(“WashingtonMSA”),asreflectedindatareportedundertheHomeMortgage DisclosureAct(“HMDA”)29fortheyears2013through2015.Onecommenteralso assertedthat,intheWashingtonMSA,UnitedBank-Virginiamadeadisproportionately lownumberof homepurchaseloanstomajority-minorityandLMIcensustracts,and UnitedBank-WestVirginiamadeadisproportionatelylownumberof homepurchaseloans toLMIborrowers,asreportedunderHMDAfor2013through2015.Additionally,a commentercriticizedtherateatwhichGeorgeMasonMortgage,LLC(“GeorgeMason”), asubsidiaryof CardinalBank,deniedapplicationsbyAfricanAmericansandHispanics, comparedtotherateof denialsforwhites,forconventionalhomepurchaseloansinthe WashingtonMSA,asreportedunderHMDAfor2015. OnecommenteralsogenerallyallegedthatUnitedBank-VirginiaandUnitedBank-West Virginiahaveinadequaterecordsof helpingtomeettheconvenienceandneedsof the communitieswheretheydobusinessbecauseUnitedBank-Virginiareceiveda“LowSatisfactory”ratingonitsServiceTestintheCommonwealthof VirginiaandUnitedBank- WestVirginiareceiveda“LowSatisfactory”ratingonitsInvestmentTestfortheoverall bankandintheWheeling,WestVirginia-OhioMultistateMetropolitanStatisticalArea, theStateof WestVirginia,andtheCommonwealthof Pennsylvania,inthebanks’most recentCRAexaminations,bothasof 2015. Businessof theInvolvedInstitutionsandResponsetoComments UnitedBank-Virginiaoffersabroadrangeof retailandcommercialbankingproductsand servicestoconsumersandbusinesses.Throughitsnetworkof 54brancheslocatedinthe Districtof Columbia,Maryland,andVirginia,UnitedBank-Virginiaoffersavarietyof bankingproducts,includingcommercial,residential,agricultural,andconsumerloans. CardinalBankoffersasimilarrangeof retailandcommercialproductsthrough29 brancheslocatedintheDistrictof Columbia,Maryland,andVirginia.Itsproductsinclude checkingandsavingsaccounts,certificatesof deposit,residentialmortgages,treasury managementservices,commercialandconsumerloans,andbrokerageservices.Cardinal Bankalsoprovidesresidentialmortgagesthroughitssubsidiary,GeorgeMason. 28 OnecommenterrequestedthattheBoardnotapprovetheproposaluntilUnitedentersintoacommunity benefitsplanthatoutlineshowthebankplanstohelpmeettheconvenienceandneedsofthecommunitiesit serves.TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganizations.See,e.g.,HuntingtonBancsharesInc.,FRBOrderNo.2016-13at32n.50(July29,2016);CITGroup, Inc.,FRBOrderNo.2015-20at24n.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485(2002); FifthThirdBancorp,80FederalReserveBulletin838,841(1994).Initsevaluation,theBoardreviewsthe existingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethe creditneedsofitsCRAassessmentareas. 29 12U.S.C.§2801etseq.

LegalDevelopments:SecondQuarter,2017 309 Inresponsetothecomments,UnitedrepresentsthatUnitedBank-VirginiaandCardinal Bankarecurrentlymeetingthecreditneedsof theircommunities,includingLMIand minorityindividuals,thattheproposalwouldbenefittheexistingcustomersof bothUnited Bank-VirginiaandCardinalBank,andthatthecombinedinstitutionwouldcontinueto meetthecreditneedsof itsentirecommunityfollowingconsummationof theproposal. UnitedrepresentsthatbothUnitedBank-VirginiaandCardinalBankhaveinstitutedpoliciesandprocedurestohelpensurecompliancewithallfairlendingandotherconsumer protectionlawsandregulations. WithrespecttoUnitedBank-Virginia’slendingintheWashingtonMSA,Unitedrepresents thatithastakenanumberof steps,includingcreatingapositionsolelydedicatedtoitsfair lendingprogram,tobetterserveminoritycommunities.UnitedalsonotesthatUnited Bank-Virginia’srecordof lendingintheWashingtonMSAshowsapositivetrendinthe numberof homepurchaseloanslocatedinmajority-minoritycensustracts.Additionally, Unitednotesthat,whenUnitedBank-Virginia’slendinginallHMDAcategoriesisconsidered,thebankoutperformedpeerlendersinlendinginLMIareasin2014.Unitedalso assertsthatthehousingmarketisrelativelyexpensiveintheWashingtonMSA,which hinderstheabilityof low-incomeborrowerstopurchasehomesinthearea,meaningthat UnitedBank-Virginiahasfewpotentiallow-incomemortgagecustomers.Inaddition, Unitedrepresentsthatasubstantialamountof itssmallbusinesslendingwithintheWashingtonMSAismadetobusinesseslocatedinmajority-minoritycensustracts. UnitedarguesthatUnitedBank-Virginia’soverallCRAratingof “Outstanding”and UnitedBank-WestVirginia’soverallCRAratingof “Satisfactory”areconsistentwith approval,notwithstandingthespecificratingsnotedbyacommenter.Unitednotesthat UnitedBank-Virginiareceivedanoverallbankwide“HighSatisfactory”ratingonthe ServiceTestandthat,intheCommonwealthof Virginia,examinersfoundthatthebank’s deliverysystemsandbranchlocationswereaccessibletoallsegmentsof theassessment areasandthatthebankhadanadequatelevelof participationinqualifiedcommunity developmentservicesthatgenerallybenefitaffordablehousingandmicro-enterprisedevelopment. Withrespecttoacommenter’sallegationregardingUnitedBank-WestVirginia’srecordof lendingtoLMIindividualswithintheWashingtonMSA,UnitednotesthatUnitedBank- WestVirginiaoutperformedpeerlenders,whenconsideringallcategoriesof HMDAloans, inLMIareaswithintheWashingtonMSA.Additionally,UnitednotesthatUnitedBank- WestVirginia’sdistributionof HMDAloansbylevelof borrowerincomefortheyears 2013through2015wassimilartothatof theaggregateof lendersintheWashingtonMSA, andthatthebank’slendingtoLMIborrowersintheWashingtonMSAasreportedin 2015HMDAdataoutperformedpeerlenders. Inresponsetoonecommenter’scriticismof UnitedBank-WestVirginia’s“LowSatisfactory”CRAratingontheInvestmentTestfortheoverallbankandinseveralof thebank’s assessmentareas,UnitednotesthatUnitedBank-WestVirginiahassignificantlyincreased itslevelof communitydevelopmentinvestmentsincethebank’smostrecentCRAexamination.UnitedalsorepresentsthatUnitedBank-WestVirginiaistakingstepstoimproveits investmentperformanceinPennsylvaniaandWestVirginia,includingcreatingnewpartnershipswithcommunitydevelopmentfinanceinstitutions,startingarelationshipwitha companythatisawaitingaSmallBusinessInvestmentCompanydesignationfromthe UnitedStatesSmallBusinessAdministration,andmakinganinvestmentinaschool districtinwhichamajorityof studentsqualifyforafreeorreduced-pricelunch. WithrespecttoGeorgeMason’slendingintheWashingtonMSA,Unitedrepresentsthat GeorgeMasonoutperformedpeerlendersinlendinginLMIareas.Additionally,United

310 FederalReserveBulletin|October2017 assertsthatGeorgeMasonconductsvariousactivitiesthatarefocusedonservingminority andLMIcommunities,includingmarketingandoutreachtohistoricallyunderserved neighborhoodsandpopulations;periodicreviewsof GeorgeMason’spolicies,procedures, andlendingoutcomestoensurethatlenderdiscretionisclearlyoutlinedandtoconfirm compliancewithfairlendinglaws;andcommunityoutreacheffortstosupportlendingin LMIandminorityareas.UnitedrepresentsthatGeorgeMason’sfairlendingpolicieswith respecttofirstmortgagelendingwouldbeadoptedinthecombinedentity. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commentersandtheapplicant’sresponsetocomments.Inparticular,theBoardevaluates aninstitution’sperformanceinlightof examinationsbytheappropriatefederalsupervisors of theCRAperformancerecordsof therelevantinstitutions,aswellasinformationand viewsprovidedbytheappropriatefederalsupervisors.30Inthiscase,theBoardconsidered thesupervisoryviewsof itssupervisorystaff andof examinersfromtheFederalReserve Bankof Richmond(“ReserveBank”)andtheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.31Aninstitution’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 theinstitution’slendinginitsassessmentareasandthenumber andamountof loansinlow-,moderate-,middle-,andupper-incomegeographies;(3)the distributionof loansbasedonborrowercharacteristics,including,forhomemortgage loans,thenumberandamountof loanstolow-,moderate-,middle-,andupper-income individuals;32(4)theinstitution’scommunitydevelopmentlending,includingthenumber andamountof communitydevelopmentloansandtheircomplexityandinnovativeness; and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecredit needsof LMIindividualsandgeographies. 30 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 31 12U.S.C.§2906. 32 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3).

LegalDevelopments:SecondQuarter,2017 311 TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDA data.33Consequently,HMDAdatamustbeevaluatedinthecontextof otherinformation regardingthelendingrecordof aninstitution. CRAPerformanceof UnitedBank-Virginia UnitedBank-Virginiawasassignedanoverallratingof “Outstanding”atitsmostrecent CRAperformanceevaluationbytheReserveBank,asof October19,2015(“UnitedBank- VirginiaEvaluation”).34Thebankreceivedan“Outstanding”ratingfortheLendingTest, and“HighSatisfactory”ratingsforboththeInvestmentTestandtheServiceTest. Examinersconcludedthatthebank’soveralllendingactivitywasexcellentrelativetothe bank’scapacitytolendandtheeconomicconditionswithinthebank’smarketareas. Examinersnotedthatasubstantialmajorityof thebank’sloansweremadetoborrowers withinitsassessmentareas.Overall,examinersfoundthatthegeographicdistributionof thebank’sloansreflectedgoodpenetrationthroughoutitsassessmentareasandthatthe distributionof itsborrowersreflectedgoodpenetrationamongborrowersof different incomelevelsandbusinessesof differentsizes.Additionally,examinersfoundthatUnited Bank-Virginiawasaleaderincommunitydevelopmentlending. IntheWashington,D.C.,assessmentarea,anareaof concernforthecommenters,United Bank-Virginia’sperformanceundertheLendingTestwasrated“Outstanding.”Examiners foundthatthebank’slendingactivityintheassessmentareawasconsistentwiththebank’s capacityandhelpedtomeetidentifiedcommunitycreditneeds.Additionally,examiners foundthatthegeographicdistributionof thebank’sloansintheWashington,D.C.,assessmentareawasexcellent,whiletheoverallborrowerdistributionwasgood.Examinersalso notedthatUnitedBank-Virginiawasaleaderinprovidingcommunitydevelopment loansintheassessmentarea. IntheCommonwealthof Virginia,anotherareaof concerntoacommenter,UnitedBank- Virginia’sperformanceundertheLendingTestwasrated“HighSatisfactory.”Examiners foundthatthebank’slendingactivitywithinthestatewidemarketwasconsistentwiththe bank’scapacityandthatthebankofferedabroadrangeof loanproductstomeettheneeds of thestatewidearea.Examinersalsonotedthatthebank’sborrowerdistribution throughoutthestatewasgoodandthegeographicdistributionof itsloanswasadequate. WithrespecttotheInvestmentTest,examinersfoundthatthebankhadahighlevelof participationincommunitydevelopmentinvestments,showingresponsivenesstocommunitycreditneeds.Examinersnotedthatthebankmadeanumberof investmentstosupport affordablehousinginitiatives,aswellascharitabledonationstoavarietyof community 33 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 34 TheUnitedBank-VirginiaEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. Examinersreviewedhomemortgageloansreported,pursuanttoHMDA,andsmallbusinessandsmallfarm loansreportedunderCRAdatacollectionrequirementsfor2013and2014.Theevaluationperiodforcommunitydevelopmentlending,investments,andserviceswasJune4,2013,throughOctober19,2015. TheUnitedBank-VirginiaEvaluationincludedfull-scopeevaluationsoftheWashington-Baltimore-Arlington, D.C.-Maryland-Virginia-WestVirginia-Pennsylvania,CombinedStatisticalArea(“WashingtonCSA”)andthe Harrisonburg-Staunton-Waynesboro,Virginia,CSA.Limitedscopeevaluationswereperformedinthe Charlottesville,Virginia,MSAandinShenandoahCounty,Virginia.

312 FederalReserveBulletin|October2017 developmentorganizationsthatfacilitatesmallbusinessdevelopment,revitalizeorstabilize LMIgeographies,andfocusonlocaljobcreationwithinthebank’sassessmentareas.In boththeWashington,D.C.,assessmentareaandVirginia,UnitedBank-Virginia’sperformanceundertheInvestmentTestwasrated“HighSatisfactory.”Examinersinbothareas foundthatthebankmaintainedasignificantlevelof qualifiedinvestmentsthatbenefitthe bank’smarketareas. ExaminersfoundUnitedBank-Virginia’sdeliverysystemsandbranchlocationstobe accessibletoallsegmentsof thebank’sassessmentareas.Examinersnotedthatbranch closingsbythebankhadnotadverselyaffectedLMIneighborhoods.Additionally,examinersnotedthatthebankengagedinahighlevelof communitydevelopmentservices withinitsprimarymarketareas.Overall,examinersnotedthatthebankshowedahighlevel of supportforaffordablehousingefforts,communityservices,andeconomicdevelopment withinitsassessmentareas. IntheWashington,D.C.,assessmentarea,examinersratedUnitedBank-Virginia’sperformanceontheServiceTestas“HighSatisfactory.”Examinersnotedthatthebank’sdelivery systemsandbranchlocationswereaccessibletoallsegmentsof theassessmentareaand thatthebankhadarelativelyhighlevelof participationinqualifiedcommunitydevelopmentservicesbenefitingtheassessmentarea. InVirginia,UnitedBank-Virginia’sperformanceontheServiceTestwasratedas“Low Satisfactory.”Examinersfoundthatthebank’sdeliverysystemsinVirginiawerereasonably accessibletoallportionsof UnitedBank-Virginia’smarketareasandtopeopleof various incomelevels.Additionally,examinersnotedthattheproductsandservicesofferedby UnitedBank-VirginiawithinVirginiawererepresentativeof thoseofferedbytheinstitution overallandthatthebank’semployeesparticipatedinanadequatelevelof community developmentactivitiesinvolvingtheprovisionof financialexpertisetoorganizations assistinginsmallbusinessfunding. UnitedBank-Virginia’sEffortssincethe2015CRAEvaluation UnitedrepresentsthatUnitedBank-VirginiahastakenstepstofurtherstrengthenitsCRA performancesincetheUnitedBank-VirginiaEvaluation.UnitedBank-Virginiaasserts thatithascontinuedtoofferseveralspecialloanprogramsthroughoutitsassessmentareas thatbenefitLMIborrowers,smallbusinesses,affordablehousingprojects,andother communitydevelopmentinitiatives.Additionally,UnitedBank-Virginiarepresentsthatit hasincreasedthenumberanddollaramountof donationstocommunitydevelopment activitiesandsocialserviceorganizationsinitsassessmentareas,andthatthebank’s employeeshavevolunteeredbyteachingfinancialliteracytostudentsat75localschools. CRAPerformanceof UnitedBank-WestVirginia UnitedBank-WestVirginiareceiveda“Satisfactory”CRAperformanceratingonitsmost recentCRAexaminationbytheReserveBank,asof October19,2015(“UnitedBank-West VirginiaEvaluation”).35Thebankreceivedratingsof “HighSatisfactory”fortheLending Test,“LowSatisfactory”fortheInvestmentTest,and“Outstanding”fortheServiceTest. 35 TheUnitedBank-WestVirginiaEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedhomemortgageloansreported,pursuanttoHMDA,andsmallbusinessandsmall farmloansreportedunderCRAdatacollectionrequirementsfor2013and2014.Examinersreviewedqualified communitydevelopmentloansthatwereoriginatedfromJune3,2013,throughOctober19,2015.TheevaluationperiodforinvestmentsandserviceswasJune3,2013,throughOctober19,2015. TheUnitedBank-WestVirginiaEvaluationincludedfull-scopeevaluationsoftheWashingtonCSA;the Wheeling,WestVirginia-Ohio,CSA(“Wheelingassessmentarea”);theCharleston-Huntington-Ashland,West

LegalDevelopments:SecondQuarter,2017 313 ExaminersfoundthatUnitedBank-WestVirginia’soveralllendinglevelswereconsistent withthebank’scapacityandmarketpresence.Accordingtoexaminers,ahighpercentage of theinstitution’sreportedHMDAandsmallbusinessloanswasoriginatedwithinthe bank’sassessmentareas.Additionally,examinersnotedthatthegeographicdistributionof thebank’slendingwasexcellentoverall.Examinersalsofoundthatthebank’sborrower distributionperformancewasgoodoverall. IntheWashington,D.C.,assessmentarea,Wheelingassessmentarea,theStateof West Virginia,andtheCommonwealthof Pennsylvania,examinersratedUnitedBank-West Virginia’sperformanceontheLendingTestas“HighSatisfactory.”IntheWashington, D.C.,assessmentarea,examinersfoundthatthebank’slendingactivitywasconsistentwith thebank’scapacityandhelpedtomeetidentifiedcommunitycreditneeds.Additionally, examinersnotedthatthegeographicdistributionof thebank’slendingwasexcellent,while theborrowerdistributionof loanswasgood.Examinersalsonotedthatthebankoriginatedarelativelyhighlevelof communitydevelopmentloans. IntheWheelingassessmentarea,examinersfoundthatthebank’slendingactivitywas goodandconsistentwiththebank’scapacityandthatithelpedtomeetidentifiedcredit needs.Examinersnotedthatthegeographicandborrowerlendingdistributionswithinthe assessmentareawasgoodforeachlendingproductreviewed.Additionally,examiners foundthatthebankoriginatedanadequatelevelof communitydevelopmentloanswithin theassessmentarea. InWestVirginiaandPennsylvania,examinersfoundthatthebank’slendingactivityin bothstateswasconsistentwiththebank’scapacityandthatthebankofferedabroadspectrumof loanproductsinanefforttomeetlocalcreditneeds.Examinersnotedthatthe geographicdistributionof thebank’slendingwithinthestateswasexcellentandadequate, respectively,whileborrowerlendingdistributionwasgood.Additionally,examinersfound thatthebankwasaleaderinprovidingcommunitydevelopmentloanswithinthestates. Asnoted,UnitedBank-WestVirginia’soverallperformanceundertheInvestmentTestwas rated“LowSatisfactory.”Examinersnotedthatthebankmaintainedanadequatelevelof qualifiedcommunitydevelopmentinvestmentswhenconsideringtheavailableopportunitiesforsuchinvestments.ExaminersalsonotedthatthebankhadmadecharitabledonationssupportingorganizationswhoseoperationsprimarilysupportLMIindividuals. ExaminersratedUnitedBank-WestVirginia’sperformanceundertheInvestmentTestas “HighSatisfactory”withintheWashington,D.C.,assessmentarea.Examinersfoundthat thebank’slevelof qualifiedinvestmentsmaintainedgoodresponsivenessintheassessment area.IntheWheelingassessmentarea,theStateof WestVirginia,andtheCommonwealthof Pennsylvania,examinersratedthebank’sperformanceundertheInvestmentTest as“LowSatisfactory.”Ineachof thesegeographicalareas,examinersfoundthatthebank maintainedanadequatelevelof qualifiedinvestments. ExaminersfoundthatUnitedBank-WestVirginia’sdeliverysystemsandbranchlocations werereadilyaccessibletoallsegmentsof thebank’sassessmentareas.Additionally, examinersnotedthatthebankwasaleaderinsupportingcommunitydevelopmentservices throughoutitsassessmentareas. Virginia-Ohio-Kentucky,CSA;theMorgantown,WestVirginia,MSA;theBraxton,WestVirginia, nonmetropolitanstatisticalarea;andthePittsburgh,Pennsylvania,MSA.Limitedscopeevaluationswere performedintheBeckley,WestVirginia,MSA;theParkersburg-Marietta-Vienna,WestVirginia-Ohio,MSA; theWeirton-Steubenville,WestVirginia-Ohio,MSA;andtheJackson,WestVirginia,nonmetropolitanstatisticalarea.

314 FederalReserveBulletin|October2017 IntheWashington,D.C.,assessmentareaandtheWheelingassessmentarea,examiners ratedUnitedBank-WestVirginia’sperformanceintheServiceTestas“HighSatisfactory.” Examinersnotedthat,inbothareas,thebank’sdeliverysystemsandbranchlocationswere readilyaccessibletoallsegmentsof theassessmentareaandthatthebankhadan adequatelevelof participationinqualifiedcommunitydevelopmentservicesbenefitingthe assessmentarea.InWestVirginia,examinersratedthebank’sperformanceintheService Testas“Outstanding.”Examinersfoundthatthebank’sdeliverysystemsandbranchlocationswerereadilyaccessibletoallsegmentsof thebank’sassessmentareawithinthestate. Additionally,examinersnotedthatthebankwasaleaderwithinitsmarketareasinthe stateinprovidingcommunitydevelopmentservices.InPennsylvania,examinersratedthe bank’sperformanceintheServiceTestas“HighSatisfactory.”Examinersfoundthatthe bank’sdeliverysystemsandbranchlocationswereaccessibletoallsegmentsof thebank’s assessmentareawithinthestate.Additionally,examinersnotedthatthebankandits employeesparticipatedinarelativelyhighlevelof communitydevelopmentactivities. UnitedBank-WestVirginia’sEffortssincethe2015CRAEvaluation Unitedrepresentsthat,sincetheUnitedBank-WestVirginiaEvaluation,thebankhas significantlyincreaseditscommunitydevelopmentinvestmentlevels.Asnoted,United Bank-WestVirginiahasformedpartnershipsinWestVirginiatoexplorenewinvestment opportunitiesandhasmade,orisintheprocessof finalizing,investmentsinWestVirginia tosupportruralhealthdevelopmentandinPennsylvaniatosupporttheeducationof localLMIstudents. CRAPerformanceof CardinalBank CardinalBankreceivedanoverallratingof “Satisfactory”atitsmostrecentCRAperformanceevaluationbytheFDIC,asof September28,2015(“CardinalBankEvaluation”).36 Thebankreceived“HighSatisfactory”ratingsfortheLendingTest,theInvestmentTest, andtheServiceTest. Examinersfoundthatthebank’soveralllendinglevelsreflectedgoodresponsivenessto creditneedsinitsassessmentarea.Examinersnotedthatasubstantialmajorityof the bank’sloansweremadetoborrowerswithinitsassessmentarea.Overall,examinersfound thatthegeographicdistributionof thebank’sloansreflectedadequatepenetration throughouttheassessmentarea.Examinersfoundthatthebank’sdistributionof borrowersreflectedagoodpenetrationamongretailcustomersof differentincomelevels. Additionally,examinersfoundthatthebankusedflexiblelendingpracticesinorderto servetheassessmentarea’screditneeds.Examinersnotedthatthebankmadearelatively highlevelof communitydevelopmentloansandthattheseloanswereresponsivetothe community’screditneeds. ExaminersfoundthatCardinalBankhadasignificantlevelof qualifiedcommunitydevelopmentinvestmentsandgrantsandthatthebankoccasionallyactedinaleadershippositionforsuchinvestments.Examinersnotedthatthebankexhibitedagoodresponsiveness tothecreditandcommunityeconomicdevelopmentneedsof itsassessmentarea. ExaminersfoundCardinalBank’sdeliverysystemstobeaccessibletoessentiallyall portionsof thebank’sassessmentarea.Examinersnotedthatthebank’sopeningand 36 TheCardinalBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examinersreviewedthebank’sloansreportedpursuanttotheHMDAandtheCRAfor2013,2014,andthefirsttwo quartersof2015.TheevaluationperiodfortheInvestmentTestandtheServiceTestwasApril30,2013, throughSeptember29,2015.TheCardinalBankEvaluationincludedafull-scopeevaluationoftheWashingtonCSA.

LegalDevelopments:SecondQuarter,2017 315 closingof brancheshadnotadverselyaffectedtheaccessibilityof itsdeliverysystems. Additionally,examinersnotedthatthebank’sservicesdidnotvaryinawaythatinconveniencedportionsof itsassessmentareaoranygroupof individuals.Examinersalsonoted thatthebankprovidedarelativelyhighlevelof communitydevelopmentservicesinits assessmentarea. AdditionalSupervisoryReviews TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexaminationsof UnitedBank-VirginiaandUnitedBank-WestVirginiaconductedbyReserveBank examiners,whichincludedareviewof thebanks’compliancerisk-managementprogram andthebanks’compliancewithconsumerprotectionlawsandregulations.Aspartof the consumercomplianceexaminations,ReserveBankexaminersalsoevaluatedUnitedBank- Virginia’sandUnitedBank-WestVirginia’sfairlendingcompliancemanagementprogram, includingthebanks’fairlending-relatedpolicies,procedures,andlimits;boardandsenior managementoversightof thebanks’fairlendingmanagementprogram;fairlendingriskmonitoringandmanagementinformationsystems;andinternalcontrolsrelatingtofair lending. TheBoardalsohasconsideredtheresultsof arecentconsumercomplianceexaminationof CardinalBankconductedbyFDICexaminers,whichincludedareviewof thebank’s compliancerisk-managementprogramandthebank’scompliancewithconsumerprotectionlawsandregulations. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Unitedrepresentsthatitplanstocontinueits currentofferingof productsandservicesuponconsummationof theproposal.Unitedalso representsthatexistingcustomersof CardinalBankwouldhaveaccesstoamoreextensivecomplementof productsandservicesthanthosecurrentlyavailabletothem,including neworenhancedproductsandservicesinareassuchasbrokerageservices,custody,trust andestateservices,businesscheckingproductsandservices,cashmanagement,government contractlending,andnonprofitservices.Additionally,Unitedassertsthatcustomersof CardinalBankwouldbenefitfromamoreexpansivebranchandATMnetwork.United alsorepresentsthatexistingcustomersof UnitedBank-Virginiawouldbenefitfromaccess toproductsandservicesofferedbyGeorgeMason.Unitedrepresentsthattheproposal wouldcreateanexpandedproductofferingforfirst-timehomebuyersandprovideadditionalopportunitiesforUnitedBank-Virginia’sLMIcustomers. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyUnited,thepubliccommentsontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsconsiderationsareconsistent withapproval. TheBoardalsoexpectsUnitedtocontinuetoimproveitsperformanceundertheinvestmenttestsinWestVirginiaandPennsylvaniaandtoensurethatitseffortstohelpmeetthe convenienceandneedsof thecommunitiesitservesarecommensuratewithitssize, activities,andprominenceinitscommunities.

316 FederalReserveBulletin|October2017 FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’srisk“tothestabilityof theUnitedStatesbankingorfinancial system.”37 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.38These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.39 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.40 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominatelyengagedinavarietyof retailcommercialbankingactivities.41Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwould notexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwith otherfirmsorthemarketsthatitwouldposeasignificantrisktothefinancialsysteminthe eventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor 37 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). 38 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 39 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 40 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 41 Ineachoftheactivitiesinwhichitengages,Unitedhas,andasaresultoftheproposalwouldcontinuetohave, asmallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices.

LegalDevelopments:SecondQuarter,2017 317 financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches UnitedBank-Virginiahasappliedundersection9of theFRAtoestablishbranchesatthe currentlocationsof CardinalBank.42TheBoardhasassessedthefactorsitisrequiredto considerwhenreviewinganapplicationunderthatsection.43Specifically,theBoardhas consideredUnitedBank-Virginia’sfinancialcondition,management,capital,actionsin meetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance, andinvestmentinbankpremises.44Forthereasonsdiscussedinthisorder,theBoardfinds thesefactorstobeconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.45Inreachingitsconclusion,theBoardhasconsidered allthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHC Act,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof this proposalisspecificallyconditionedoncompliancebyUBIandUBVwithalltheconditions setforthinthisOrder,includingreceiptof allrequiredregulatoryapprovals,andonthe commitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwriting bytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybe enforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBankactingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveApril6,2017. 42 12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebranchesonthe sametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthat,understatelaw,maybeestablishedasanew branchoftheresultingbankorretainedasanexistingbranchoftheresultingbank.See 12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofUnitedBank-Virginia’sbrancheswouldbepermissibleunderapplicablestatelaw.SeeD.C.Code§26-735(b);Md.Code,Com.Law§5-1003(a)(3);Va.CodeAnn. §6.2-831. 43 12U.S.C.§322;12CFR208.6. 44 Uponconsummationoftheproposedtransaction,UnitedBank-Virginia’sinvestmentsinbankpremiseswould remainwithinlegalrequirementsunder12CFR208.21. 45 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.NoticeoftheproposalwaspublishedintheFederalRegisteronOctober27, 2016,andinarelevantnewspaperofgeneralcirculation(TheWashingtonPost)onOctober20,October27,and November10,2016.ThecommentperiodendedonNovember25,2016.IntheBoard’sview,thecommenter hashadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwrittencommentsthat theBoardhasconsideredinactingontheproposal.Thecommenter’srequestdidnotidentifydisputedissuesof factmaterialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestdid notdemonstratewhywrittencommentsdonotpresentthecommenter’sviewsadequatelyorwhyahearingor meetingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord, theBoardhasdeterminedthatapublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestforapublichearingormeetingontheproposalisdenied.

318 FederalReserveBulletin|October2017 Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsTarullo, Powell,andBrainard. MargaretMcCloskeyShanks DeputySecretaryof theBoard Appendix BranchestoBeEstablishedbyUnited ‰ 4115AnnandaleRoad Annandale,Virginia22207 Districtof ColumbiaBranches ‰ 5335LeeHighway ‰ 1776KStreet,NW Arlington,Virginia22207 Washington,DC20006 ‰ ‰ 2100NorthGlebeRoad 1825WisconsinAvenue,NW Arlington,Virginia22207 Washington,DC20007 ‰ 2505WilsonBoulevard MarylandBranches Arlington,Virginia22201 ‰ 7315WisconsinAvenue ‰ 6402WilliamsburgBoulevard Bethesda,Maryland20814 Arlington,Virginia22207 ‰ 1807RockvillePike ‰ 4300WilsonBoulevard Rockville,Maryland20852 Suite102 Arlington,Virginia22203 VirginiaBranches ‰ 1737KingStreet Alexandria,Virginia22207

LegalDevelopments:SecondQuarter,2017 319 Order Issued Under International Banking Act Nordea Bank AB Stockholm, Sweden OrderApprovingEstablishmentof aBranch FRBOrderNo.2017–11(April13,2017) NordeaBankAB(publ)(“NordeaBankSweden”),Stockholm,Sweden,aforeignbank withinthemeaningof theInternationalBankingActof 1978(“IBA”),hasappliedunder section7(d)of theIBA1toretainthestate-licensedbranchinNewYork,NewYork,of NordeaBank’sformerwholly-ownedsubsidiarybank,NordeaBankFinlandplc(“Nordea BankFinland”),Helsinki,Finland,followingconsummationof aninternalreorganization of NordeaBankSwedenanditsconsolidatedsubsidiaries(“NordeaGroup”).The ForeignBankSupervisionEnhancementActof 1991,whichamendedtheIBA,provides thataforeignbankmustobtaintheapprovalof theBoardtoestablishabranchinthe UnitedStates. Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinNewYork,NewYork(NewYork Post,December1,2015).Thetimeforsubmittingcommentshasexpired,andtheBoard hasconsideredallcommentsreceived. NordeaBankSwedenistheparentcompanyandtop-tierbankingorganizationof Nordea Group.Sampoplc(“Sampo”),aFinnishcompany,owns21.3percentof NordeaBank Sweden’soutstandingsharesandisthelargestindividualshareholderof NordeaBank Sweden.2Noothershareholderownsmorethan5percentof thesharesof NordeaBank Sweden. NordeaBankSwedenproposestoretaintheformerNewYorkbranchof NordeaBank FinlandfollowinganinternalreorganizationinwhichNordeaBankSweden’sbanksubsidiariesinDenmark,Finland,andNorway(“NordicBankSubsidiaries”)wereconverted intobranchesof NordeaBankSwedenbywayof mergersbetweenNordeaBankSweden andeachof theNordicBankSubsidiaries.3Followingthemergers,thebankingbusiness willbeconductedthroughbranchesof NordeaBankSwedeninDenmark,Finland, Norway,andtheUnitedStates. NordeaBankSwedenhasconsolidatedassetsof approximately$739billion.4Itisanoperatingbankthatengagesdirectlyinbankingactivitiesusualinconnectionwiththebusinessof bankinginthecountriesinwhichitoperates,includingbyofferingretailand 1 12U.S.C.§3105(d). 2 SampohastwodirectorinterlockswithNordeaBankSwedenandisconsideredtocontrolNordeaBank SwedenforpurposesoftheBankHoldingCompanyAct(“BHCAct”).12U.S.C.§1841etseq.NordeaBank SwedenandSampohaveeachcommittedtonotifytheBoardifSampo’sownershipinterestinNordeaBank Swedenincreasestomorethan21.3percent.TheFinanssivalvotaFinansinspektionen,theFinnishsupervisory authority,istheprimarysupervisorofSampo,whichisregardedasafinancialconglomerateundertheEuropeanUnion’sFinancialConglomeratesDirective.Sampo’sholdingofNordeaBankSwedenisconsistentwith section4oftheBHCAct. 3 OnNovember18,2016,theBoard’sGeneralCounselapproved,underdelegatedauthority,arequestpursuant tosection211.24(a)(6)oftheBoard’sRegulationKfromNordeaBankSwedentoproceedwiththeproposed internalreorganizationpriortoBoardactiononNordeaBankSweden’sapplicationtoestablishabranchinthe UnitedStates,butsubjecttotheBoard’sactionontheapplication.NordeaBankSwedenexecuteditsinternal reorganizationonJanuary2,2017.Thesemergersarestructuredastransfersofalltheassetsandliabilitiesof theNordicBankSubsidiariestoNordeaBankSweden. 4 AssetdataareasofSeptember30,2016.

320 FederalReserveBulletin|October2017 wholesalebankingproductstocustomersinsideandoutsideof Sweden.IntheUnited States,NordeaBankSwedenoperatestheformerNewYorkbranchof NordeaBank Finland(“NYBranch”).NordeaBankSwedenindirectlyownsNordeaInvestment ManagementNorthAmerica,Inc.,aU.S.assetmanagementcompanyincorporatedin DelawareandregisteredwiththeU.S.SecuritiesandExchangeCommission.NordeaBank SwedenisaqualifyingforeignbankingorganizationunderRegulationK.5Sincethemerger of NordeaBankFinlandintoNordeaBankSweden,theNYBranchhasservicedNordea BankSweden’scustomersdoingbusinessintheUnitedStates,Canada,andelsewhere.The branchalsooffersloansandothercreditservices,cashmanagementservices,andmarkets servicesincludingforeignexchange. UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether(1)theforeignbankhasfurnishedtothe Boardtheinformationitneedstoassesstheapplicationadequately,(2)theforeignbank andanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof the UnitedStates,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.6TheBoard alsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.7 Inthiscase,theFinansinspektionen,theSwedishfinancialsupervisoryauthority(“SFA”), remainstheprimarysupervisorof NordeaBankSwedenonaconsolidatedbasisafterthe NordeaGroup’sinternalreorganization.TheSFAalsogaineddirectresponsibilityfor supervisingthebranchesthatwereformerlysubsidiariesof NordeaBankSweden. 5 12CFR211.23(a).SampoandNordeaBankSwedenwouldalsotogethermeetthestandardstobeaqualifying foreignbankingorganization.NordeaBankSwedenhascommittedtoinformtheBoardifeitherSampono longerqualifiesasaqualifyingforeignbankingorganizationorSampoengagesinactivitiesormakesinvestmentsintheUnitedStatesthatarenotpermissibleunderregulationspromulgatedbytheBoard,including section211.23(f)ofRegulationK.Separately,Sampohascommittedtoprovide,onanannualbasis,awritten statementindicatingwhetheritis,directlyorindirectly,engagedinactivitiesintheUnitedStatesforpurposes oftheBoard’sRegulationK. 6 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)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. 7 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).

LegalDevelopments:SecondQuarter,2017 321 TheSFAisprimarilyresponsibleforthesupervisionof Swedishbankingorganizationsand hasauthoritytoregulatetheestablishmentandactivitiesof bankinginstitutionsandto approvetheirbusinessexpansions,bothdomesticallyandabroad.8TheSFAmonitors Swedishbanks’consolidatedfinancialcondition,compliancewithlawsandregulations, andinternalcontrolsthroughacombinationof on-siteexaminations,off-sitesurveillance throughthereviewof requiredregulatoryreportsandexternalauditreports,andinteractionwithseniormanagement. TheSFAhasestablishedariskclassificationsystemfordetermininganinstitution’ssupervisionplan.Thesupervisionincludesanassessmentof theinstitution’sinternalcapital andliquidityandissupplementedbyregularriskreviews,whichincludecreditrisk,market risk,operationalrisk,andliquidityrisk.Inaddition,theSFAconductson-siteandoff-site reviewsof NordeaBankSwedenanditsSwedishsubsidiaries.Examinationfindingsand areasof concernarediscussedwithseniormanagementof thebank,andcorrectiveactions takenbythebankaremonitoredbytheSFA.Theoff-sitemonitoringsystemrequiresall Swedishbankstosubmitmonthly,quarterly,semi-annual,orannualreportsrelatingto assetquality,lendingconcentrations,capitaladequacy,earnings,liquidity,affiliatetransactions,off-balancesheetexposures,andownershipandcontrol.Inaddition,banksmust fileannualexternallyauditedconsolidatedfinancialstatements.Newreportsareaddedto permitcollectionandanalysisof informationasnewissuesdevelopandthefocusof SFA oversightisadjusted. TheSFAisrepresentedintheSwedishFinancialStabilityCouncil,whichwasestablishedto discussissuesrelatingtofinancialstability.9TheSFAhasbeenparticipatinginvarious EuropeanBankingAuthority(“EBA”)initiativesandhasestablishedasupervisorysystem forSwedishbanksinlinewiththeEUdirectives,includingthoserelatedtocapital adequacyandrecoveryandresolutionframeworks.TheSFAisalsoafullmemberof the BaselCommitteeof BankingSupervision,theFinancialStabilityBoard,andglobal standard-settingbodiesrelatingtosecuritiesandinsurancebusinesses.Overall,theSFA’s approachtosupervisionisrisk-focusedanditsregulationsanddirectivesareintendedto strengthenpracticesconsistentwiththeBaselCorePrinciplesforEffectiveBanking Supervision. WhiletheSFAistheconsolidatedprimarysupervisor,otherregulatorssupervisetheactivitiesof particularsubsidiariesoractivitiesof Swedishbanks.NordeaBankSwedenstates thatithasretainedlocalsubsidiariesinDenmark,Finland,andNorwayafterthereorganizationforthepurposeof makingresidentialmortgageloansandissuingcoveredbonds. Theseentitieswillbesupervisedbythelocalcompetentauthorities.IntheEU,collegesof supervisorsarethevehiclesforthecoordinationof supervisoryactivities.UnderEUlaw, collegesof supervisorshavetobeestablishedforEuropeanEconomicArea(“EEA”)banks withsubsidiariesorsignificantbranchesinotherEEAcountriesand,whererelevant,may includesupervisorsfromnon-EEAcountries.TheEBAhasissuedregulatoryandimplementingtechnicalstandardsonthefunctioningof collegesof supervisors.10TheSFAregu- 8 SwedenisaEuropeanUnion(“EU”)memberstatebutisnotaeuroareacountryanddoesnotcurrently participateintheSingleSupervisoryMechanism(“SSM”)underthesupervisionoftheEuropeanCentralBank (“ECB”).FortheEUmembercountriesthatareintheeuroareaandnon-euroareamembersthatchooseto participate,theECBisnowthecompetentauthorityforthesupervisionofalllargeinternationallyactive bankingorganizationsundertheSSM.AsSwedenhas,forthetimebeing,decidednottoparticipateinthe SSM,nosupervisoryresponsibilitieshavebeentransferredfromtheSFAtotheECB. 9 OthermembersofthecouncilaretheSwedishcentralbank,SverigesRiksbank;theSwedishNationalDebt Office;andtheSwedishMinistryofFinance. 10 In2008,theSFAandthenationalsupervisoryauthoritiesofcountriesincludingDenmark,Norway,Finland, andLuxembourgenteredintoaMultilateralCooperationandCoordinationAgreementforthesupervisionof NordeaBankSwedenanditssubsidiariesandsignificantbranches.

322 FederalReserveBulletin|October2017 larlycoordinatessupervisionwiththeseagenciesandsharesandreceivesdataandinformationfromtheseagencies. TheFinanssivalvontaFinansinspektionen,theFinnishfinancialsupervisoryauthority (“FinnishFSA”),remainstheprimarysupervisorof Sampoonaconsolidatedbasis followingtheNordeaGroup’sinternalreorganization.TheFinnishFSAisprimarily responsibleforthesupervisionof Finnishbankingandinsuranceorganizations.Sampo, whichisheadquarteredinFinlandandownssharesincompaniesengagedinbanking,fund management,andinsuranceinseveralcountriesintheEEA,isconsideredafinancial conglomerateundertheEU’sFinancialConglomeratesDirective.Finnishregulationsfor supervisingfinancialconglomeratesarebasedonthedirectivesissuedbytheEuropean ParliamentandtheEuropeanCouncil.Themainfocusof conglomeratesupervisionison capitaladequacy,largecommonexposures,intra-conglomerateexposures,othersimilar businessrelationships,andinternalriskmanagement.TheFinnishFSArequiresreportson capitaladequacyandonriskconcentrationsastheyrelatetosingle,oragroupof related, counterpartiesorspecificproducts.TheFinnishFSAalsorequiresreportsonallsignificant inter-grouptransactionsof regulatedentitieswithinthefinancialconglomerate.TransactionsbetweenSampoandNordeaBankSwedenarerequiredtobeonanarms-length basis.NordeaBankSweden’sprimarysupervisor,theSFA,andothernationalcompetent authoritiesfromjurisdictionsinwhichSampohasoperationsparticipateashostcountry supervisorsintheSampofinancialconglomeratesupervisorycollege. Basedonthefactsof recordandthesupervisorysystemthattheSFAandtheFinnishFSA haveinplace,theBoardhasdeterminedthatNordeaBankSwedenandSampoaresubject tocomprehensivesupervisiononaconsolidatedbasis TheBoardhasalsoconsideredthefinancialandmanagerialandotherapplicablefactorsin thecase.TheSFAandFinnishFSAhavenoobjectionstotheestablishmentof the proposedbranch.Sweden’srisk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapitalAccord(“BaselAccord”).NordeaBankSweden’scapitalisin excessof theminimumlevelsthatwouldberequiredbytheBaselAccordandisconsidered equivalenttocapitalthatwouldberequiredof aU.S.bankingorganization.Managerial andotherfinancialresourcesof NordeaBankSwedenareconsideredconsistentwith approval,andNordeaBankSwedenappearstohavetheexperienceandcapacityto supporttheproposedbranch.Inaddition,NordeaBankSwedenhasestablishedcontrols andproceduresfortheproposedbranchtoensurecompliancewithU.S.lawandforits operationsingeneral. Swedenisamemberof theFinancialActionTaskForceandsubscribestoitsrecommendationsonmeasurestocombatmoneylaunderingandinternationalterrorism.Inaccordance withtheserecommendations,Swedenhasenactedlawsandregulationstodetermoney laundering,terroristfinancing,andotherillicitactivities.Moneylaunderingisacriminal offenseinSweden,andfinancialinstitutionsarerequiredtoestablishinternalpolicies, procedures,andsystemsforthedetectionandpreventionof moneylaunderingthroughout theirworldwideoperations.NordeaBankSwedenhaspoliciesandprocedurestocomply withtheselawsandregulations,andNordeaBankSweden’scompliancewithapplicable lawsandregulationsismonitoredbygovernmentalentitiesresponsibleforanti-moneylaunderingcompliance. NordeaBankSwedenhascommittedtomakeavailabletotheBoardsuchinformationon itsoperationsandonthoseof anyof itsaffiliates,includingSampo,thattheBoarddeems necessarytodetermineandenforcecompliancewiththeIBA,theBankHoldingCompany Actof 1956,andotherapplicablefederallaw.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedbylaworotherwise,NordeaBankSwedenhas

LegalDevelopments:SecondQuarter,2017 323 committedtocooperatewiththeBoardtoobtainanynecessaryconsentsorwaiversthat mightberequiredfromthirdpartiesfordisclosureof suchinformation.Inlightof these commitmentsandotherfactsof record,ithasbeendeterminedthatNordeaBankSweden hasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoard mayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresents arisktothestabilityof theUnitedStatesfinancialsystem,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,an appropriatesystemof financialregulationforthefinancialsystemof suchhomecountryto mitigatesuchrisk.11Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStatesfinancialsystemhasalsobeenreviewed.Inparticular,considerationhas beengivento(1)thesizeandscopeof NordeaBankSweden’sactivities,includingthetype of activitiesitproposestoconductintheUnitedStatesandthepotentialfortheseactivities toincreaseortransmitfinancialinstability,and(2)theframeworkinplaceforsupervising NordeaBankSwedeninitshomejurisdiction.Basedontheseandotherfactors,financial stabilityconsiderationsforthisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyNordea BankSwedenaswellasthetermsandconditionssetforthinthisOrder,NordeaBank Sweden’sapplicationtoestablishabranchinNewYorkisherebyapproved.Shouldany restrictionsonaccesstoinformationontheoperationsoractivitiesof NordeaBank Swedenanditsaffiliates,includingSampo,subsequentlyinterferewiththeBoard’sability toobtaininformationtodetermineandenforcecompliancebyNordeaBankSwedenand itsaffiliates,includingSampo,withapplicablefederalstatutes,theBoardmayrequire terminationof anyof NordeaBankSweden’sdirectorindirectactivitiesintheUnited States.Approvalof thisapplicationalsoisspecificallyconditionedoncomplianceby NordeaBankSwedenwiththecommitmentsmadeinconnectionwiththisapplicationand withtheconditionsinthisOrder.12 Byorderof theBoardof Governors,effectiveApril13,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. 11 Pub.L.No.111-203,124Stat.1376,1440(2010),codifiedat12U.S.C.§3105(d)(3)(E). 12 TheBoard’sauthoritytoapprovetheestablishmentofabranchparallelsthecontinuingauthorityoftheState ofNewYorktolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplant theauthorityoftheStateofNewYorkanditsagent,theNewYorkStateDepartmentofFinancialServices,to licensetheproposedbranchofNordeaBankSwedeninaccordancewithanytermsandconditionsthatthe NewYorkStateDepartmentofFinancialServicesmayimpose.TheNewYorkStateDepartmentofFinancial ServicesapprovedNordeaBankSweden’sapplicationtoestablishthebranchonNovember29,2016.

324 FederalReserveBulletin|October2017 Order Issued Under Home Owners’ Loan Act TIAA Board of Overseers New York, New York Teachers Insurance and Annuity Association of America New York, New York TCT Holdings, Inc. New York, New York OrderApprovingtheAcquisitionandMergerof SavingsandLoanHoldingCompanies FRBOrderNo.2017–16(June7,2017) TIAABoardof Overseers(“Overseers”),TeachersInsuranceandAnnuityAssociationof America(“TIAA”),andTCTHoldings,Inc.(“TCT”)(collectively,“Applicants”),eachof NewYork,NewYork,andeachasavingsandloanholdingcompany(“SLHC”)have requestedtheBoard’sapprovalundersection10(e)of theHomeOwners’LoanAct,as amended(“HOLA”),1toacquireandmergewithEverBankFinancialCorp.(“EFC”),an SLHC,andindirectlyacquireitssubsidiaryfederalsavingsassociation,EverBank,bothof Jacksonville,Florida. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(81FederalRegister69530(October6,2016)).2Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposal,allcommentsreceived, andthefactorssetforthinsection10(e)of HOLAinlightof alltheinformationof record.3TheOfficeof theComptrollerof theCurrency(“OCC”)hasapprovedtherelated applicationundersection18(c)of theFederalDepositInsuranceAct4forTIAA-CREF TrustCompanyFSB(“TIAAFSB”),St.Louis,Missouri,tomergewithandinto EverBank. Applicants,withtotalassets5of approximately$282.4billion,controlTIAAFSBand approximately$3.6billionindeposits,whichrepresentlessthan 1percentof thetotalamountof depositsintheUnitedStates.6TIAAFSBconductsallof itsbankingactivitiesthroughanationwideInternetplatform. EFC,withconsolidatedassetsof approximately$27.8billion,isthe64thlargestdepository organizationintheUnitedStates.EFCcontrolsEverBank,the6thlargestdepository institutioninFlorida,controllingapproximately$18.9billionindeposits,whichrepresent 3.7percentof thetotaldepositsheldbyinsureddepositoryinstitutionsinFlorida.7 Onconsummationof theproposal,Applicantswouldhavetotalassetsof approximately $282.4billionandwouldcontroldepositsof approximately$23.3billion,whichrepresent 1 12U.S.C.§1467a(e). 2 12CFR238.14(c)(2). 3 12U.S.C.§1467a(e)(2);seealso12CFR238.15. 4 12U.S.C.§1828(c). 5 Asaninsurancecompany,TIAAfollowsstatutoryaccountingprinciplesanddoesnotprepareconsolidated financialstatementsunderU.S.generallyacceptedaccountingprinciples.Asusedhere,“totalassets”includes onlythoseassetsoftheinsurerthatareallowableoradmittedunderstatutoryaccountingrules. 6 DepositdataareasofDecember31,2016,unlessotherwisenoted. 7 StatedepositandrankingdataareasofJune30,2016.

LegalDevelopments:SecondQuarter,2017 325 lessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates.8InFlorida,Applicantswouldbecomethe6thlargestdepositoryorganization,controllingdepositsof approximately$18.9billion,whichrepresent3.7percentof the totaldepositsof insureddepositoryinstitutionsinthatstate. InterstateandDepositCapAnalysis Section10(e)(2)(E)of HOLAgenerallyprovidesthattheBoardmaynotapproveanapplicationbyanSLHCtoacquireaninsureddepositoryinstitutioninastateotherthanthe SLHC’shomestateif theSLHCcontrols,oruponconsummationwouldcontrol,more than10percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates,unlesstheacquisitioninvolvesaninsureddepositoryinstitutionindefaultor dangerof default.9 Forpurposesof HOLA,EverBank’shomestateisFlorida,andApplicants’homestateis Missouri.10Onconsummationof theproposedtransaction,Applicantswouldcontrolless than1percentof thetotalamountof consolidateddepositsininsureddepositoryinstitutionsintheUnitedStates.Accordingly,inlightof allthefactsof record,theBoardmay approvetheproposalundersection10(e)(2)(E)of HOLA. CompetitiveConsiderations Section10(e)(2)of HOLAprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopoly,orthatwouldbeinfurtheranceof anycombinationorconspiracyto monopolizeortoattempttomonopolizethesavingsandloanbusinessinanypartof the UnitedStates.11HOLAalsoprohibitstheBoardfromapprovingaproposalif theproposal wouldsubstantiallylessencompetition,tendtocreateamonopoly,orinanyothermanner restraintradeinanysectionof thecountry,unlesstheanticompetitiveeffectsof the proposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposal inmeetingtheconvenienceandneedsof thecommunitytobeserved.12 EverBankmaintainstenretailbranches,allof whicharelocatedinFlorida,butoperates primarilyasanonlinedepositoryinstitution.TIAAFSBdoesnotoperateanyphysical retailbranchesandinteractswithcustomersthroughanInternetplatform.Eachbank controlsarelativelysmallamountof depositswhencomparedtotheamountof deposits takenovertheInternetasawhole.13TIAAFSBandEverBankcompeteinlocalmarkets throughoutthenationthroughtheirInternetplatforms;however,bothinstitutionssolicit depositsfromacrossthecountry,makingitunlikelythateitherinstitutionholdsahigh concentrationof Internetdepositsinanylocalmarket.Basedonthesizeof theinstitutions, thelargenumberof Internet-basedcompetitors,andthediffusegeographicnatureof the Internetdepositsof EverBankandTIAAFSB,theproposedtransactionwouldnotresult 8 TIAAutilizesequitymethodaccountingforitsinvestmentsinsubsidiaries,asmandatedunderstatutory accountingprinciples.Accordingly,Applicants’totalassetswouldnotbemateriallyaffectedbytheacquisition. 9 12U.S.C.§1467a(e)(2)(E). 10 12U.S.C.§1467a(e)(7)(B)(iii)and(iv).Afederalsavingsassociation’shomestateisthestateinwhichitshome officeislocated.AnSLHC’shomestateisthestateinwhichthetotaldepositsofallinsureddepositoryinstitutionsubsidiariesofsuchcompanywerethelargestonthedateonwhichthecompanybecameanSLHC. 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 DataconcerningthetotalamountofdepositsgatheredovertheInternetbyalldepositoryinstitutionsarenot available.However,dataconcerningtheamountofdepositsgatheredbyInternet-onlydepositoryinstitutions,a subsetofdepositoryinstitutionsthattakedepositsovertheInternet,areavailable.Theresultantinstitution’s shareofalldepositsofInternet-onlydepositoryinstitutions(includingtheshareofdepositsattributableto EverBank’sretailbranchesthatwouldsurvivethemerger)wouldbelessthan5percent.

326 FederalReserveBulletin|October2017 inamaterialincreaseinconcentrationinanysinglemarket,includinganyinwhich EverBankhasaphysicallocation.14Consummationof theproposalwouldbeconsistent withBoardprecedentandwithinthethresholdsintheDepartmentof Justice(“DOJ”) BankMergerGuidelines. TheDOJhasconductedareviewof thepotentialcompetitiveeffectsof theproposaland hasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthat competitiveconsiderationsareconsistentwithapproval. FinancialandManagerialResourcesandFutureProspects InreviewingproposalsunderHOLA,theBoardconsidersthefinancialandmanagerial resourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financial factors,theBoardreviewspublicandsupervisoryinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.15Inthisevaluation,the Boardconsidersavarietyof informationregardingcapitaladequacyandearningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthefinancial conditionof thecombinedorganization,includingitscapitalposition,assetquality, liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction. TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof theproposal andtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitution.In addressingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan.TheBoardhas consultedwiththeOCCandtheConsumerFinancialProtectionBureau(“CFPB”) regardingthisproposal. ApplicantsandEFCarewellcapitalized,andthecombinedorganizationwouldremainso onconsummationof theproposal.TheproposedtransactionisanSLHCacquisitionthat isstructuredasanexchangeof cashforsharesfollowedbyamerger.16Theassetquality, earnings,andliquidityof Applicants,EFC,andtheirsubsidiarydepositoryinstitutionsare consistentwithapproval,andApplicantsappeartohaveadequateresourcestoabsorbthe costsof theproposalandtocompletetheintegrationof theinstitutions’operations.In addition,futureprospectsareconsideredconsistentwithapproval. 14 EverBankhas10physicalbranchesinlocationsacrossFlorida.Evenassumingthatallofthedepositsofthe resultantinstitutionwouldbelocatedinFlorida,theresultantinstitutionwouldcontrollessthan5percentof thetotaldepositsinthatstate. 15 AsofthedateofthisorderandbasedoninformationprovidedbyApplicants,Applicantsmeettherequirementsofsection10(c)(9)(c)ofHOLAandthereforearenotrequiredtoobtaintheBoard’spriorapprovalto engageinanybusinessactivitiesresultingfromthemergerandacquisitionofEFCandEverBank. 16 Toeffecttheholdingcompanymerger,alloutstandingsharesofEFCwillbeconvertedintotherighttoreceive cashfromApplicants.Applicantshavetheresourcestofundtheproposedtransaction.

LegalDevelopments:SecondQuarter,2017 327 TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.17Thisconsiderationincludedanevaluationof the competence,experience,andintegrityof theofficers,directors,andprincipalshareholders of ApplicantsandTIAAFSB;theirrecordof compliancewithlawsandregulations;and therecordof theApplicantsandTIAAFSBanditsaffiliatesof fulfillinganycommitments to,andanyconditionsimposedby,theBoardinconnectionwithpriorapplications.18The Boardhasreviewedtheexaminationrecordsof Applicants,EFC,andtheirsubsidiary depositoryinstitutions,includingassessmentsof theirmanagement,risk-management systems,andoperations.Inaddition,theBoardhasconsideredinformationprovidedby Applicants;theBoard’ssupervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations;andtheorganizations’recordsof compliancewith applicablebanking,consumerprotection,andanti-money-launderinglaws,aswellasinformationprovidedbythecommenters. Applicants’existingrisk-managementprogramandtheirdirectorsandseniormanagement areconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Applicants haveknowledgeof andexperienceinthebankingandfinancialservicessectors.Applicants haveconductedcomprehensiveduediligenceandaredevotingsignificantfinancialand otherresourcestoaddressallaspectsof thepost-integrationprocessforthisproposal. TheBoardalsohasconsideredApplicants’plansforimplementingtheproposal.Applicantsplantoleveragemuchof EverBank’sexistingrisk-managementframeworkand program,compliance-managementframework,andrelatedcorporatesupportfunctions, andtheseareconsideredsatisfactoryfromasupervisoryperspective.Applicantsintendfor EverBank’srisk-managementandcomplianceframeworkandprogramtoserveasthe operatingframeworkandprogramattheresultantdepositoryinstitutionfollowingthe transaction.Inaddition,themanagementof Applicants,EFC,andtheirdepositoryinstitutionsubsidiarieshavetheexperienceandresourcestooperatethecombinedorganization inasafeandsoundmanner,andApplicantsplantointegrateEverBank’sexistingmanagementandpersonnelinamannerthataugmentsApplicants’management.19 Basedonallthefactsof record,includingthesupervisoryrecordsof Applicants,EFC,and theirsubsidiarydepositoryinstitutions;theirmanagerialandoperationalresources;Applicants’plansforoperatingtheinstitutionafterconsummation;andthecommentsreceived ontheproposal,theBoardconcludesthatconsiderationsrelatingtothefinancialand managerialresourcesandfutureprospectsof theorganizationsinvolvedintheproposal,as wellastherecordsof effectivenessof ApplicantsandEFCincombattingmoneylaunderingactivities,areconsistentwithapproval. 17 12CFR238.15(b)(2). 18 See12U.S.C.§1467a(e)(1)(B);12CFR238.15(b)(2). 19 AcommenterassertedthatApplicantsdonothavesufficientbankingexperiencetoacquireEFCand EverBank.Applicantsrepresentthatmanagementoftheresultantdepositoryinstitutionwouldconsistof bankingprofessionalswithextensiveexperiencedrawnfromthecurrentmanagementofTIAAFSBand EverBank.Forthereasonsdiscussedabove,managementofbothTIAAFSBandEverBankareconsidered satisfactoryfromasupervisoryperspective. ThecommenteralsoallegedthatApplicantshaveimproperlyinvestedheavilyinagriculturalexpansioninBrazil thatcontributedtothedepletionoftheBrazilianrainforest,whichreflectspoorlyonmanagement.Applicants representthattheirinvestmentsinBrazilfollowtheU.N.PrinciplesforResponsibleInvestmentinFarmland. Thisallegationdoesnotreflectonthecompetence,experience,orintegrityofmanagementwithrespecttothe controlandoperationofadepositoryinstitution.

328 FederalReserveBulletin|October2017 ConvenienceandNeedsConsiderations Inactingonaproposalundersection10(e)of HOLA,theBoardconsiderstheeffectof the transactionontheconvenienceandneedsof thecommunitiestobeserved.20Initsevaluationof theeffectof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).21TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeandsoundoperation,22andrequirestheappropriatefederalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluatingexpansionary proposals.23 Inaddition,theBoardconsiderstheinstitutions’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheinstitutions’businessmodels,theirmarketingandoutreachplans,thecombinedorganization’s plansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof TIAAFSB andEverBank,thefairlendingandcompliancerecordsof bothsavingsassociations,the supervisoryviewsof theOCCandtheCFPB,confidentialsupervisoryinformation,informationprovidedbyApplicants,andthepubliccommentsreceivedontheproposal. Summaryof PublicCommentsonConvenienceandNeeds Acommenterobjectedtotheproposalallegingthat,basedondatareportedunderthe HomeMortgageDisclosureAct(“HMDA”)for2015,TIAAFSBlentonlytowhite borrowersintheSt.Louis,Missouri-IllinoisMetropolitanStatisticalArea(“St.Louis MSA”).ThecommenteralsocriticizedtherateatwhichEverBankdeniedapplicationsby AfricanAmericansintheMiami-FortLauderdale-WestPalmBeach,FloridaMetropolitan StatisticalArea(“MiamiMSA”)andtheTampa-St.Petersburg-Clearwater,Florida MetropolitanStatisticalArea(“TampaMSA”),basedon2015HMDAdata. TheBoardalsoreceivedcommentsfrom10communitygroupsandnonprofitorganizationsinsupportof theproposal.Supportingcommenterspraisedthecommunityoutreach effortsof bothTIAAFSBandEverBankandexpressedconfidencethattheproposal wouldallowthecombinedorganizationtoexpanditscommunitydevelopmentactivities. 20 12U.S.C.§1467a(e)(2);12CFR238.15(b)(3). 21 12CFR238.15(b)(3). 22 12U.S.C.§2901(b). 23 12U.S.C.§2903.

LegalDevelopments:SecondQuarter,2017 329 Businessesof InvolvedInstitutionsandResponsetoComments TIAAisaNewYorklifeinsurancecompanyfocusingonconsumersthatworkinnot-forprofitfields,includingacademia,research,medicine,andgovernment.TIAAiswholly ownedbyOverseers,aNewYorknot-for-profit,non-stockmembershipcorporation.TCT isawhollyownedsubsidiaryof TIAAandhasnooperationsoutsideitsownershipof TIAAFSB.TIAAFSBisafederalsavingsassociationthatdoesnotoperatephysical branchesbutoffersdepositproducts,investmentmanagementandtrustservices,andresidentialrealestatelendingthroughouttheUnitedStatesthroughanInternetplatformunder thebrandname“TIAADirect.” EFC,apubliclytradedDelawarecorporation,operatesprimarilythroughEverBank. EverBankisafederalsavingsassociationthatservescustomersinFloridathrough10 branchesandcustomersthroughouttheUnitedStatesthroughanationwideInternetplatform.EverBankoffersconsumerproductsincludingdepositservices,loans,residential lending,andloanservicing,aswellasproductstargetedprimarilytobusinesscustomers, suchasbusinessdepositservices,commercialrealestatelending,lenderfinance,equipment financeandleasing,andmortgagewarehousefinancing.EverBankoperatesahome lendingnetworkinall50statesandmarketstocustomersnationwidethroughitsInternet platform. ApplicantsassertthattheallegationsinthecommentletterwithrespecttoTIAAFSBdo notfullyrepresentTIAAFSB’slendingrecord,whichconsistsof nationwideactivity. ApplicantsnotedthatTIAAFSBdoesnotoperateanyphysicalbranchesandmarketsto consumersnationwidethroughitsInternetplatformandotherbroad-baseddistribution channels,andthereforearguethatlendingdatafocusedonasinglemarketdonotreflect TIAAFSB’sbroaderlendingrecordorstrategy.Applicantsassertthatthedenialratescited bythecommenterarebasedonasmallnumberof originationsanddonottakeinto accountfactors,suchascredithistoryandexistingdebtlevels,thatTIAAFSBusesto underwriteloans. WithrespecttotheallegationsrelatedtoEverBank,Applicantssimilarlyassertthatthe denialratescitedbythecommenterarebasedonasmallnumberof applicationsanddo nottakeintoaccountlegitimateunderwritingfactors,suchascredithistoryandexisting debtlevels.Applicantsassertthatthedenialsunderlyingthedatacitedbythecommenter wereproperlymadebecausetheapplicationsdidnotsatisfyEverBank’sunderwriting criteria.Applicantsalsoassertthatlendingdatafocusedonoperationsinasmallnumberof specificmarketsdonotreflectEverBank’sbroaderlendingrecordorstrategy. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performanceinlightof examinationsbytheappropriatefederalsupervisorsof theCRA performancerecordsof therelevantinstitutions,aswellasinformationandviewsprovided bytheOCCandtheCFPB.24 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit 24 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016).

330 FederalReserveBulletin|October2017 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’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 theinstitution’slending,includingtheproportionanddispersionof theinstitution’sloansinitsassessmentareasandthenumberandamountof loans inlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof such loansbasedonborrowercharacteristics,includingforhomemortgageloansthenumber andamountof loanstolow-,moderate-,middle-,andupper-incomeindividuals;26(4)the institution’scommunitydevelopmentlending,includingthenumberandamountof communitydevelopmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.27 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof TIAAFSB TIAAFSBwasassignedanoverall“Satisfactory”ratingbytheOCCatitsmostrecent CRAperformanceevaluation,asof January13,2014(the“TIAAFSBEvaluation”).28 TIAAFSBreceived“LowSatisfactory”ratingsfortheLendingTestandtheServiceTest anda“HighSatisfactory”ratingfortheInvestmentTest. 25 12U.S.C.§2906. 26 Examinersalsoconsiderthenumberandamountofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 27 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 28 TheTIAAFSBEvaluationwasconductedusingLargeBankCRAExaminationProcedures.TheLendingTest evaluationperiodwasJanuary1,2012,throughDecember31,2013,forhomemortgageloansoriginatedand purchased.ExaminersreviewedcommunitydevelopmentactivitiesfromAugust21,2010,throughJune2,2014. TheassessmentareareviewedwasdefinedasthecityofSt.Louis,St.Charles,St.Louis,andWarrencounties inMissouri,andMadisonandSt.ClaircountiesinIllinois.ThesefivecountiesandthecityofSt.Louisare contiguousgeographieslocatedwithintheSt.LouisMSA.

LegalDevelopments:SecondQuarter,2017 331 ExaminersfoundthatTIAAFSB’slendinglevelsreflectedadequateresponsivenesstothe creditneedsof TIAAFSB’sassessmentarea.Examinersalsonotedthatthegeographic distributionof homemortgageloansreflectedgoodpenetrationandthatthedistribution of homemortgageloansamongborrowersof differentincomelevelsreflectedexcellent penetration.ExaminersalsofoundthatTIAAFSB’sgeographicdistributionof homerefinanceloanswasexcellent.ExaminersfurtherfoundthatTIAAFSBhadarelativelyhigh levelof communitydevelopmentloans,includingloanstoalow-incomecreditunion focusedspecificallyonmeetingthefinancialserviceneedsof underservedcommunities. ExaminersnotedthatTIAAFSB’sloan-productofferingwasvariedandthatTIAAFSB madeuseof severalcommunitydevelopmentfinancialinstitutionsthatsupportedaffordablehousingandcommunitydevelopmentprojectsinordertoprovideinnovativeandflexiblecreditproductstoaddresscreditneedsinitsassessmentarea. ExaminersnotedthatTIAAFSBpurchasedasignificantlevelof qualifyingmortgagebackedsecuritiesandthatitsparentcompany,TIAA,hadasignificantlevelof qualified investmentstominority-ownedinstitutionsandcommunitydevelopmentfinancialinstitutions.Inaddition,examinersnotedthatTIAAFSBmadeadonationtoaSt.Louiscredit unionthatmetanidentifiedcommunityneed. ExaminersconcludedthatTIAAFSB’sdeliverysystemswereaccessibletogeographiesand individualsof differentincomelevels.ExaminersnotedthatTIAAFSBwasanInternetbaseddepositoryinstitutionwithnotraditionalbankingofficesordeposit-takingATMs, insteadrelyingontheInternet,mobilebanking,andtelephonebankingforloansand depositaccounts.Examinersstatedthatitwasunprovenwhetherornotthesealternative deliverysystemsspecificallymettheneedof LMIfamiliesinTIAAFSB’sassessmentarea. ExaminersfoundthatTIAAFSBprovidedanadequatelevelof communitydevelopment services.ExaminersnotedthatTIAAFSB’scommunitydevelopmentservicesincluded creditandhomebuyerseminarsprimarilytargetedtowardLMIindividualsresidinginits assessmentareaandfinancialliteracytrainingtoLMIstudentswithinitsassessmentarea. TIAAFSB’sEffortsSincethe2014CRAEvaluation TIAAFSBrepresentsthatsincetheTIAAFSBEvaluation,ithasoriginatedorrenewed high-impactcommunitydevelopmentloansandhasdevelopedpartnershipswithavariety of communityorganizationsinitsassessmentareatofacilitateaffordablehousingand otherloanstoLMIindividuals.TIAAFSBalsorepresentsthatithaspurchasedmortgagebackedsecuritiescollateralizedbymortgagestoLMIindividualsandisparticipatingina five-yearEnterpriseCommunityImpactnote. CRAPerformanceof EverBank EverBankwasassignedanoverall“Satisfactory”ratingbytheOCCatitsmostrecentCRA performanceevaluation,asof October14,2015(the“EverBankEvaluation”).29EverBank received“HighSatisfactory”ratingsfortheLending,Investment,andServiceTests. ExaminersfoundthatEverBankhadanoveralladequatedispersionof loansingeographiesof differentincomelevels.AlthoughtheexaminersconsideredEverBank’sgeographic distributionof homepurchaseloanstobegoodanditsgeographicdistributionof home improvementloanstobeexcellent,theyfoundEverBank’sgeographicdistributionof home 29 TheEverBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.TheLendingTest evaluationperiodwasJanuary1,2012,throughDecember31,2014,forhomemortgageloansandsmallbusinessloans.ExaminersreviewedcommunitydevelopmentactivitiesfromMay1,2012,throughAugust31,2015. Theassessmentareareceivingafull-scopereviewfortheEverBankEvaluationwasdefinedasDuvalCounty, Florida,withintheJacksonville,FloridaMetropolitanStatisticalArea.

332 FederalReserveBulletin|October2017 refinanceloanstobepoor.ExaminersnotedthatEverBankhadagooddistributionof loanstoborrowersof differentincomelevels.Examinersfurtherfoundagoodlevelof geographicdistributionof lendingforloanstosmallbusinessesandagoodlevelof overall lendingactivityandcommunitydevelopmentlending.ExaminersnotedthatEverBank’s communitydevelopmentloanssupportedaffordablehousinginitiatives,economicdevelopmentinEverBank’sassessmentarea,andtherevitalizationorstabilizationof LMIcensus tracts. ExaminersfoundEverBanktohavecommunitydevelopmentinvestmentsthatexhibited excellentresponsivenesstocommunitydevelopmentneedswithinitsassessmentarea. ExaminersnotedthatEverBank’sinvestmentsincludedgovernment-sponsoredmortgagebackedsecurities,inwhichtheunderlyingmortgagesweretoLMIborrowers.InvestmentsalsoincludedgrantstothelocalHabitatforHumanityandotheraffordablehousing organizationsaswellasacontributiontoafinancialliteracyprogramtargetedtohigh schoolstudentsinLMIcommunities. ExaminersnotedthattelephoneandInternetaretheprimarymeansusedbyEverBankto deliverservicestoitscustomers.ExaminersfoundthatEverBank’sphysicalbranches werereasonablyaccessibletopeopleandgeographiesof differentincomelevelsandthatno significantdifferencesinhoursexistedamongbrancheslocatedingeographiesof different incomelevels.ExaminersfoundthatEverBankofferedanadequatelevelof services throughalternatedeliverysystems.ExaminersalsofoundthatEverBank’srecordof openingorclosingofficeshadnotadverselyimpactedaccesstobankingservices.ExaminersstatedthatEverBankprovidedanexcellentlevelof communitydevelopmentservices thatwerehighlyresponsivetocommunityneeds.Examinersspecificallyhighlighted EverBank’seffortstoprovidetechnicalassistanceonfinancialandbanking-relatedmatters tocommunitygroups,whichrepresentedanexcellentresponsivenesstotheaffordable housingandcommunitydevelopmentneedswithinEverBank’sassessmentarea. EverBank’sEffortsSincethe2015CRAEvaluation ApplicantsrepresentthatsincetheEverBankEvaluation,EverBankhascontinuedto provideproductsandservicestailoredtotheconvenienceandneedsof LMIindividuals. ApplicantsrepresentthatEverBankcontinuestooriginateandpurchasecommunitydevelopmentloanswithinitsassessmentarea.ApplicantsalsorepresentthatEverBankhas madequalifiedinvestmentswithinitsassessmentarea,includinginvestmentsinaffordable housingunits,scholarshipprogramsservinglow-incomestudents,andgrantstocommunityorganizationsthatprovideaffordablehousing,communityservices,andeducation opportunities.ApplicantsrepresentthatEverBankcontinuestoparticipateinaffordable lendingprogramsandthatEverBanksupportsthemissionof HabitatforHumanityboth byoriginatingloansfortheprogramandprovidingcontinuingmortgage-servicingsupport forloansownedbyHabitatforHumanityorganizations,aswellasforloanssoldby HabitatforHumanityorganizationstootherinvestors.EverBankalsooffersbankingproducts,suchasaffordablesavingsandcheckingaccounts,designedtoprovideanarrayof servicesthroughoutitsassessmentareaataminimalcost,aswellasadditionallending productsandservicesaimedatextendingbankingservicestosmallersaversandborrowers andanonlinebusiness-payrollserviceforsmallbusinesses. Viewsof theOCCandtheCFPB Initsreviewof theproposal,theBoardconsultedwiththeOCCregardingtheCRA, consumercompliance,andfairlendingrecordsof TIAAFSBandEverBank.TheBoard alsoconsultedwiththeCFPBregardingEverBank’srecordof compliancewithconsumer protectionlaws.TheOCCapprovedthebankmergerunderlyingthisproposal.TheOCC

LegalDevelopments:SecondQuarter,2017 333 wasprovidedwiththecommentsontheproposalreceivedbytheBoardandconsidered theminconnectionwithitsreviewof thebankmergerapplication. TheBoardhasconsideredtheresultsof arecentconsumercomplianceexaminationof TIAAFSBconductedbyOCCexaminers,whichincludedareviewof TIAAFSB’spolicies andproceduresforcomplyingwithfairlendingandotherconsumercompliancelaws. TheBoardalsohasconsideredtheresultsof arecentconsumercomplianceexaminationof EverBankconductedbyOCCexaminers,whichincludedreviewsof EverBank’sconsumer compliancepoliciesandprocedures,internalcontrols,compliancetesting,monitoring, training,andthecompliance-riskassessmentprocess.Examinersalsoreviewedthird-party riskmanagement;managementinresponsetochangesinlaws,regulations,systems,and products;duediligencefornewproductsandservices;andareasof potentialunfairor deceptiveactsorpractices. TheBoardhastakentheseconsultationsintoaccountinevaluatingthisproposal,including inconsideringwhetherApplicantshavetheexperienceandresourcestoensurethatthe organizationwouldeffectivelyimplementpoliciesandprogramsthatwouldallowthe combinedorganizationtoeffectivelyservethecreditneedsof allthecommunitieswithin thefirm’sassessmentareas. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Applicantsrepresentthattheresultantdepository institutionwillleveragethestrengthsof TIAAFSBandEverBanktofocusonmeeting communityneedsthroughoutthegeographicfootprintof thecombinedsavingsassociation.Plannedeffortsinclude,butarenotlimitedto,financingforacquisition,renovation, orconstructionof affordablehousingforsaleorrenttoLMIindividualsorfamilies; revolvingloanfundsfornonprofitorganizationsforthepurposeof acquiring,rehabilitating,andsellingaffordablehomes;financingfortheacquisition,renovation,orconstructionof affordablemultifamilyhousing;loansforowner-occupied,nonresidentialproperties ownedbycommunitydevelopmentorganizations;investmentsinpre-developmentor permanentfinancingforaffordablehousingandcommunitydevelopmentprojectsthat benefitLMIgeographies;workingcapitallinesof credittocommunitydevelopmentcorporations;financialliteracyprogramsrelatedtocreditrepairandforeclosurealternatives;and directinvestmentsinnonprofitprogramsandrelatedcommunityservices.Applicantsrepresentthatasaresultof theproposedtransaction,theresultantdepositoryinstitutionwill havethecapabilitytoofferawiderarrayof bankingproductsthroughexpandeddistributionchannels.Thesebankingproductsincludecreditcardsandsmallbusinessloans,which TIAAFSBdoesnotcurrentlyoffertoitscustomers,aswellasbroaderresidentiallending andcommerciallendingoperations. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof TIAAFSBand EverBankundertheCRA;theirrecordsof compliancewithfairlendingandother consumerprotectionlaws;consultationswiththeOCCandtheCFPB;confidentialsupervisoryinformation;informationprovidedbyApplicants;thepubliccommentsonthe proposal;andotherpotentialeffectsof theproposalontheconvenienceandneedsof the communitiestobeserved.Basedonthatreview,theBoardconcludesthattheconvenience andneedsfactorisconsistentwithapproval.

334 FederalReserveBulletin|October2017 Effectof theTransactionontheSavingsAssociationandInsuranceRisktotheDeposit InsuranceFund Inactingonaproposalundersection10(e)of HOLA,theBoardconsidersthelikelyeffect of thetransactiononthesavingsassociationandanyinsurancerisktotheDepositInsuranceFund.30Asdiscussedabove,thefinancialandmanagerialresourcesandthefuture prospectsof thecombinedorganizationareconsistentwithapproval.TheBoardhas consideredthelikelyeffectof thetransactionontheresultantdepositoryinstitutionand believesthatitisconsistentwithapproval.Inviewof Applicants’andEFC’scurrent resources,capital,andfutureprospects;thesignificantfinancialandotherresourcesbeing devotedtosupporttheproposedcombinedorganization;themanagerialresourcesof Applicants,EFC,TIAAFSB,andEverBank;andthelikelyeffectof thetransactiononthe proposedcombinedorganization,theBoard,afterconsultingwiththeFederalDeposit InsuranceCorporation,believesthattheproposalwouldnotappearlikelytohaveany materialeffectontheinsurancerisktotheDepositInsuranceFund. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthattheapplicationshouldbe,andherebyis,approved.31Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder HOLA.TheBoard’sapprovalisspecificallyconditionedoncompliancebyApplicantswith alltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedlaterthanthreemonthsaftertheeffectivedateof thisorderunlesssuchperiodisextendedforgoodcausebytheBoardortheFederal ReserveBankof Boston,actingpursuanttodelegatedauthority. Byorderof theBoardof Governors,effectiveJune7,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. 30 12U.S.C.§1467a(e)(2). 31 AcommenterrequestedthattheBoardholdpublichearingsormeetingsontheproposal.Underitsrules,the Boardmay,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunityto providerelevanttestimonywhenwrittencommentswouldnotadequatelyrepresenttheirviews.12CFR 238.14(e)and262.3(e).TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.In theBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact, submittedwrittencommentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequest didnotidentifydisputedissuesoffactmaterialtotheBoard’sdecisionthatwouldbeclarifiedbyapublic meeting.Inaddition,therequestdidnotdemonstratewhywrittencommentsdonotpresentthecommenter’s viewsadequatelyorwhyahearingormeetingotherwisewouldbenecessaryorappropriate.Forthesereasons, andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingormeetingisnotrequired orwarrantedinthiscase.Accordingly,therequestforapublichearingormeetingontheproposalisdenied. Inaddition,acommenterrequestedanextensionofthecommentperiodfortheproposal.TheBoard’srules contemplatethatthepubliccommentperiodwillnotbeextendedabsentacleardemonstrationofhardshipor othermeritoriousreasonforseekingadditionaltime.Thecommenter’srequestforadditionaltimetocomment doesnotidentifycircumstancesthatwouldwarrantanextensionofthepubliccommentperiodforthis proposal.Accordingly,theBoarddeterminesnottoextendthecommentperiod.

335 Federal Reserve BULLETIN December 2017 Vol. 103, No. 7 Legal Developments: Third Quarter, 2017 Orders Issued Under Bank Holding Company Act Orders Issued Under Section 3 of the Bank Holding Company Act Veritex Holdings, Inc. Dallas, Texas OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2017–18(July6,2017) VeritexHoldings,Inc.(“VeritexHoldings”),Dallas,Texas,abankholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2tomergewithSovereignBancshares, Inc.(“SovereignBancshares”),andtherebyindirectlyacquireSovereignBank,bothof Dallas,Texas. Inaddition,VeritexHoldings’subsidiarystatememberbank,VeritexCommunityBank (“VeritexBank”),Dallas,Texas,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewithSovereignBank, withVeritexBankasthesurvivingentity.3VeritexBankalsohasappliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeand branchesof SovereignBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(82FederalRegister8425(January25,2017)).5Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). VeritexHoldings,withconsolidatedassetsof approximately$1.4billion,isthe524th largestinsureddepositoryorganizationintheUnitedStates.6VeritexHoldingscontrols approximately$1.1billioninconsolidateddeposits,whichrepresentlessthan1percentof 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedintheAppendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofDecember31,2016,unlessotherwisenoted.

336 FederalReserveBulletin|December2017 thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.7 VeritexHoldingscontrolsVeritexBank,whichoperatesonlyinTexas.VeritexHoldingsis the64thlargestinsureddepositoryorganizationinTexas,controllingdepositsof approximately$1.0billion,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.8 SovereignBancshares,withconsolidatedassetsof approximately$1.1billion,isthe670th largestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $857.3millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Sovereign BancsharescontrolsSovereignBank,whichoperatesonlyinTexas.SovereignBancsharesis the80thlargestinsureddepositoryorganizationinTexas,controllingdepositsof approximately$814.7million,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. Onconsummationof thisproposal,VeritexHoldingswouldbecomethe338thlargest insureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$2.5billion,whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnitedStates.VeritexHoldingswouldcontrolconsolidateddeposits of approximately$2.0billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryorganizationsintheUnitedStates.VeritexHoldingswould becomethe38thlargestinsureddepositoryorganizationinTexas,controllingdeposits representinglessthan1percentof thetotaldepositsof insureddepositoryinstitutionsin thatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.9Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitionortendto createamonopolyinanybankingmarket,unlesstheanticompetitiveeffectsof the proposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposal inmeetingtheconvenienceandneedsof thecommunitytobeserved.10 VeritexHoldingsandSovereignBancshareshavesubsidiarydepositoryinstitutionsthat competedirectlyintheDallas,Texas,bankingmarket(“Dallasmarket”).11TheBoardhas consideredthecompetitiveeffectsof theproposalinthisbankingmarket.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthemarket;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)thatVeritexHoldingswouldcontrol;12theconcentrationlevelsof market depositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsandloanassociations,andsavingsbanks. 8 Stateassetdata,marketshare,andrankingdataareasofJune30,2016,unlessotherwisenoted. 9 12U.S.C.§§1842(c)(1)and1828(c)(5). 10 12U.S.C.§§1842(c)(1)(B)and1828(c)(5)(B). 11 TheDallasmarketincludesDallasandRockwallcounties;thesoutheasternquadrantofDentonCounty, includingDentonandLewisville;thesouthwesternquadrantofCollinCounty,includingMcKinneyand Plano;thecommunitiesofForneyandTerrellinKaufmanCounty;andMidlothian,WaxahachieandFerrisin EllisCounty,allinTexas. 12 LocaldepositandmarketsharedataareasofJune30,2016,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g.,

LegalDevelopments:ThirdQuarter,2017 337 (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”);13andothercharacteristicsof themarket. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheDallasmarket.Onconsummation of theproposal,theDallasmarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,accordingtotheDOJBankMergerGuidelines.ThechangeinHHIinthis marketwouldbesmall,andnumerouscompetitorswouldremaininthemarket.14 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe Dallasmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheDallasmarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof the institutionsinvolved.15Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancialconditionof theorganizationsinvolvedonbothparent-only andconsolidatedbases,aswellasinformationregardingthefinancialconditionof the subsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapital adequacy,assetquality,andearningsperformance,aswellaspubliccommentsonthe proposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization, includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtocompletetheproposedintegration of theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiders capitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof MidwestFinancialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70Federal ReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html. 14 VeritexHoldingsoperatesthe23rdlargestdepositoryinstitutionintheDallasmarket,controllingapproximately$1.0billionindeposits,whichrepresentlessthan1percentofmarketdeposits.SovereignBancshares operatesthe28thlargestdepositoryinstitutioninthesamemarket,controllingapproximately$539.7millionin deposits,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,VeritexHoldingswouldbecomethe16thlargestdepositoryorganizationinthemarket,controlling depositsofapproximately$1.6billion,whichrepresentlessthan1percentofmarketdeposits.TheHHIforthe Dallasmarketwouldincreaseby1pointto1792,and121competitorswouldremaininthemarket. 15 12U.S.C.§§1842(c)(2),(5),and(6),and1828(c)(5)and(11).

338 FederalReserveBulletin|December2017 theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerial resourcesandtheproposedbusinessplan. VeritexHoldingsandSovereignBancsharesarebothwellcapitalized,andthecombined entitywouldremainsoonconsummationof theproposedtransaction.Theproposed transactionisabankholdingcompanymerger,withasubsequentmergerof VeritexBank andSovereignBank.16Theassetquality,earnings,andliquidityof bothVeritexBank andSovereignBankareconsistentwithapproval,andVeritexHoldingsappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of VeritexHoldings,SovereignBancshares,andtheirsubsidiarydepositoryinstitutions, includingassessmentsof theirmanagement,risk-managementsystems,andoperations.In addition,theBoardhasconsideredinformationprovidedbyVeritexHoldings;theBoard’s supervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththe organizations;andtheorganizations’recordsof compliancewithapplicablebanking, consumerprotection,andanti-money-launderinglaws. VeritexHoldings,SovereignBancshares,andtheirsubsidiarydepositoryinstitutionsare consideredtobewellmanaged.VeritexHoldingshasarecordof successfullyintegrating organizationsintoitsoperationsandrisk-managementsystemsafteracquisitions.Veritex Holdings’directorsandseniorexecutiveofficershaveknowledgeof andexperienceinthe bankingandfinancialservicessectors,anditsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredVeritexHoldings’plansforimplementingtheproposal. VeritexHoldingshasconductedcomprehensiveduediligenceandisdevotingsignificant financialandotherresourcestoaddressallaspectsof thepost-integrationprocessforthis proposal.VeritexHoldingswouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,VeritexHoldings’managementhastheexperienceand resourcestooperatethecombinedorganizationinasafeandsoundmanner,andVeritex HoldingsplanstointegrateSovereignBancshares’existingmanagementandpersonnelina mannerthataugmentsVeritexHoldings’management.17 Basedonallthefactsof record,includingthesupervisoryrecordsof VeritexHoldings, SovereignBancshares,andtheirsubsidiarybanks,managerialandoperationalresources, andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludes thatconsiderationsrelatingtothefinancialandmanagerialresourcesandfutureprospects of theorganizationsinvolvedintheproposal,aswellastherecordsof effectivenessof 16 Toeffecttheholdingcompanymerger,awhollyownedsubsidiaryofVeritexHoldingsformedtofacilitatethe transactionwouldmergewithSovereignBancshares,withSovereignBancsharesasthesurvivingentity,and immediatelythereafterSovereignBancshareswouldmergewithVeritexHoldings,withVeritexHoldingsasthe survivingentity.Uponconsummationofthatmerger,eachshareofSovereignBancsharescommonstock wouldbeentitledtoreceiveaportionoftheaggregatemergerconsideration,whichwouldconsistofVeritex Holdingscommonstockandcash.SovereignBankwouldthenmergewithandintoVeritexBank,withVeritex Bankasthesurvivingentity.VeritexHoldingshasthefinancialresourcestoeffectthetransaction. 17 Onconsummation,SovereignBancshares’presidentandchiefexecutiveofficer,aswellasthechairmanofits boardofdirectors,willbeappointedtotheboardsofdirectorsofVeritexHoldingsandVeritexBank.Additionally,oneoftheseindividualsisexpectedtobeappointedvicechairmanoftheboardofdirectorsofVeritex Holdings.

LegalDevelopments:ThirdQuarter,2017 339 VeritexHoldingsandSovereignBancsharesincombatingmoney-launderingactivities,are consistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.18Initsevaluationof theeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).19The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods,inevaluatingbankexpansionaryproposals.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheirrecentfair 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 VeritexBank andSovereignBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisoryviewsof theFDIC;confidentialsupervisoryinformation;informationprovidedby VeritexHoldings;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal TheBoardreceivedcommentsfromonecommenteropposingtheproposal.The commenterallegedthatVeritexBankdiscriminatesagainstAfricanAmericansand “redlines”AfricanAmericanneighborhoods,particularlyintheDallasandHouston areas,22bothinTexas,withrespecttoitsbranching,marketing,andlendingactivities.23 ThecommenteralsoallegedthatVeritexBankhasdesignateditsCRAassessmentareaina mannerthatexcludesmajorityAfricanAmericanneighborhoodsinDallas.Inaddition, 18 12U.S.C.§§1842(c)(2)and1828(c)(5). 19 12U.S.C.§2901etseq.;12CFR225.13(b)(3). 20 12U.S.C.§2901(b). 21 12U.S.C.§2903. 22 VeritexcurrentlyhasnobranchlocationsinHouston. 23 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.SeeInteragencyFairLendingExaminationProcedures(August2009),availableathttps://www.ffiec.gov/pdf/fairlend.pdf.

340 FederalReserveBulletin|December2017 thecommenterallegedthatSovereignBankalsodiscriminatesagainstAfricanAmericans andredlinesAfricanAmericanneighborhoods. Businessesof theInvolvedInstitutionsandResponsetoComments VeritexHoldingsandVeritexBankofferarangeof financialproductsandservicestoindividualcustomersandbusinesses.VeritexBankisafull-serviceretailbankofferingagricultural,commercial,homepurchase,homeimprovement,homeequity,andvehicleloans. Throughitsnetworkof 11branches,VeritexBankoffersawiderangeof depositproducts includingvariouscheckingaccounts,savingsaccounts,certificatesof deposit,individual retirementaccounts,moneymarketaccounts,andNOWaccounts.VeritexBankalso providesautomatedtellermachines,debitcards,andinternetbanking. SovereignBancsharesandSovereignBankofferdepositandloanproductsandspecializein commercialbankingactivities.SovereignBankoffersarangeof financialproductsand servicestoindividualcustomersandbusinesses,includingbusinessloans,commercialreal estatelending,andconsumerdepositproducts. VeritexHoldingsdeniesthecommenter’sallegationsof discriminatorylendingand redliningwithrespecttothebranching,marketing,andlendingactivitiesof VeritexBank. VeritexHoldingsassertsthatVeritexBankmaintainsappropriatecontrolstoensure compliancewithapplicablefairlendinglawsandregulations,andassertsthatVeritexBank designatedtheentiretyof twocountiesintheDallasareaasitsCRAassessmentarea,24in parttoensurethatnoLMIorhighminoritycensustractswereexcludedorneglected. VeritexHoldingsfurtherassertsthatVeritexBank’smanagementiscommittedtoensuring thatnogeographicareasareexcludedbybranchlocationdecisions.Withrespecttofair lending,VeritexHoldingsassertsthatthebankhasimplementedpoliciesandproceduresto ensurefairlendingcompliance,includinganequalcreditopportunitypolicyandafair lendingpolicy,amongothers.VeritexHoldingsrepresentsthatVeritexBankmonitorsand reviewsloanpoliciesandpracticesforthepurposeof measuringcompliancewithfair lendinglawsandequalcreditopportunityrequirements,andthatthismonitoringincludes internalandexternalaudits,aswellastrainingprograms. Inresponsetothecommenter’scriticismthatVeritexBankhasnoadvertisingormarketing effortsdirectedatAfricanAmericancommunities,VeritexHoldingsassertsthatVeritex Bankhasdirectedadvertisingandmarketingeffortstowardsindividualsandsmallbusinessesinareastypicallyunderservedbybanks,includingAfricanAmericancommunities. VeritexHoldingsrepresentsthatthesemarketingeffortsincludepartnershipswithvarious communityorganizations,includingonethatfacilitatesmicrolendingtolow-and moderate-incomeindividuals. ThecommenteralsonotedthatSovereignBankdiscriminatesagainstAfricanAmericans andredlinesinAfricanAmericanneighborhoods.VeritexHoldingsnotesthataspartof its communitydevelopmentactivities,amajorityof SovereignBank’scommunitydevelopmentloanshavebeentoborrowersinpredominantlyminoritycensustracts.VeritexHoldingsrepresentsthataspartof SovereignBank’sCRAefforts,ithasmadequalifieddonationstoorganizationsthathelptosupportfinancialliteracyandmoneymanagementto individualsincensustractsthatareover50percentminority,aswellastoorganizations thatfocusonhousing,endinghomelessness,andprovidingothersocialservicestargetedto LMIindividualsintheDallasmetropolitanarea.Further,VeritexHoldingsrepresentsthat, throughSovereignBankbranchlocations,bankpersonnelprovidecommunitydevelop- 24 Thesecounties,theDallasandCollincounties,aredefinedbelow.

LegalDevelopments:ThirdQuarter,2017 341 mentservicestoorganizationslocatedinpredominantlyminoritycensustractsandmeet withdifferentcommunitygroups,includinganallianceforthehomeless,whichhelpsthe bankbetterunderstandtheneedsof thecommunitiesitserves.VeritexHoldingsalsorepresentsthatSovereignBankhasimplementedprocessestocomplywithanti-discrimination requirements,includingtheestablishmentof afairlendingcommitteethatreviews,among otherthings,high-rateloansandconsumerloanswithoriginationfees. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontotheinformationprovidedbythepubliccommenters andtheapplicant’sresponsetocomments.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.25Inthiscase,theBoardconsideredthe viewsof itssupervisorystaff andof examinersfromtheFederalReserveBankof Dallas (“ReserveBank”)andtheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.26Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities.27 Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailableHomeMortgageDisclosureAct(“HMDA”)28data,automated loanreports,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.29Intermediatesmallbanksaresubjecttothelendingtest,aswellasacommunitydevelopmenttest thatevaluatesthenumberandamountof theircommunitydevelopmentloansandqualifiedinvestments;theextenttowhichtheyprovidecommunitydevelopmentservices;and theirresponsivenesstocommunitydevelopmentlending,investment,andserviceneeds.30 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 26 12U.S.C.§2906. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 28 12U.S.C.§2801etseq. 29 See12CFR228.26(b). 30 See12CFR228.26(c).

342 FederalReserveBulletin|December2017 CRAPerformanceof VeritexBank VeritexBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheReserveBank,asof January23,2017(“VeritexBankEvaluation”).31Thebankreceived“Satisfactory”ratingsforeachof theLendingTestandthe CommunityDevelopmentTest.TheVeritexBankEvaluationincludedfull-scopeevaluationsof DallasandCollincountiesintheDallas-Plano-IrvingMetropolitanDivision,an areaof concerntothecommenter. Examinersconcludedthatthebank’sperformancedemonstratedareasonableresponsivenesstocreditneedsinitsassessmentarea.Examinersnotedthatasubstantialmajorityof thebank’sHMDAandsmallbusinessloanswereoriginatedinsideitsassessmentarea. Examinersfoundthatthebank’snetloan-to-depositratiowasconsideredreasonable,given thebank’ssizeandfinancialcondition,thecreditneedsof theassessmentarea,andthe competitivelocalbankingenvironment. Examinersalsofoundthatthebank’sdistributionof lendingtoborrowersreflecteda reasonablepenetrationamongindividualsof differentincomelevels(includingLMI borrowers)andthatthegeographicdispersionof thebank’slendingwasreasonablegiven theperformancecontext.Examinersdeterminedthatthedistributionof HMDAloansby borrowerincomelevelwasreasonablegiventhehighlevelof competitionintheassessment areaandlowvolumeof loansoriginatedtoLMIborrowersbytheaggregatelenders.Loans weregenerallymadeincloseproximitytothebank’sbranches,andtherewereno conspicuousgapsoranomaliesinthelendingpatterns.Thedistributionof theremainder of banklendinginmiddle-andupper-incomegeographiesdidnotaffecttheconclusions aboutthebank’sperformanceconsideringitslendinginLMIgeographies.Withrespectto smallbusinesslending,examinersfoundgeographicdistributiontobereasonable. ExaminersalsodeterminedthatVeritexBank’sresponsivenesstocommunitydevelopment needswasadequateconsideringthebank’scapacityanditsprimaryfocusasacommerciallender.Examinersnotedthatthebankapplieditscommunitydevelopmentresources strategicallytomeetcommunityneeds,primarilythroughqualifiedloansandcommunity servicestargetedtoLMIindividualsinitscommunity,andthatthebankprovidedcommunitydevelopmentservicesthroughitsbranchesinLMIareas.Examinersfoundthatthe bankprovidedahighlevelof retailservicesinitsassessmentarea.Specifically,examiners foundVeritexBank’sdeliverysystemstobeaccessibletogeographiesandindividualsof differentincomelevelsinitsassessmentarea.Examinersalsonotedthatthebank’srecord of openingandclosingbrancheshadnotadverselyaffectedtheaccessibilityof itsdelivery systems,particularlytoLMIgeographiesandindividuals,andthatitsservicesdidnotvary inawaythatinconvenienceditsassessmentarea,particularlyLMIgeographiesand individuals. CRAPerformanceof SovereignBank SovereignBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof March30,2015(“SovereignBankEvaluation”).32SovereignBankreceiveda“Satisfactory”ratingfortheLendingTestandan 31 TheVeritexBankEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,examinersreviewedHMDAloansreportedbyVeritexBankin2014and2015andsmall businessloansoriginatedbythebankbetweenApril1,2016,andSeptember30,2016.FortheCommunity DevelopmentTest,examinersreviewedcommunitydevelopmentlending,investments,andservicesbasedon datafromNovember12,2013,throughJanuary23,2017. 32 TheSovereignBankEvaluationwasconductedusingIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,examinersreviewedsmallbusinessloansoriginatedbythebankfromJanuary1,2014,

LegalDevelopments:ThirdQuarter,2017 343 “Outstanding”ratingfortheCommunityDevelopmentTest.AlthoughSovereignBank’s overallratingtookintoconsiderationitsperformanceineachof itsMSAAAs,examiners gavesignificantlymoreweighttothebank’srecordsintheDallas,TexasMSAAAdueto thehighervolumeof loansinthatarea. FortheLendingTest,examinersevaluatedSovereignBank’ssmallbusinessloans.Basedon thisevaluation,examinersfoundthatSovereignBank’sloan-to-depositratioreflected reasonableresponsivenesstocreditneedsinitsassessmentareasgivenitssizeandfinancial condition.ExaminersfoundthatSovereignBankoriginatedamajorityof itslending withinthebank’sassessmentareas.Specifically,examinersnotedthatSovereignBank originatedamajorityof itssmallbusinessloansbynumberanddollarvolumeinsideof its assessmentareas.ExaminersfoundthatSovereignBankdisplayedareasonablelevelof penetrationregardingitsdistributionof loansbasedonborrowerprofileandthatthe bank’srecordof lendingtobusinessesof differentsizesreflectedareasonableperformance. ExaminersalsofoundthatSovereignBankdemonstratedareasonablerecordof geographicallydistributingitsloansthroughouttheassessmentareas.Examinersfound thatthebank’slendinginmoderate-incomeareasreflectedreasonableperformance,but lendinginlow-incomecensustractsdemonstratedpoorperformance.However,examiners notedthatthegeographicdistributionof thebank’ssmallbusinessloansreflectedareasonablerecordof lendingwithintheassessmentareaswhenperformancecontextfactorsthat mitigatethebank’ssmallbusinessloanoriginationsinLMIcensustractswereconsidered. Theseperformancecontextfactorsinclude(1)thebank’sconcentratedmarketingeffortsin LMIareastoincreasesmallbusinessloanvolumethroughitsSmallBusinessAdministrationLoanPrograms,suchasbymailingoutlettersadvertisingtheprogramineachassessmentarea,and(2)thebank’stargetingof businesses,andspecificallythosewithgross annualrevenuesof lessthan$1million,inthebank’slow-incomecensustracts.Overall, examinersnotedthat,consideringeffortsmadetoincreasesmallbusinesslendinginLMI areasandtheheavyconcentrationof bankcompetitionintheDallasMSAAA,thebank’s geographicdistributionof smallbusinessloansreflectedreasonabledispersion. Withrespecttocommunitydevelopment,examinersconsideredSovereignBank’scommunitydevelopmentloans,communitydevelopmentinvestments,andcommunitydevelopmentservices.ExaminersfoundthatSovereignBankdemonstratedanexcellentrecord regardingitscommunitydevelopmentlending.ExaminersalsofoundthatSovereignBank exhibitedanadequaterecordregardingitscommunitydevelopmentinvestmentsanddonations.Specifically,examinersnotedthatthebankhadadequateresponsivenesstocommunitydevelopmentneedscombinedwithanadequatelevelregardingthenumberand dollarvolumeof communitydevelopmentinvestmentsanddonations.Examinersfound thatSovereignBankestablishedanexcellentrecordof providingcommunitydevelopment servicestoLMIindividualsthroughitscontributionof financialexpertiseandinvolvement inactivitiesdirectedatLMIindividualsandfamilies.ExaminersfurthernotedthatSovereignBankprovidedarangeof bankingproductsandservicestomeettheneedsof consumerandcommercialcustomersandthatitsbranchofficesanddeliverysystemswere readilyaccessibletoLMIborrowers. throughDecember31,2014.Becausecommercialloanscomprisedapproximately49percentofthebank’sloan portfolioanditsprimaryproductline,examinersfocusedtheLendingTestonsmallbusinessloans.Forthe CommunityDevelopmentTest,examinersreviewedthebank’squalifiedcommunitydevelopmentlending, investments,andserviceactivitiesfromJune19,2012,throughMarch30,2015. TheSovereignBankEvaluationincludedafull-scopereviewofperformanceintheDallas-FortWorth- Arlington,TexasMetropolitanStatisticalAreaAssessmentArea(“Dallas,TexasMSAAA”);andalimitedscopereviewofperformanceintheAustin-RoundRock,TexasMSAassessmentareaandtheHouston-The Woodlands-SugarLand,TexasMSAassessmentarea.

344 FederalReserveBulletin|December2017 SovereignBank’sEffortssincetheSovereignBankEvaluation VeritexHoldingsrepresentsthatsincetheSovereignBankEvaluation,SovereignBankhas workedtocontinuetoserveitscommunitiesthroughitssmallbusinesslending,community serviceactivities,outreachefforts,investments,anddonations.Specifically,VeritexHoldingsrepresentsthatsinceitslastevaluation,SovereignBankhascontinuedtoprovidefor communitydevelopmentservicesthroughnon-profitorganizationstoLMIindividualsand thatthebank’semployeeshavecontinuedtoserveitscommunitiesthroughworkonthe boardsof directorsof non-profitorganizations.VeritexHoldingsrepresentsthatSovereign Bank’sCRAcommitteemeetswithdifferentcommunitygroups,whichhelpsthebank understandtheneedsof thecommunitiesitserves. AdditionalSupervisoryReviews TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexaminationsof VeritexBankconductedbyReserveBankexaminers,whichincludedareviewof thecompliancemanagementprogramandthebanks’compliancewithconsumerprotectionlawsandregulations.Aspartof theconsumercomplianceexaminations,ReserveBank examinersalsoevaluatedVeritexBank’sfairlendingmanagementprogram,includingthe bank’sfair-lending-relatedpractices,policies,procedures,andinternalcontrols. TheBoardalsohasconsideredtheresultsof arecentconsumercomplianceexaminationof SovereignBankconductedbyFDICexaminers,whichincludedareviewof thebank’s compliancemanagementsystemandthebank’scompliancewithconsumerprotectionlaws, includingfairlendinglawsandregulations. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.VeritexHoldingsrepresentsthatithasnoplansto discontinueanysignificantproductorservicecurrentlyofferedbyVeritexBankorSovereignBank.Specifically,VeritexBankrepresentsthatitwillcontinuetooffercustomersa rangeof depositandcreditproductsandservicesthatbenefitthecommunitiesinwhich VeritexBankandSovereignBankeachpresentlyconductbusiness,includingthosecredit productsandservicesthatfulfilltheneedsof LMIdemographics.VeritexBankrepresents that,followingtheproposedtransaction,customersof SovereignBankwouldhaveaccess toacomplementof productsandservicesthataremoreexpansivethanthosecurrently availabletoSovereignBankcustomers,includingresidentialmortgageloanproducts,and thatSovereignBankcustomerswouldalsohaveincreasedaccesstoVeritexBank’soffices bytelephoneandonlineapplications,whichmayincreaseaccesstobankingservices.In addition,VeritexBankassertsthatcustomersof bothinstitutionswouldbenefitfroma moreexpansivebranchandATMnetwork.Followingtheproposedtransaction,Veritex Bankrepresentsthatitwillcontinuetoprovidealevelof serviceconsistentwithVeritex Bank’scurrentCRAperformance. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyVeritexBank,publiccommentsontheproposal,andthepotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval.

LegalDevelopments:ThirdQuarter,2017 345 FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’s“risktothestabilityof theUnitedStatesbankingorfinancial system.”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 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.36 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominantlyengagedinavarietyof consumerandcommercial bankingactivities.37Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complexinterrelationships,or uniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financial distress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. 33 Dodd-FrankAct§§604(d)and(f),Pub.L.No.111-203,124Stat.1376,1601–1602(2010),codifiedat12U.S.C. §§1842(c)(7)and1828(c)(5). 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 36 SeePeoplesUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 37 VeritexHoldingsprimarilyofferscommercialandconsumerbankingservices,mortgagebankingservices, commercialrealestatelending,andtreasurymanagement.SovereignBancsharesprimarilyofferscommercial andconsumerbankingservices,commercialrealestatelending,andtreasurymanagement.Ineachofthe activitiesinwhichitengages,VeritexHoldingshas,andasaresultoftheproposalwouldcontinuetohave,a smallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices.

346 FederalReserveBulletin|December2017 Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches VeritexBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof SovereignBank.38TheBoardhasassessedthefactorsitisrequiredtoconsider whenreviewinganapplicationunderthatsection.39Specifically,theBoardhasconsidered VeritexBank’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentin bankpremises.40Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobe consistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.41Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof this proposalisspecificallyconditionedoncompliancebyVeritexHoldingsandVeritexBank withalltheconditionssetforthinthisOrder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBank,actingunderdelegatedauthority. 38 See12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebrancheson thesametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthatwasabranchofanybankparticipatinginthe mergerpriortoFebruary25,1927,orthatunderstatelawmaybeestablishedasanewbranchoftheresulting bankorretainedasanexistingbranchoftheresultingbank.See12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofVeritexBank’sbrancheswouldbepermissibleunderapplicablestatelaw.SeeTex.Fin.Code §§32.203;32.301(c). 39 12U.S.C.§322;12CFR208.6. 40 Uponconsummationoftheproposedtransaction,VeritexBank’sinvestmentsinbankpremiseswouldremain withinlegalrequirements,under12CFR208.21. 41 TheBoardconstruesthecommentreceivedontheproposaltoincludearequestthattheBoardholdpublic hearingsontheproposal.Section3(b)oftheBHCActdoesnotrequirethattheBoardholdapublichearing onanyapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimely writtenrecommendationofdenialoftheapplication.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhas notreceivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underitsrules,theBoard may,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoprovide relevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Noticeoftheproposalwaspublishedinthe FederalRegisteronJanuary25,2017,andintherelevantnewspaperofgeneralcirculation(TheDallasMorning News)onJanuary13,January20,andFebruary10,2017.ThecommentperiodendedonFebruary12,2017.In theBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact, submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’s requestdoesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbe clarifiedbyapublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnot presentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.For thesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnot requiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

LegalDevelopments:ThirdQuarter,2017 347 Byorderof theBoardof Governors,effectiveJuly6,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. Appendix BranchestoBeEstablishedbyVeritexBank 1. 600West5thStreet,Austin,Texas78701 2. 150SouthBellBoulevard,CedarPark,Texas78613 3. 17950PrestonRoad,Suite100,Dallas,Texas75252 4. 6060SherryLane,Dallas,Texas75225 5. 7255NorthStateHighway161,Irving,Texas75039 6. 3800MatlockRoad,Arlington,Texas,76015 7. 2438EastSouthlakeBoulevard,Southlake,Texas76092 8. 2800West7thStreet,FortWorth,Texas76107 9. 5111SanFelipe,Houston,Texas77056 10. 777PostOakBoulevard,Suite700,Houston,Texas77056

348 FederalReserveBulletin|December2017 PacWest Bancorp Beverly Hills, California OrderApprovingtheAcquisitionof aBankHoldingCompany FRBOrderNo.2017–24(September21,2017) PacWestBancorp(“PacWest”),BeverlyHills,California,abankholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2toacquireCUBancorpandthereby indirectlytoacquireCUBancorp’ssubsidiarybank,CaliforniaUnitedBank,bothof Los Angeles,California.Followingtheproposedacquisition,CaliforniaUnitedBankwouldbe mergedintoPacWest’ssubsidiarybank,PacificWesternBank,BeverlyHills,California.3 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(82FederalRegister21,390(May8,2017)).4Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct. PacWest,withconsolidatedassetsof approximately$22.2billion,isthe77thlargestinsured depositoryorganizationintheUnitedStates.PacWestcontrolsapproximately$16.3billion inconsolidateddepositsthroughPacificWesternBank,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.5PacificWesternBankoperatesinCaliforniaandNorthCarolina.PacificWestern Bankisthe15thlargestinsureddepositoryinstitutioninCalifornia,controllingapproximately$11.2billionindeposits,whichrepresentapproximately0.9percentof thetotal depositsheldbyinsureddepositoryinstitutionsinthatstate.6 CUBancorp,withconsolidatedassetsof approximately$3.0billion,isthe288thlargest insureddepositoryorganizationintheUnitedStates,controllingapproximately$2.8billion indeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.CUBancorpcontrolsCaliforniaUnitedBank, whichoperatesinCalifornia.CaliforniaUnitedBankisthe40thlargestinsureddepositoryinstitutioninCalifornia,controllingapproximately$2.4billionindeposits,which representlessthan1percentof thetotaldepositsheldbyinsureddepositoryinstitutionsin thatstate. Onconsummationof theproposal,PacWestwouldbecomethe70thlargestinsureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $25.4billion,7whichrepresentlessthan1percentof thetotalassetsof insureddepository organizationsintheUnitedStates.PacWestwouldcontroltotaldepositsof approximately$19.1billion, whichrepresentlessthan1percentof thetotalamountof depositsof insureddepository institutionsintheUnitedStates.InCalifornia,PacWestwouldbecomethe14thlargest insureddepositoryorganization,controllingdepositsof approximately$13.6billion,which 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 ThemergerofCaliforniaUnitedBankintoPacificWesternBankissubjecttoapprovaloftheFederalDeposit InsuranceCorporation(“FDIC”),pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C. §1828(c). 4 12CFR262.3(b). 5 NationwideassetdataareasofJune30,2017,anddepositdataareasofMarch31,2017,unlessotherwise noted. 6 StatedepositdataareasofJune30,2016,unlessotherwisenoted. 7 AssetdataareasofMarch31,2017.

LegalDevelopments:ThirdQuarter,2017 349 representapproximately1.1percentof thetotaldepositsof insureddepositoryinstitutions inthatstate. CompetitiveConsiderations Section3of theBHCActprohibitstheBoardfromapprovingaproposalthatwouldresult inamonopolyorwouldbeinfurtheranceof anattempttomonopolizethebusinessof bankinginanyrelevantmarket.8TheBHCActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany bankingmarket,unlesstheanticompetitiveeffectsof theproposalareclearlyoutweighedin thepublicinterestbytheprobableeffectof theproposalinmeetingtheconvenienceand needsof thecommunitytobeserved.9 PacWestandCUBancorphavesubsidiarydepositoryinstitutionsthatcompetedirectlyin theLosAngeles,California,bankingmarket(“LosAngelesmarket”)andtheOxnard- ThousandOaks-Ventura,California,bankingmarket(“Oxnardmarket”).10TheBoardhas consideredthecompetitiveeffectsof theproposalinthesebankingmarkets.Inparticular, theBoardhasconsideredthenumberof competitorsthatwouldremainineachmarket; therelativeshareof totaldepositsininsureddepositoryinstitutionsineachmarketthat PacWestwouldcontrol;11theconcentrationlevelsof marketdepositsandtheincreasein theselevelsasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBankMergerGuidelines”);12andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheLosAngelesmarketandtheOxnard market.Onconsummationof theproposal,theLosAngelesmarketwouldremain unconcentratedandtheOxnardmarketwouldremainmoderatelyconcentrated,asmeasuredbytheHHI,accordingtotheDOJBankMergerGuidelines.ThechangeinHHIin thesemarketswouldbesmall,andnumerouscompetitorswouldremainineachmarket.13 8 12U.S.C.§1842(c)(1). 9 12U.S.C.§1842(c)(1)(B). 10 TheLosAngelesmarketisdefinedastheLosAngelesmetropolitanareainLosAngelesandOrangeCounties, thewesternportionsofSanBernardinoandVenturaCounties,andthesouthernmostedgeofKernCounty. TheOxnardmarketisdefinedastheOxnard-ThousandOaks-VenturametropolitanareainVenturaCounty andtheextremewesterntipofLosAngelesCounty. 11 LocaldepositandmarketsharedataareasofJune30,2016,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 12 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. 13 IntheLosAngelesmarket,PacWestoperatesthe13thlargestdepositoryinstitution,controllingapproximately $7.2billionindeposits,whichrepresent1.43percentofmarketdeposits.CUBancorpoperatesthe24thlargest depositoryinstitutionintheLosAngelesmarket,controllingdepositsofapproximately$2.1billion,which represent0.43percentofmarketdeposits.Onconsummationoftheproposedtransaction,PacWestwould becomethe11thlargestdepositoryorganizationintheLosAngelesmarket,controllingdepositsof$9.3billion, whichrepresentapproximately1.86percentofmarketdeposits.TheHHIfortheLosAngelesmarketwould increase1pointto923,and124competitorswouldremaininthemarket.

350 FederalReserveBulletin|December2017 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe LosAngelesandOxnardmarkets.Inaddition,theappropriatebankingagencieshavebeen affordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheLosAngelesorOxnardbankingmarketsorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancialcondition of theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,aswellas informationregardingthefinancialconditionof thesubsidiarydepositoryinstitutionsand theorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof informationregardingcapitaladequacy,assetquality,liquidity,and earningsperformance,aswellaspubliccommentsontheproposal.TheBoardevaluatesthe financialconditionof thecombinedorganization,includingitscapitalposition,asset quality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof theorganizationtoabsorbthecostsof the proposalandtocompleteeffectivelytheproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiderscapitaladequacytobeespecially important.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedinthe proposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusiness plan. PacWestandCUBancorparebothwellcapitalized,andthecombinedorganizationwould remainsoonconsummationof theproposal.Theproposedtransactionisabankholding companymergerthatisstructuredasacombinationof cashandshareexchange,witha subsequentmergerof thesubsidiarydepositoryinstitutions.14Theassetquality,earnings, andliquidityof bothPacificWesternBankandCaliforniaUnitedBankareconsistentwith approval,andPacWestappearstohaveadequateresourcestoabsorbthecostsof the proposalandtocompleteintegrationof theinstitutions’operations.Inaddition,thefuture prospectsof theinstitutionsundertheproposalareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of PacWest,CUBancorp,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,the IntheOxnardmarket,PacWestoperatesthe8thlargestdepositoryinstitution,controllingapproximately $549.3millionindeposits,whichrepresent3.24percentofmarketdeposits.CUBancorpoperatesthe10th largestdepositoryinstitutionintheOxnardmarket,controllingapproximately$265.6millionindeposits,which represent1.57percentofmarketdeposits.Onconsummationoftheproposedtransaction,PacWestwould become7thlargestdepositoryinstitutionintheOxnardmarket,controllingdepositsof$815.0million,which representapproximately4.81percentofmarketdeposits.TheHHIfortheOxnardmarketwouldincrease10 pointsto1506,and23competitorswouldremaininthemarket. 14 Aspartoftheproposedtransaction,eachshareofCUBancorpcommonstockwouldbeconvertedintoaright toreceiveacashamountandPacWestcommonstockbasedonafixedexchangeratio.PacWesthasthefinancialresourcestofundtheacquisition.

LegalDevelopments:ThirdQuarter,2017 351 BoardhasconsideredinformationprovidedbyPacWest,theBoard’ssupervisoryexperienceswithPacWestandCUBancorpandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicable banking,consumerprotection,andanti-money-launderinglaws,aswellasinformation providedbythecommenters. PacWestandPacificWesternBankarebothconsideredtobewellmanaged.PacWest’s existingrisk-managementprogramanditsdirectorsandseniormanagementareconsidered tobesatisfactory.Thedirectorsandseniorexecutiveofficersof PacWesthavesubstantial knowledgeof andexperienceinthebankingandfinancialservicessectors. TheBoardalsohasconsideredPacWest’splansforimplementingtheproposal.PacWest hasconductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal. PacWestwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,PacWest’smanagementhastheexperienceandresourcestoensurethat thecombinedorganizationoperatesinasafeandsoundmanner. Basedonallof thefactsof record,includingPacWest’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandthefutureprospectsof theorganizationsinvolvedintheproposal,aswellas therecordsof effectivenessof PacWestandCUBancorpincombattingmoneylaunderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.15Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarecurrentlyhelpingtomeet thecreditneedsof thecommunitiestheyserve,aswellasotherpotentialeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation, theBoardplacesparticularemphasisontherecordsof therelevantdepositoryinstitutions undertheCommunityReinvestmentAct(“CRA”).TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthe creditneedsof thelocalcommunitiesinwhichtheyoperate,consistentwiththeirsafeand soundoperation,16andrequirestheappropriatefederalfinancialsupervisoryagencyto assessadepositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentire community,includinglow-andmoderate-income(“LMI”)neighborhoods,inevaluating bankexpansionaryproposals.17 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloan applicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainother characteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe 15 12U.S.C.§1842(c)(2). 16 12U.S.C.§2901(b). 17 12U.S.C.§2903.

352 FederalReserveBulletin|December2017 institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof Pacific WesternBankandCaliforniaUnitedBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisoryviewsof theFederalDepositInsuranceCorporation (“FDIC”);confidentialsupervisoryinformation;informationprovidedbyPacWest;and thepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal Inthiscase,threecommentersobjectedtotheproposalbasedonallegeddeficienciesinthe CRAperformanceof PacificWesternBank.AllthreecommentersallegedthatPacific WesternBankhasdisplayedaninadequaterecordof servinglow-incomecommunitiesand minority-ownedbusinesses,andtwocommentersassertedthatPacificWesternBankhas beendeficientinservingnon-urbancommunities.CommenterscriticizedPacificWestern Bank’srecordof CRAinvestments,allegingthatthebank’scurrentCRAinvestmentsand futurecommitments,asdetailedinitsCRAplan,lagbehindseveralof itspeersand requestedthatPacificWesternBankdevelopanewCRAplanwithinputfromcommunity groups.18Commentersexpressedconcernsaboutthenumberof PacificWesternBank’s loanstosmallbusinesseslocatedinlow-incomecensustracts.Acommenteralsoalleged thatPacificWesternBankisunwillingtosetquantitativegoalstocontractwithminorityownedbusinesses.AcommenterexpressedconcernthatbanksinCaliforniawereengaged inthepracticeof providing“displacementmortgages”19andthereafterrequestingCRA credit.ThecommenterrequestedthattheBoardinvestigatewhethereitherPacificWestern BankorCaliforniaUnitedBankhadengagedinthispractice.TheFDICconsideredthe sameadversecommentsinconnectionwithitsreviewof theunderlyingbankmerger application. TheBoardalsoreceivedcommentsfromfourcommenterssupportingtheapplication. ThesecommentersgenerallydescribedthebenefitsPacificWesternBankprovidestothe communitiesitserves,includingvariousprojectsandpartnershipsbetweenPacificWestern Bankandcommunitygroups.Forinstance,thesecommentersnotedthebanksupports educationalprogramstargetingunderservedstudentsandfinancialliteracyprogramsfor LMIyouth. Businessof theInvolvedInstitutionsandResponsetoComments PacificWesternBankisafull-servicecommercialbankheadquarteredinBeverlyHills, California,focusingonbusinessbankingforsmall,middle-market,andventure-backed businessesnationwide.Itoffersabroadrangeof loananddepositproductsandservices, includingdemand,moneymarket,andtimedepositaccounts;savingsandindividualretirementaccounts;andloanandleaseoriginations,whichencompasscommercialrealestate loans,equipmentloansandleases,asset-basedloans,loanstofinancecompanies,cashflow 18 TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganization.See,e.g.,CITGroup,Inc.,FROrderNo.2015-20at24fn.54(July19,2015);CitigroupInc.,88Federal ReserveBulletin485(2002);FifthThirdBancorp,80FederalReserveBulletin838,841(1994).Initsevaluation, theBoardreviewstheexistingCRAperformancerecordofanapplicantandtheprogramsthattheapplicant hasinplacetoservethecreditneedsofitsCRAassessmentareas. 19 Thecommenterusedtheterm“displacementmortgages”torefertotheoriginationofmortgagestoinvestors whopurchaserent-controlledbuildingsandtheninvoketheEllisAct,whichallowsthemtoevictallofthe tenantsofthebuildingsinordertoexittherentalbusinessandconvertthebuildingstocondominiumsor tenanciesincommon.

LegalDevelopments:ThirdQuarter,2017 353 loans,andSmallBusinessAdministration-guaranteedandconsumerloans.PacificWestern Bankhas73full-serviceretailbranchesthroughoutCaliforniaandonebranchlocatedin Durham,NorthCarolina.PacWest’sprincipalbusinessistoserveastheholdingcompany forPacificWesternBank. CaliforniaUnitedBankisafull-servicecommercialbankwithheadquartersinLosAngeles California.Inadditiontoitsheadquartersoffice,ithaseightadditionalfull-service branchesinsouthernCalifornia.CaliforniaUnitedBankoffersproductsandservicesfor businessconsumers,includingdepositservices,lendingandcashmanagementtosmalland medium-sizedbusinesses,nonprofitorganizations,businessprincipals,andentrepreneurs, aswellascommercial,realestateconstruction,SmallBusinessAdministration-guaranteed, andpersonalloans. Inresponsetothecomments,PacWestassertsthatapprovalisjustifiedbasedonPacific WesternBank’smostrecentCRAperformanceevaluation.PacWestnotesthatPacific WesternBankhasa“Satisfactory”CRAratingandstatesthatthebankhasstrivedto obtainan“Outstanding”CRAratingsinceitsmostrecentCRAperformanceevaluation. PacWestreferencestheletterstheBoardreceivedinsupportof theapplicationasdemonstratingthecloseworkingrelationshipthebankhaswithcommunityorganizations. PacWestalsonotesthatthereisnogeneralrequirementtosubmitaCRAplanasaprerequisiteforapprovalof anapplication.PacWestfurtherarguesthatthecommentsopposing theapplicationmischaracterizePacificWesternBank’scurrentCRAplanandthattheplan supportsabalancedapproachthattakesintoconsiderationamixof innovativeinvestment opportunitiesthatallowthebanktohaveagreaterimpactonthecommunitiesitserves. PacWestrepresentsthatthebank’scurrentCRAplanaddressescommunitydevelopment activitiesthroughoutitsmarketsinCalifornia,includingthoseinnon-urbanareas. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews 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 creditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’shomemortgage,smallbusiness,smallfarm,andcommunitydevelopmentlendingto determinewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze 20 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 21 12U.S.C.§2906.

354 FederalReserveBulletin|December2017 aninstitution’sdatareportedundertheHomeMortgageDisclosureAct,22inadditionto smallbusiness,smallfarm,andcommunitydevelopmentloandatacollectedandreported undertheCRAregulations,toassessaninstitution’slendingactivitieswithrespectto borrowersandgeographiesof differentincomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors,including(1)thenumberandamountsof home mortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas(“AAs”);(2)thegeographicdistributionof theinstitution’slending, includingtheproportionanddispersionof theinstitution’slendinginitsAAsandthe numberandamountsof loansinlow-,moderate-,middle-,andupper-incomegeographies; (3)thedistributionof loansbasedonborrowercharacteristics,including,forhomemortgageloans,thenumberandamountsof loanstolow-,moderate-,middle-,andupperincomeindividuals;23(4)theinstitution’scommunitydevelopmentlending,includingthe numberandamountsof communitydevelopmentloansandtheircomplexityand innovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies. CRAPerformanceof PacificWesternBank PacificWesternBankwasassignedanoverall“Satisfactory”ratingbytheFDICatitsmost recentCRAperformanceevaluation,asof October27,2014(“PacificWesternBank Evaluation”).24PacificWesternBankreceived“HighSatisfactory”ratingsfortheLending TestandtheInvestmentTestandan“Outstanding”ratingfortheServiceTest. ExaminersfoundthatPacificWesternBank’slendinglevelsreflectedgoodresponsiveness tothecreditneedsof itsAAs.Examinersalsonotedthatasubstantialmajorityof Pacific WesternBank’sloanswereoriginatedwithinitsAAsandthatthedistributionof borrowers,giventheproductlinesofferedbythebank,reflectedadequatepenetration amongbusinesscustomersof differentrevenuesizes.Examinersnotedthatthegeographic distributionof loansreflectedgoodpenetrationthroughoutPacificWesternBank’sAAs. ExaminersalsofoundthatPacificWesternBankmadearelativelyhighlevelof community developmentloansandthatitexhibitedanadequaterecordof servingthecreditneedsof themosteconomicallydisadvantagedareas,low-incomeindividuals,andverysmallbusinesses,consistentwithsafeandsoundbankingpractices.Examinersfoundthatthebank madelimiteduseof innovativeorflexiblelendingpracticesinservingthecreditneedsinits AAs. ExaminersfoundthatPacificWesternBankhadasignificantlevelof qualifiedcommunity developmentinvestmentsandgrantsandwasoccasionallyinaleadershipposition,particularlywithregardtoinvestmentsthatwerenotroutinelyprovidedbyprivateinvestors. Examinersnotedthatthebankexhibitedgoodresponsivenesstocreditandcommunity economicdevelopmentneedsandthatitmadesignificantuseof innovativeorcomplex investmentstosupportcommunitydevelopmentinitiatives. 22 12U.S.C.§2801etseq. 23 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 24 ThePacificWesternBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. ExaminersreviewedsmallbusinessloansoriginatedfromJanuary1,2012,throughJune30,2014.Theevaluationperiodforcommunitydevelopmentloans,investments,andserviceswasfromOctober10,2010,through October27,2014.Asoftheevaluationdate,eachofthebank’sAAswaslocatedinCalifornia. Examinersconductedfull-scopereviewsoftheLosAngelesandSanDiegoAAsofthebank.Theexaminers performedlimited-scopereviewsofthebank’sperformanceinthebank’sremainingAAs,includingSanLuis Obispo,SantaBarbara,SanFrancisco,Fresno,Kern,andKings-Tulare.

LegalDevelopments:ThirdQuarter,2017 355 ExaminersfoundthatPacificWesternBank’sdeliverysystemswereaccessibletoessentially allportionsof thebank’sAAs.ExaminersalsofoundthatPacificWesternBank’srecord of openingandclosingbranchesdidnotadverselyaffecttheaccessibilityof itsdelivery systems,particularlyinLMIgeographiesandtoLMIindividuals,andthatthebank’s services,including,whereappropriate,businesshours,didnotvaryinawaythatinconveniencedcertainportionsof itsAAs,particularlyLMIgeographiesandindividuals.ExaminersnotedthatPacificWesternBankwasaleaderinprovidingcommunitydevelopment services. PacificWesternBank’sActivitiessincethePacificWesternBankEvaluation PacWestassertsthat,sincethePacificWesternBankEvaluation,thebankhasestablisheda multifamily-lendingbusinessunitandismakingprogressintroducingthisproductwithin itsAAs.PacWestfurtherassertsthatthebankisoriginatingloansthroughouteachof its AAsinthesamemanner,includinginLMIareasandcommunitieswithhighminority composition.PacWestalsostatesthatPacificWesternBank’scommunitydevelopment lendinghasbeenrobust,withyear-over-yeargrowthinresponsetoawiderangeof communityneeds,includingcreatingandpreservingaffordablehousingandsupporting economicdevelopment.Examplesincludedloanstopurchasewholemultifamilyloansasa partof arecapitalizationstrategyof aminority-ownedcommunitydevelopmentfinancial institution,aloansupportingtheconstructionof amedicalfacilityinadistressedcommunity,andaloanfortheconstructionof anaffordablehousingcomplexthatwillprovide permanenthomesforlow-incomeveterans. PacWestassertsthatPacificWesternBankhasbeenstrategicingrowingitsportfolioof investmentswithcommunitydevelopmentmerit.Forinstance,thebankhasprovided financialsupporttoahostof communityprojects,includingaffordablehousingdevelopments,capitalforsmallbusinesses,andsupportforcommunityorganizationsforthe purposeof replacingorimprovingwaterwellsinruralcommunitiesthatexperienced extremedrought.PacWestassertsthatPacificWesternBankisalsoparticipatingina campaigndedicatedtohelpingindividuals,includingthosefromLMIhouseholds,save money,reducedebt,andbuildwealth.PacWestnotesthatthebankisalsoparticipatingina financialeducationprogramtargetedtohighschoolswithahighpercentageof studentson freeorreduced-costmealprograms.PacWestalsostatesthatPacificWesternBankparticipatesinnumeroussmallbusinesstechnicalassistanceworkshops.PacWestnotesthata numberof PacificWesternBank’sseniorexecutivesareactivelyinvolvedintheircommunitiesthroughboardmemberships,supportingorganizationsthatextendproductsand servicestolow-incomecommunities. CRAPerformanceof CaliforniaUnitedBank CaliforniaUnitedBankwasassignedanoverallCRAratingof “Outstanding”atitsmost recentCRAperformanceevaluationbytheFDIC,asof August1,2016(“California UnitedBankEvaluation”).25Thebankreceiveda“HighSatisfactory”ratingforthe LendingTestand“Outstanding”ratingsfortheInvestmentandServiceTests. ExaminersfoundthatCaliforniaUnitedBank’slendinglevelsreflectedgoodresponsivenesstocreditneedswithinitsAAandthatasubstantialmajorityof itssmallbusinessloans 25 TheCaliforniaUnitedBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures. ExaminersreviewedsmallbusinessloansfromJanuary1,2014,throughDecember31,2015.Theevaluation periodforcommunitydevelopmentloans,qualifiedinvestments,andserviceswasfromJune24,2013,through August1,2016.TheCaliforniaUnitedBankEvaluationincludedafull-scopereviewoftheLosAngeles- LongBeach,California,CombinedStatisticalArea.

356 FederalReserveBulletin|December2017 weremadewithinitsAA.Examinersfurtherfoundthatthegeographicdistributionof CaliforniaUnitedBank’ssmallbusinessloansreflectedgoodpenetrationthroughoutits AA.Examinersnotedthat,giventheproductlinesofferedbytheinstitution,California UnitedBank’sdistributionof borrowersreflectedpoorpenetrationamongbusiness customersof differentrevenuesizes.However,examinersalsofoundthattheinstitution exhibitedanadequaterecordof servingthecreditneedsof themosteconomicallydisadvantagedareasof itsAAandverysmallbusinesses,consistentwithsafeandsoundbanking practices.ExaminersstatedthatCaliforniaUnitedBankusedinnovativeandflexible lendingpracticesinordertoservethecreditneedsof itsAAandthatthebankwasaleader inmakingcommunitydevelopmentloans. ExaminersfoundthatCaliforniaUnitedBankhadmadeanexcellentlevelof qualified communitydevelopmentinvestmentsandgrants,ofteninaleadershipposition,particularlythosethatwerenotroutinelyprovidedbyprivateinvestors.Examinersfurthernoted thatthebankexhibitedexcellentresponsivenesstocreditandcommunityeconomicdevelopmentneedsandthattheinstitutionmadesignificantuseof innovativeorcomplexinvestmentstosupportcommunitydevelopmentinitiatives. Examinersfoundthatthebank’sdeliverysystemswereaccessibletoessentiallyallportions of thebank’sAA.ExaminersalsofoundthatCaliforniaUnitedBank’shoursdidnotvary inawaythatinconveniencedanyportionof itsAA,particularlyLMIgeographiesand individuals,andthat,totheextentchangeshadbeenmade,theinstitution’srecordof openingandclosingbrancheshadnotadverselyaffectedtheaccessibilityof itsdelivery systems,particularlyinLMIgeographiesortoLMIindividuals.Examinersfurthernoted thatthebankwasaleaderinprovidingcommunitydevelopmentserviceswithinitsAA. CaliforniaUnitedBank’sActivitiessincetheCaliforniaUnitedBankEvaluation PacWestassertsthat,sincetheCaliforniaUnitedBankEvaluation,CaliforniaUnitedBank hascontinueditsstrongrecordof communitydevelopmentlending,makingloanstosmall businessesthatprovidedjobstoLMIindividualsandloansthatfinancedtheacquisition anddevelopmentof multifamilyaffordablehousingunits.PacWestassertsthatCalifornia UnitedBankhascontinuedtomakeCRA-qualifiedcommunitydevelopmentinvestments, forexampleaninvestmentinafundthatestablishedsevenaffordablehousingprojects, includingwithinthebank’sAA.PacWestassertsthatCaliforniaUnitedBankhas continuedtoofferproductsandserviceswithinitsAA,includingadministrationpayroll cardsforLMIemployeesof manyof thebank’sborrowers.Thesecardsdonotassessfees forloadingfundsandincludeanonlinefinancialeducationmodel. Viewsof theFDICandtheConsumerFinancialProtectionBureau Initsreviewof theproposal,theBoardconsultedwiththeFDICregardingPacificWestern Bank’sCRA,consumercompliance,andfairlendingrecords.TheFDICreviewedthebank mergerunderlyingthisproposal,includingthecommentsreceivedbytheBoard.Specifically,theBoardhasconsideredtheresultsof themostrecentconsumercomplianceexaminationof PacificWesternBankconductedbyFDICexaminers,whichincludedareview of thebank’scompliance-relatedpoliciesandproceduresandresponsestoconsumer complaints,aswellastransactionaltestinginareasexhibitingpotentialriskof consumer harm,newproductorserviceofferings,andnewlyimplementedregulations.Examiners alsoconductedafairlendingreviewwithafocusoncommerciallending. TheBoardalsoconsultedwiththeConsumerFinancialProtectionBureau(“CFPB”) regardingPacificWesternBank’sconsumercompliancerecord.

LegalDevelopments:ThirdQuarter,2017 357 TheBoardhastakentheseconsultationswiththeFDICandCFPBandtheinformation discussedaboveintoaccountinevaluatingthisproposal,includinginconsideringwhether PacWesthastheexperienceandresourcestoensurethattheorganizationeffectivelyimplementspoliciesandprogramsthatwouldallowthecombinedorganizationtoeffectively servethecreditneedsof allthecommunitieswithinthefirm’sAAs. AdditionalConvenienceandNeedsConsiderations TheBoardalsohasconsideredotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.PacWestrepresentsthat,asaresultof the proposal,itwillnotdiscontinueanyof theservicesorproductscurrentlyofferedbyeither PacificWesternBankorCaliforniaUnitedBank.PacWestassertsthatitwillexpandthe availabilityof productsofferedtothecommunitiescurrentlyservedbyCaliforniaUnited Bank,bothbyincreasingmaximumloanlimitsforrenewedlinesof creditandby expandingofferingsof directsmallbusinessloansandloansguaranteedbytheSmallBusinessAdministration.Inaddition,PacWestrepresentsthatitwouldbeabletooffer customersof CaliforniaUnitedBankincreasedcreditavailabilityandexpandedaccessto financialproductsandservicesfromanexpandedbranchnetwork. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,thesupervisoryviewsof theFDICand CFPB,confidentialsupervisoryinformation,informationprovidedbyPacWest,public commentsontheproposal,andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthat theconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActtorequiretheBoardtoconsider“theextenttowhicha proposedacquisition,merger,orconsolidationwouldresultingreaterrisktothestability of theUnitedStatesbankingorfinancialsystem.”26 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theUnitedStates bankingorfinancialsystem,theBoardconsidersavarietyof metricsthatcapturethe systemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactionon thesystemicfootprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresultingfirm,theavailabilityof substituteprovidersforanycriticalproductsand servicesofferedbytheresultingfirm,theinterconnectednessof theresultingfirmwiththe bankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothe complexityof thefinancialsystem,andtheextentof thecross-borderactivitiesof the resultingfirm.27Thesecategoriesarenotexhaustive,andadditionalcategoriescould informtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoard considersqualitativefactors,suchastheopaquenessandcomplexityof aninstitution’s internalorganization,thatareindicativeof therelativedegreeof difficultyof resolvingthe 26 Dodd-FrankAct§604(d),Pub.L.No.111-203,124Stat.1376,1601(2010),codifiedat12U.S.C.§1842(c)(7). 27 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system.

358 FederalReserveBulletin|December2017 resultingfirm.Afinancialinstitutionthatcanberesolvedinanorderlymannerislesslikely toinflictmaterialdamagetothebroadereconomy.28 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.29 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominatelyengagedinretailcommercialbankingactivities.30The proformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibit anorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthat wouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,the organizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirms ormarketsthatitwouldposesignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.31Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedon compliancebyPacWestwithalltheconditionsimposedinthisorder,includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetotheBoardinconnec- 28 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012). 29 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 30 BothPacWestandCUBancorpprimarilyengageinretailandcommercialbankingactivities,andPacWest wouldcontinuetohaveasmallmarketsharefollowingtheproposedtransaction. 31 ThreecommentersrequestedthattheBoardholdpublichearingsormeetingsontheproposal.Section3(b)of theBHCActdoesnotrequirethattheBoardholdapublichearingonanyapplicationunlesstheappropriate supervisoryauthoritiesforthebanktobeacquiredmakeatimelywrittenrecommendationofdenialofthe application.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhasnotreceivedsucharecommendationfrom theappropriatesupervisoryauthorities.Underitsrules,theBoardalso,initsdiscretion,mayholdapublic hearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwritten commentswouldnotadequatelyrepresenttheirviews.TheBoardhasconsideredthecommenters’requestsin lightofallthefactsofrecord.IntheBoard’sview,thecommentershavehadampleopportunitytosubmit commentsontheproposaland,infact,submittedwrittencommentsthattheBoardhasconsideredinactingon theproposal.Thecommenters’requestsdonotidentifydisputedissuesoffactmaterialtotheBoard’sdecision thatwouldbeclarifiedbyapublicmeeting.Inaddition,therequestsdidnotdemonstratewhywritten commentsdonotpresentthecommenters’viewsadequatelyorwhyahearingormeetingotherwisewouldbe necessaryorappropriate.Forthesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthat apublichearingormeetingisnotrequiredorwarrantedinthiscase.Accordingly,therequestsforapublic hearingormeetingontheproposalaredenied.

LegalDevelopments:ThirdQuarter,2017 359 tionwiththeapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheFederalReserveBankof SanFrancisco,actingunder delegatedauthority. Byorderof theBoardof Governors,effectiveSeptember21,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard.

360 FederalReserveBulletin|December2017 Orders Issued Under Section 4 of the Bank Holding Company Act Sterling Bancorp Montebello, New York OrderApprovingtheAcquisitionof aSavingsandLoanHoldingCompanyandAcquisitionof aSavingAssociation FRBOrderNo.2017–21(August30,2017) SterlingBancorp(“Sterling”),Montebello,NewYork,afinancialholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956,asamended(“BHCAct”),has requestedtheBoard’sapprovalundersections4(c)(8)and4(j)of theBHCAct1toacquire AstoriaFinancialCorporation(“Astoria”),LakeSuccess,NewYork,asavingsandloan holdingcompany,andtherebyindirectlyacquireitssubsidiary,AstoriaBank,LongIsland City,NewYork,afederalsavingsassociation.Followingtheproposedacquisition, AstoriawouldbemergedintoSterling,andAstoriaBankwouldbemergedintoSterling’s subsidiarybank,SterlingNationalBank(“SterlingBank”),Montebello,NewYork.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(82FederalRegister19048(2017)).3Thetimeforsubmittingcomments hasexpired,andtheBoardhasconsideredtheproposalandallcommentsreceivedinlight of thefactorssetforthintheBHCAct. Sterling,withconsolidatedassetsof approximately$15.4billion,isthe100thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$10.1billionin deposits.4SterlingcontrolsSterlingBank,whichoperatesinNewYorkandNewJersey. SterlingBankisthe19thlargestdepositoryinstitutioninNewYork,controllingdepositsof approximately$9.5billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinNewYork.SterlingBankisthe67thlargestdepository institutioninNewJersey,controllingdepositsof approximately$347.0million,which representlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinNew Jersey.5 Astoria,withconsolidatedassetsof approximately$14.1billion,isthe97thlargestinsured depositoryorganizationintheUnitedStates,controllingapproximately$9.1billionin deposits.AstoriacontrolsAstoriaBank,whichoperatessolelyinNewYork.AstoriaBank isthe20thlargestinsureddepositoryinstitutioninNewYork,controllingdepositsof approximately$9.1billion,whichrepresentlessthan1percentof thetotaldepositsof insureddepositoryinstitutionsinthatstate. Onconsummationof thisproposal,Sterlingwouldbecomethe62ndlargestinsureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately $29.0billion,whichrepresentlessthan1percentof thetotalassetsof insureddepository institutionsintheUnitedStates.Sterlingwouldcontroltotaldepositsof approximately 1 12U.S.C.§§1843(c)(8)and(j). 2 ThemergerofAstoriaBankintoSterlingBank,whichisexpectedtooccurimmediatelyafterSterling’sacquisitionofAstoria,issubjecttotheapprovaloftheOfficeoftheComptrolleroftheCurrency(“OCC”),pursuant tosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).TheOCCapprovedthebankmerger onAugust16,2017. 3 12CFR262.3(b). 4 ConsolidatedassetdataareasofJune30,2017.Nationwideassetrankinganddepositdataareasof December31,2016,unlessotherwisenoted. 5 StatedepositdataareasofJune30,2016,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsbanks,andsavingsassociations.

LegalDevelopments:ThirdQuarter,2017 361 $19.1billion,whichrepresentlessthan1percentof thetotalamountof depositsof insured depositoryinstitutionsintheUnitedStates.InNewYork,Sterlingwouldbecomethe14th largestdepositoryorganization,controllingdepositsof approximately$18.6billion,which representlessthan1.5percentof thetotaldepositsof insureddepositoryinstitutionsin NewYork. TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.6TheBoardrequiresthatsavingsassociationsacquiredby bankholdingcompaniesconformtheirdirectandindirectactivitiestothosepermissiblefor bankholdingcompaniesundersection4(c)(8)of theBHCAct.7Sterlinghascommitted thatallof theactivitiesof Astoriaanditssubsidiarieswouldconformtothosepermissible undersection4of theBHCActandRegulationYorbedivested. FactorsGoverningBoardReviewof theTransactions Becausethistransactioninvolvestheacquisitionof asavingsassociation,theBoardhas reviewedthetransactionundersection4of theBHCAct.Section4(j)(2)(A)of theBHC ActrequirestheBoardtoconsiderwhethertheproposedacquisitionof Astoria“can reasonablybeexpectedtoproducebenefitstothepublic,suchasgreaterconvenience, increasedcompetition,orgainsinefficiency,thatoutweighpossibleadverseeffects,suchas undueconcentrationof resources,decreasedorunfaircompetition,conflictsof interests, unsoundbankingpractices,orrisktothestabilityof theUnitedStatesbankingorfinancial system.”8Aspartof itsevaluation,theBoardreviewsthefinancialandmanagerial resourcesandthefutureprospectsof thecompaniesinvolved,theeffectof theproposalon competitionintherelevantmarkets,therisktothestabilityof theUnitedStatesbankingor financialsystem,andthepublicbenefitsof theproposal.9TheBoardalsoreviewsthe recordsof performanceof therelevantinsureddepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).10 CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4of theBHCAct,the Boardevaluatesthecompetitiveeffectsof aproposalinlightof allof thefactsof record.11 SterlingandAstoriahavesubsidiarydepositoryinstitutionsthatcompetedirectlyinthe MetroNewYorkCity,NewYork-NewJersey-Connecticut-Pennsylvania(“MetroNew YorkCity”)bankingmarket.12TheBoardhasconsideredthecompetitiveeffectsof the 6 12CFR225.28(b)(4)(ii). 7 12CFR225.28(b)(4). 8 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. 9 See12CFR225.26;see,e.g.,CapitalOneFinancialCorporation,FRBOrder2012-2(February14,2012) (“CapitalOneOrder”);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008); WachoviaCorporation,92FederalReserveBulletinC183(2006). 10 Theproposaldoesnotraiseinterstateissuesundersection4(c)(8)oftheBHCActbecauseNewYorkisthe homestateofbothSterlingandAstoriaBank.See12U.S.C.§1843(i)(8). 11 12U.S.C.§1843(j)(2). 12 TheMetroNewYorkCitymarketincludesFairfieldCountyandportionsofLitchfieldandNewHavencountiesofConnecticut;Bronx,Dutchess,Kings,Nassau,NewYork,Orange,Putnam,Queens,Richmond, Rockland,Suffolk,Sullivan,Ulster,andWestchestercountiesandportionsofColumbiaandGreenecounties ofNewYork;Bergen,Essex,Hudson,Hunterdon,Middlesex,Monmouth,Morris,Ocean,Passaic,Somerset, Sussex,andUnioncountiesandportionsofBurlington,Mercer,andWarrencountiesofNewJersey;andPike CountyandportionsofMonroeandWaynecountiesofPennsylvania.

362 FederalReserveBulletin|December2017 proposalinthisbankingmarketinlightof allthefactsof record.Inparticular,theBoard hasconsideredthenumberof competitorsthatwouldremaininthebankingmarket;the relativeshareof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)thatSterlingwouldcontrol;13theconcentrationlevelsof marketdepositsand theincreaseinthatlevelasmeasuredbytheHerfindahl-HirschmanIndex(“HHI”)under theDepartmentof JusticeBankMergerCompetitiveReviewguidelines(“DOJBank MergerGuidelines”);14andothercharacteristicsof themarkets. Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheMetroNewYorkCitybanking market.Onconsummationof theproposal,theMetroNewYorkCitymarketwould remainmoderatelyconcentrated,asmeasuredbytheHHI.ThechangeintheHHIwould beminimal,andnumerouscompetitorswouldremaininthemarketfollowingconsummationof theproposal.15 TheDOJhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhave asignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition, theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhave notobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheMetroNewYorkCitymarketorinanyotherrelevantbanking market.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistent withapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingproposalsundersection4of theBHCAct,theBoardconsidersthefinancial andmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.16Inits evaluationof financialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothaparent-onlyandconsolidatedbasis,as 13 LocaldepositandmarketsharedataareasofJune30,2016,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989);NationalCityCorporation,70FederalReserve Bulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona 50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(1991). 14 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. 15 Sterlingoperatesthe23rdlargestdepositoryinstitutionintheMetroNewYorkCitymarket,controlling approximately$9.8billionindeposits,whichrepresent0.6percentofmarketdeposits.ForpurposesoftheHHI analysis,Astoriaoperatesthe32ndlargestdepositoryinstitutioninthesamemarketandistreatedascontrollingapproximately$4.6billionindeposits(i.e.actualdepositsweightedat50percent),whichrepresent 0.3percentofmarketdeposits.Onconsummationoftheproposedtransaction,Sterlingwouldbecomethe16th largestdepositoryinstitutionintheMetroNewYorkCitymarket,controllingdepositsofapproximately $19.0billion,whichrepresent1.1percentofmarketdeposits.TheHHIfortheMetroNewYorkCitymarket woulddecreaseby6pointsto1316,and237competitorswouldremaininthemarket.Forpurposesof competitiveanalysis,onceasavingsassociationisacquiredbyabankholdingcompany,theBoardweightsthe depositscontrolledbythesavingsassociationat100percent,similartoacommercialbank. 16 12U.S.C.§1843(j)(4);12CFR225.26(b).

LegalDevelopments:ThirdQuarter,2017 363 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. SterlingandSterlingBankarebothwellcapitalizedandwouldremainsoonconsummationof theproposal.Theproposedtransactionisaholdingcompanymergerthatisstructuredasashareexchange,withasubsequentmergerof thesubsidiarydepositoryinstitutions.17Theassetquality,earnings,andliquidityof SterlingBankandAstoriaBankare consistentwithapproval,andSterlingappearstohaveadequateresourcestoabsorbthe costsof theproposalandtocompleteintegrationof theinstitution’soperations.Inaddition,thefutureprospectsof theinstitutionundertheproposalareconsideredconsistent withapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of Sterling,Astoria,andtheirsubsidiarydepositoryinstitutions,includingassessmentsof theirmanagement,risk-managementsystems,andoperations.Inaddition,theBoardhas consideredinformationprovidedbySterling,theBoard’ssupervisoryexperienceswith SterlingandAstoriaandthoseof otherrelevantbanksupervisoryagencieswiththeorganizations,andtheorganizations’recordsof compliancewithapplicablebanking,consumer protection,andanti-money-launderinglaws,aswellasinformationprovidedbythe commenters. Sterling,Astoria,andtheirsubsidiarydepositoryinstitutionsareeachconsideredtobewell managed.Sterling’sexistingrisk-managementprogramanditsdirectorsandsenior managementareconsideredtobesatisfactory.Thedirectorsandseniorexecutiveofficersof Sterlinghavesubstantialknowledgeof andexperienceinthebankingandfinancialservices sectors. TheBoardalsohasconsideredSterling’splansforimplementingtheproposal.Sterlingis devotingsignificantfinancialandotherresourcestoaddressallaspectsof thepostacquisitionintegrationprocessforthisproposal.Sterlingwouldimplementitsriskmanagementpolicies,procedures,andcontrolsatthecombinedorganization,andtheseare consideredacceptablefromasupervisoryperspective.Inaddition,Sterling’smanagement hastheexperienceandresourcestoensurethatthecombinedorganizationoperatesina safeandsoundmanner,andSterlingplanstointegrateAstoria’sexistingmanagementand personnelinamannerthataugmentsSterling’smanagement.18 Basedonallof thefactsof record,includingSterling’ssupervisoryrecord,managerialand operationalresources,andplansforoperatingthecombinedorganizationafterconsum- 17 Aspartoftheproposedtransaction,eachshareofAstoriacommonstockwouldbeconvertedintoarightto receiveSterlingcommonstockbasedonafixedexchangeratio. 18 Onconsummation,fourindividualscurrentlyservingasdirectorsandofficersofAstoriaandAstoriaBankwill beaddedtotheboardofdirectorsofSterlingandSterlingBank.

364 FederalReserveBulletin|December2017 mation,theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerial resourcesandthefutureprospectsof theorganizationsinvolvedintheproposal,aswellas therecordsof effectivenessof SterlingandAstoriaincombattingmoney-launderingactivities,areconsistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection4of theBHCAct,theBoardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeservedinweighingthe possibleadverseeffectsagainstthepublicbenefitsof thetransaction.19Initsevaluationof theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved, theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserveandwhethertheproposalwouldresultinpublicbenefits.Inthis evaluation,theBoardplacesparticularemphasisontherecordsof therelevantdepository institutionsundertheCRA.20TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepositoryinstitutionstohelpmeetthecreditneedsof thelocal communitiesinwhichtheyoperate,consistentwiththeinstitutions’safeandsoundoperation,21andrequirestheappropriatefederalfinancialsupervisoryagencytoassessa depositoryinstitution’srecordof helpingtomeetthecreditneedsof itsentirecommunity, includinglow-andmoderate-income(“LMI”)neighborhoods.22 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheresultsof recentfairlendingexaminations.Fairlendinglawsrequirealllendinginstitutionsto provideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertain othercharacteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,information providedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomay considertheinstitution’sbusinessmodel,marketingandoutreachplans,theorganization’s plansfollowingconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof Sterling BankandAstoriaBank,thefairlendingandcompliancerecordsof bothbanks,thesupervisoryviewsof theOCC,confidentialsupervisoryinformation,informationprovidedby Sterling,andthepubliccommentsontheproposal. PublicCommentsRegardingtheProposal Inthiscase,theBoardreceivedcommentsfromthreecommenters.Onecommenter objectedtotheproposalonthebasisof allegeddisparitiesinthenumberof conventional homepurchaseloansmadebySterlingBanktominoritiesintheNewYork-JerseyCity- WhitePlains,NY-NJMetropolitanDivision(“NewYorkCityMD”)andinthenumberof conventionalhomepurchaseandhomeimprovementloansmadebySterlingBankto minoritiesintheNassauCounty-SuffolkCounty,NYMetropolitanDivision(“Nassau- SuffolkMD”),asreflectedindatareportedundertheHomeMortgageDisclosureAct (“HMDA”)23for2015and2013,respectively.ThissamecommenterallegedthatSterling BankhasnotcompliedwithaCRAPlanthattheOCCrequiredittodevelopinconnection witha2015mergerwithHudsonValleyBank,N.A.(“SterlingCRAPlan”).Other 19 12U.S.C.§1843(j)(2). 20 12U.S.C.§2901etseq. 21 12U.S.C.§2901(b). 22 12U.S.C.§2903. 23 12U.S.C.§2801etseq.

LegalDevelopments:ThirdQuarter,2017 365 commenterspraisedmanyaspectsof Sterling’sandAstoria’sCRAactivities,butcriticized otheraspectsof theCRAandfairlendingrecordsof SterlingBankand/orAstoriaBank andrequestedthatanupdatedCRAPlan,reflectingformalinputfromcommunityorganizations,berequiredasaconditionof approval.Thesecommentersassertedthatthe updatedCRAplanshouldincludespecificgoalsintheareasof lending,investment,and servicesforeachof themarketsservedbythecombinedorganization,particularlywith respecttoLMIneighborhoodsandLMIcensustracts.Onecommenterfurtherrequested thatSterlingBankcommittosharingyearlyoutcomesundertheCRAPlanthatinclude thenumberanddollaramountof thosegoalsbyeachlendingcategory,bothinitsentire footprintandinLongIsland.24 OnecommenterexpressedconcernaboutSterlingBank’srecentrecordof branchclosures inNewYorkCityandalsorecommendedcertainbestpracticesthatSterlingshouldadopt withrespecttomultifamilyhousinglending.Anothercommenterstatedthatthemerger shouldbeconditionedonSterlingBankretainingallof AstoriaBank’sbranchesinLong Island. TheOCCconsideredthesameadversecommentsinconnectionwithitsreviewof the underlyingbankmergerapplication.25 Businessesof theInvolvedInstitutionsandResponsetoComments SterlingBankisaregionalbankingfranchiseheadquarteredinMontebello,NewYork.Itis afull-servicebankthatoffersawiderangeof financialservices,withaprimaryfocuson loansanddepositservicestosmallandmiddlemarketcommercialbusinesses.Sterling Bank’slendingportfolioprimarilyconsistsof smallbusinessloans,commercialrealestate loans,commercialandindustrialloans,andone-to-fourfamilyresidentialrealestateloans, withalimitedresidentialmortgageloanandconsumerloanoperation.26Inadditionto traditionaldepositandloanproducts,SterlingBankoffersinvestmentproductsandwealth managementservices. AstoriaBank,afederalsavingsassociationwith87branchesinNewYork,offersafull rangeof loansanddepositservicestoitscustomers.AstoriaBanktraditionallyhasfocused onresidentialrealestatelending.AstoriaBankalsohas10operatingsubsidiaries,including amortgagecompany,abroker-dealer,andsingle-purposeentitiesthatmanagebank- 24 TheBoardhasconsistentlyfoundthatneithertheCRAnorthefederalbankingagencies’CRAregulations requiredepositoryinstitutionstomakepledgesorenterintocommitmentsoragreementswithanyorganizations.See,e.g.,UnitedBancshares,Inc.,FRBOrderNo.2017-10at12fn.28(April6,2017);Huntington BancsharesInc.,FRBOrderNo.2016-13at32fn.50(July29,2016);CITGroup,Inc.,FRBOrderNo.2015-20 at24fn.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485(2002).Initsevaluation,theBoard reviewstheexistingCRAperformancerecordofanapplicantandtheprogramsthattheapplicanthasinplace toservethecreditneedsofitsCRAassessmentareas. 25 AcommenterstatedthatSterlingBank’sCRAdatahadbeendeemedunreliable,inadditiontocitingHMDA datadisparitiesinSterlingBank’sconventionalhomepurchaseandhomeimprovementlendingtowhites comparedtoAfricanAmericansand/orHispanics.TheOCCconductedreviewsoftheaccuracyofSterling Bank’sHMDAandCRAdataandassessedfairlendingriskatSterlingBank.Inthatregard,theOCCevaluatedsupervisoryinformationaswellasotherinformationprovidedbySterlingBank.Examinersnotedinthe SterlingBankCRAevaluationasofJanuary18,2017(“SterlingBankEvaluation”),thattheyfounderrorsin thedatarelatedtosmallbusinesslending,whichsubsequentlywerecorrectedbySterlingBank.Examiners reliedonthecorrecteddatainconductingSterlingBank’sCRAperformanceevaluation. 26 In2016,SterlingBanksolditsresidentialmortgagedivisiontoFreedomMortgage,andthebankgenerally refersindividualsinterestedinhomemortgagestoFreedomMortgage.OnecommenterindicatedthatLong IslandcommunitygroupshaveconcernsregardingFreedomMortgage.SterlingrepresentsthatSterlingBank hasnoroleinthemortgageapplicationprocessafterareferralismadetoFreedomMortgage.SterlingBank alsorepresentsthatitcontinuestomakeresidentialmortgagestoLMIindividualsthroughitsCommunity Bankingteam.

366 FederalReserveBulletin|December2017 ownedassets.InadditiontoAstoriaBank,AstoriaoperatesAFInsuranceAgency,Inc., whichprovideslifeinsuranceproductsprimarilytoAstoriaBankcustomers. Inresponsetocomments,SterlinghighlightstheupdatedCRAPlanthatthebank providedinconnectionwiththeproposedtransaction.Sterlingassertsthatitconsulted withanumberof communitygroupsindevelopingtheupdatedCRAPlanandthatthe bankisawareof manyof theconcernsmentionedbythecommenters. Inaddition,Sterlingassertsthatitsfairlendingprogramextendstoeveryphaseof atransaction,includingadvertising,pre-applicationinquiries,loandisbursement,andongoing servicing.SterlingassertsthatallmortgageapplicationsreceivedbySterlingBankare reviewedinaccordancewiththebank’spoliciesandproceduresforunderwritingandare subjecttoallof thebank’spoliciesandprocedureswithrespecttofairlending.Sterling furtherrepresentsthatSterlingBank’slendingpracticesarebasedoncriteriathatensure bothsafeandsoundlendingandequalaccesstocreditandthatthebankhascomprehensiveproceduresandpoliciesinplacetoaccomplishthesegoals,whichincludeanestablishedFairLendingProgramthatisapprovedannuallybytheManagementEnterprise RiskManagementCommittee.Sterlingrepresentsthatthebank’sFairLendingProgram includesa“secondreview”processforanyloandenial,ongoingfairlendingtrainingforthe bank’slendingpersonnel,anannualfairlendingriskassessmentconductedbyaComplianceRiskManagementDepartment,andongoingmonitoringandtestingtoassessfair lendingcompliance.SterlingrepresentsthatSterlingBank’sexistingconsumercompliance program,includingfairlending,wouldapplytothecombinedorganization. Inresponsetocommenters’concernsaboutitsperformanceunderitscurrentCRAPlan, SterlingrepresentsthatSterlingBankhasachievedorexceededitsenhancedCRAgoalsfor thefirstoperationalyearundertheCRAPlan.Sterlinghighlightedthebank’sincreased activitiesinmortgagelendingthroughitsCommunityBankingteam,insmallbusiness lending,andincommunitydevelopmentlending.Sterlingarguesthatitischallengingto gleanconclusionsregardingthebank’srecordof lendingtominoritiesintheNewYork- Newark-JerseyCity,NY-NJ-PA,MultistateMetropolitanStatisticalArea(“NewYorkCity MMSA”)basedonlendingdatabecauseof thelownumberof overallapplicationsand originationsintheNewYorkCityMMSAandthelimitednatureof SterlingBank’smortgagelendingprogram.However,SterlingrepresentsthatSterlingBankisveryactiveina numberof outreachandmarketingprogramsacrossthebank’sfootprintthatfocuson LMIcensustractsandminoritycommunities. SterlingassertsthatSterlingBankiscommittedtocontinuingtheexistingpartnershipsof bothitandAstoriaBankwithorganizationsthatsupportavarietyof effortstobenefit localcommunities.Specifically,SterlingintendstomaintainAstoriaBank’smembershipin theNewYorkMortgageCoalitionandexpand,totheextentpossible,onitspartnership withtheStateof NewYorkMortgageAgency. Recordsof PerformanceundertheCRA Asindicatedabove,inevaluatingtheconvenienceandneedsfactorandCRAperformance, theBoardconsiderssubstantialinformationinadditiontoinformationprovidedbypublic commenters.Inparticular,theBoardevaluatesaninstitution’sperformanceinlightof examinationsandothersupervisoryinformation,aswellasinformationandviewsprovided bytheappropriatefederalsupervisors.27Inthiscase,theBoardconsultedwithandconsideredsupervisoryinformationprovidedbytheOCC. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,75FederalRegister11642, 11665(March11,2010).

LegalDevelopments:ThirdQuarter,2017 367 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’slendingperformanceisbasedonthenumberandamounts of homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)inthe institution’sassessmentareas;thegeographicdistributionof suchloans,includingthe proportionanddispersionof theinstitution’slendinginitsassessmentareasandthe numberandamountsof loansinlow-,moderate-,middle-,andupper-incomegeographies; thedistributionof suchloansbasedonborrowercharacteristics,includingthenumberand amountsof homemortgageloanstolow-,moderate-,middle-,andupper-incomeindividuals;29theinstitution’scommunitydevelopmentlending,includingthenumberand amountsof communitydevelopmentloansandtheircomplexityandinnovativeness;and theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhencommentersassertthatHMDAdatareflectdisparitiesinthe ratesof loanapplications,originations,ordenialsamongmembersof differentracialor ethnicgroupsinlocalareas.Thesetypesof disparitiesmayindicateweaknessesinthe adequacyof policiesandprogramsataninstitutionformeetingitsobligationstoextend creditfairly.However,otherinformationcriticaltoaninstitution’screditdecisionsisnot availablefromHMDAdata.30Consequently,HMDAdatadisparitiesmustbeevaluatedin thecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof SterlingBank SterlingBankwasassignedanoverall“Satisfactory”ratingbytheOCCatitsmostrecent CRAperformanceevaluation,asof January18,2017(“SterlingBankEvaluation”).31SterlingBankreceived“HighSatisfactory”ratingsfortheLendingTest,InvestmentTest,and 28 12U.S.C.§2906. 29 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand 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. 31 TheSterlingBankEvaluationwasconductedusingtheLargeBankExaminationProceduresthatincludethe Lending,InvestmentandServicetests.Forthelendingtest,examinersreviewedloansreportableunderHMDA andCRAdatacollectionrequirementsfromJanuary1,2014,throughDecember31,2016.Theevaluation periodforcommunitydevelopmentloans,investments,andserviceswasfromJanuary21,2014,through January21,2017.Asoftheevaluationdate,38ofthebank’s40brancheswerelocatedwithintheNewYork CityMMSA.Consequently,thegreatestweightwasgiventotheNewYorkCityMMSAinthedetermination

368 FederalReserveBulletin|December2017 ServiceTest.32Moreover,examinersfoundthatin2016,thefirstof threeyearsunderthe SterlingCRAPlan,SterlingBankmetorexceededgoalsestablishedbytheCRAPlanfor homemortgageandsmallbusinesslending,aswellasforqualifiedinvestmentsand communitydevelopmentservicesfortheNewYorkCityMMSA. Overall,examinersfoundthatSterlingBankoriginatedandpurchasedasubstantial majorityof loanswithinthebank’sassessmentareasandthatthedistributionof the bank’sloanswasgoodwhenmeasuredbygeographyandadequatewhenmeasuredbythe incomelevelof borrowers.IntheNewYorkCityMMSA,examinersfoundthebank’slevel of lendingtobegood,andexaminersdidnotidentifyanyunexplained,conspicuousgaps inlending.Thedistributionof thebank’sloansacrossborrowersof differentincomelevels andbusinessesof differentsizeswasfoundtobeadequateintheNewYorkCityMMSA. Inaddition,examinersfoundthat,althoughthebank’sdistributionof lendingtosmall businessesreflectedpoorpenetration,thebankexhibitedagoodlevelof smallbusiness lendingactivityintheNewYorkCityMMSA. AlsointheNewYorkCityMMSA,examinersfoundthebank’sgeographicdistributionof homemortgageloanstobegood,whileitsdistributionof homemortgageloansacross borrowersof differentincomelevelsreflectedadequatepenetration.Moreover,examiners concludedthathomepurchase,homerefinance,andhomeimprovementlendingreflected adequatedistributiontoLMIborrowers.InevaluatingSterlingBank’shomepurchase lendingtoLMIborrowers,examinersnotedthatthemedianhousingvalueintheNew YorkCityMMSAsignificantlylimitedhomepurchaseopportunitiesforLMIborrowers. Inaddition,examinershighlightedthatthebank’shomepurchaseloanstoLMIborrowers weresignificantlyhigherin2016thanin2014.Examinersconsideredthistrendregarding SterlingBank’shomepurchaseloans,aswellasthebank’sresponsivenessbyincreasingits homemortgagelendingtoLMIborrowersaftermeetingwithlocalcommunityorganizations,asfactorsinconcludingthatSterlingBank’sborrowerdistributionof homemortgageloanswasadequate.Inaddition,examinersnotedthatSterlingBankintroduceda loanprogramtargetedtospecificLMIco-opdevelopmentsinBronxCounty,NewYork. Overall,examinersnotedthatSterlingBankhadarelativelyhighlevelof communitydevelopmentloansthatexhibitedgoodresponsivenesstocommunityneeds.IntheNewYork CityMMSA,examinersfoundthatthebankmadeagoodlevelof communitydevelopmentloans.Examinersreportedthat,duringtheevaluationperiod,SterlingBankoriginatedorparticipatedincommunitydevelopmentloansintheNewYorkCityMMSAthat generallyprovidedloansforaffordablehousingandforhealthcareservicestoLMIindividuals,andthatrevitalizedorstabilizedLMIareasordesignateddisasterareas. ExaminersfoundthatoverallSterlingBankmadeasignificantlevelof qualifiedinvestments.IntheNewYorkCityMMSA,examinersfoundthatSterlingBankmadearelatively highlevelof qualifiedinvestmentsthatdemonstratedgoodresponsivenesstocommunity needs.Examinersnotedthatthemajorityof thebank’sinvestmentsintheNewYorkCity MMSAweremortgaged-backedsecuritieswheretheunderlyinghomemortgageswere ofthebank’soverallCRArating.WithintheNewYorkCityMMSA,thereisonebranchofficeinNewJersey, inBergenCounty,andtheremainingMMSAbranchesareinBronxCounty,KingsCounty,NewYorkCounty, OrangeCounty,QueensCounty,RocklandCountyandWestchesterCounty,allinNewYorkState. 32 Examinersconductedfull-scopereviewsoftheNewYorkCityMMSAandthenon-MSASullivanCountyNY assessmentareasofthebank,based,inpart,onthelevelofdepositsandlendingactivitywithineachassessmentarea.Examinersperformedalimited-scopereviewofthebank’sperformanceintheKingstonNYMSA. AlthoughexaminersassessedSterlingBank’sactivitiesintheStateofNewYorkratingarea,whichconsistedof thebank’sperformanceinnon-MSASullivanCountyandtheKingstonNYMSA,andratedthebank“Needs toImprove”forthatratingarea,thebank’sminimalpresence(twobranches)andactivityintheStateofNew Yorkratingarealimitedtheinfluenceofthisareaonthebank’soverallCRArating.

LegalDevelopments:ThirdQuarter,2017 369 primarilytoLMIborrowers,andthattheremainingqualifiedinvestmentsrepresentedan excellentlevelof responsivenesstothehousingneedsof theNewYorkCityMMSA. Examinershighlightedthebank’squalifiedinvestmentsinmunicipalbondsthatsupported affordablehousingdevelopmentsandtheconstructionandrehabilitationof LMImultifamilyrentaldevelopments. SterlingBank’sretailbranchingserviceswerefoundtobereasonablyaccessibleinits assessmentareas.ExaminersfoundthatoverallSterlingBankprovidedarelativelyhigh levelof communitydevelopmentservices.IntheNewYorkCityMMSA,examinersfound thatthebank’sdeliverysystemswerereasonablyaccessibletocensustractsandindividualsof differentincomelevels.ExaminersalsofoundthatSterlingBank’sservicesdid notvaryinawaythatinconveniencedLMIgeographiesintheNewYorkCityMMSA. Examinersnotedthatthebank’sperformanceinprovidingcommunitydevelopment serviceswasgood.Inaddition,examinersfoundthatSterlingBank’sopeningandclosing of branchesintheNewYorkCityMMSAdidnotadverselyaffectthebank’sdelivery systems,particularlyforLMIgeographies. SterlingBank’sActivitiesSincetheSterlingBankEvaluation SterlingrepresentsthatSterlingBankcontinuestobuilduponitsstrongCRAfoundation in2017,basedonareviewof SterlingBank’ssecondquarterCRAPlanperformance.Sterlingassertsthat,amongotheractivities,SterlingBankhasinvestedinaLowIncome HousingTaxCreditparticipationfund,originatedanaffordablemortgage,andprovideda financialliteracyseminarthroughitsbranchlocatedinSullivanCounty. CRAPerformanceof AstoriaBank AstoriaBankwasassignedanoverallCRAratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheOCC,asof December3,2012(“AstoriaBank Evaluation”).33Thebankreceiveda“HighSatisfactory”ratingfortheLendingTestand “LowSatisfactory”ratingsfortheInvestmentTestandServiceTest.34 InevaluatingtheLendingTest,examinersfoundthatthemajorityof AstoriaBank’s lendingoccurredinitsassessmentareas.Examinersfoundthatthebank’soveralllending performancewasgoodgiventhelevelof competitionforreportablehomemortgageloans andsmallloanstobusinessesinitsassessmentareas.Inaddition,examinersnotedthatthe bankwasabletoachieveanoverallgoodlevelof lendingactivitywithinitsassessment areaseventhoughaneconomicrecessionoccurredduringtheevaluationperiod. Overall,examinersfoundthatAstoriaBankshowedgoodresponsivenesstothecredit needsinitsassessmentareasandidentifiednoconspicuousgapsineitherthebank’shome mortgageorsmallbusinesslending.Examinersfoundthatthebank’soverallgeographic 33 TheAstoriaBankEvaluationwasconductedusingtheLargeBankEvaluationProceduresfortheLending, Investment,andServicetests.ExaminersreviewedhomemortgageloansreportedpursuanttoHMDAand smallbusinessloansreportedunderCRAdatacollectionrequirementsfromJuly1,2009,toDecember31, 2011.TheLendingTestevaluatedthebank’sloanoriginationsandpurchasesofloansreportableunder HMDAandsmallbusinessloansfromJuly1,2009,throughDecember31,2011.Theevaluationperiodfor communitydevelopmentloans,qualifiedinvestments,andserviceswasfromJuly1,2009,toNovember30, 2012.Examinersplacedmoreweightonthebank’shomemortgagelending,includingpurchasesandrefinancing,thanonsmallloanstobusinessesandmultifamilyhomemortgageloans.Examinersnotedthathome improvementandfarmloanswerenotconsideredasnonewereoriginatedduringtherelevanttimeperiod. 34 TheAstoriaBankEvaluationincludedafull-scopereviewofAstoriaBank’stwoassessmentareas,both locatedwithintheStateofNewYork:theNewYorkMDassessmentareaandtheNassau-SuffolkMDassessmentarea.TheNewYorkMDassessmentareawascomprisedofsixcountiesintheNewYork-WhitePlains- Wayne,NY-NJ,MD.TheNassau-SuffolkMDassessmentareawascomprisedofNassauandSuffolkcounties andisoneofthefourMDsthatmakeuptheNewYork-NorthernNewJersey-LongIsland,NY-NJ-PA,MSA.

370 FederalReserveBulletin|December2017 distributionof homemortgageloanswaspoor,althoughtheexaminersnotedthatthere wereverylimitedopportunitiestomakehomemortgageloansinlow-incomegeographies intheNassau-SuffolkMDassessmentareaandsomewhatlimitedopportunitiesintheNew YorkMDassessmentarea,giventhelowpercentageof owner-occupiedhousingunitsin thosegeographies.IntheNewYorkMDassessmentarea,examinersfoundthebank’s portionof multifamilylendinginlow-incomegeographiestobeverypoor,butfoundthe multifamilylendinginmoderate-incomegeographiestobeexcellent.Examinersalsofound thebank’smortgageloan-to-depositratiotobegood. Inaddition,examinersfoundthatthebank’soveralldistributionof lendingtoborrowersof differentincomelevelswasadequate.Examinersconsideredfactorssuchasthecostof housinginthebank’sassessmentareasandthedemographicsof thepopulationbasein evaluatingthebank’sabilitytomakemortgageloans.Examinersalsofoundthebank’s overallgeographicdistributionof lendingactivity,includingbothhomemortgageand smallbusinesslending,reflectedadequatepenetrationthroughouttheassessmentareas. InevaluatingtheInvestmentTest,examinersfoundthegrantsprovidedbyAstoriaBankin theNassau-SuffolkMDassessmentareatoberesponsivetocommunityneeds.Examiners alsofoundthebank’sgrantsandinvestmentsintheNewYorkMDassessmentareatobe responsivetocommunityneeds. InevaluatingtheServiceTest,examinersfoundAstoriaBanks’sdeliverysystemstobe reasonablyaccessibletoessentiallyallportionsof itsassessmentareas.Examinersnoted thatthebank’sopeningandclosingof branchesintheNassau-SuffolkMDhadnot adverselyaffectedtheaccessibilityof itsbranches,includingtoLMIgeographiesandindividuals,andthattherewerenomaterialdifferencesintheproductsandservicesofferedin thebank’sbranches.Examinersfurthernotedthat,overall,thebankprovidedagoodlevel of communitydevelopmentservicesintheareasinwhichthebankmaintainedan ongoingpresence,includingbypromotingthedevelopmentof affordablehousing, promotingeconomicdevelopmentwithinLMIgeographies,orprovidingservicesthat benefittedLMIindividuals.ExaminersfoundthatAstoriaBank’spersonnelfrequently tookleadershippositionsinmanyof theorganizationsthatprovidecommunitydevelopmentservices. AstoriaBank’sActivitiesSincetheAstoriaBankEvaluation SterlingrepresentsthatsincetheAstoriaBankEvaluation,AstoriaBankhasmaintaineda strongCRAperformanceacrossitsassessmentareas.Specifically,Sterlingrepresentsthat sinceitslastevaluation,AstoriaBankhascontinuedtooriginatemultifamilyandcommercialrealestateloans,primarilyforrent-controlledandrent-stabilizedapartmentbuildings inNewYorkCityanditssurroundingmetropolitanarea,aswellasresidentialmortgage loans.SterlingrepresentsthatAstoriaBankoffersanumberof mortgageproductsthat serveLMIborrowersandcommunitieswithinitsassessmentareas,includingStateof New YorkMortgageAgencyloansfor1-4familyresidences,cooperatives,andcondominiums, inadditiontoaportfolioof affordablemortgageloanproductsforpersonswithincomes eitherbelow80orbelow100percentof theareamedianincomelevel.Sterlingrepresents that,from2013to2016,AstoriaBank’sparticipationintheFederalHomeLoanBankof NewYork’sFirstHomeClubdownpaymentassistanceprogramresultedinanumberof individualsreceivinggrantsandachievinghomeownership.Sterlingalsorepresentsthat, from2013to2016,AstoriaBanksponsoredtwoaffordablehousingprojectsthatresultedin grantsfor532unitsof affordablehousinginitsassessmentareas.Sterlingstatesthatthe majorityof AstoriaBank’smortgageoriginationsaresourcedthroughAstoriaBank’s correspondentlendingchannel,throughwhichAstoriaBankpurchasesmortgageloans fromthird-partyoriginators.SterlingrepresentsthatAstoriaBankcontinuestoofferSmall

LegalDevelopments:ThirdQuarter,2017 371 BusinessAdministrationloansaswellaslinesof credit,installmentloans,standbylettersof credit,andequipmentfinancingtoassistsmallbusinessowners. SterlingrepresentsthatsincetheAstoriaBankEvaluation,AstoriaBankhasfocusedits communitydevelopmentlending,investments,andgrantactivitiesonsupportingnonprofit organizationsthat,amongotheractions,expandopportunitiesforresponsibleand sustainablehomeownershipbyminorityandLMIindividualsthroughaffordablehousing projects,developaffordablehousingandservicesforspecialneedspopulations,andengage ineconomicdevelopmentactivitiestoassistLMIindividualsorneighborhoods.Sterling alsorepresentsthatAstoriaBank’scommunitydevelopmentserviceactivitieshave included,amongotherservices,providingfinancial-relatedtechnicalassistancetononprofit communityorganizationsthroughboardserviceandotherengagements,offeringtechnical andfinancialadvicetosmallbusinesses,engaginginhomeownershipandfirst-time homebuyercounseling,andvolunteeringinaffordablehousingconstructionandrenovation projects. AdditionalSupervisoryViews TheBoardhasconsideredtheresultsof arecentconsumercomplianceassessmentof SterlingBankconductedbyOCCexaminers,whichincorporatedareviewof thebank’s compliancerisk-managementprogramandthebank’scompliancewithconsumerprotectionlawsandregulations.TheBoardalsohasconsideredtheresultsof arecentcompliance examinationof AstoriaBankconductedbyOCCexaminers,whichincludedareviewof thebank’sconsumercompliancefunction.TheBoardhasconferredwiththeOCC regardingitsreviewandhastakenintoconsiderationsupervisoryreviewsandother relevantinformation.Inaddition,theBoardhasconsultedwiththeConsumerFinancial ProtectionBureau. AdditionalConvenienceandNeedsConsiderations Inevaluatingproposalsundersection4of theBHCAct,theBoardalsoconsidersother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Sterlingrepresentsthattheproposalwouldprovidecustomersof thecombined organizationaccesstoadditionalorexpandedservices,duetoanexpandednetworkof branchandATMlocationsinitsmarketareas.Sterlingrepresentsthat,withtheexception of changestoAstoriaBank’smortgagelendingoperation,itdoesnotintendtoeliminate anymaterialretailproductsorservicesofferedbyAstoriaandwouldprovideAstoria customerswithabroadersuiteof commercialproductsandservices.Withrespecttomortgagelending,SterlingrepresentsthatSterlingBankwouldcontinuetomakeavailablea fullrangeof residentialmortgageproductstocustomersof thecombinedorganization throughSterlingBank’srelationshipwithFreedomMortgage.Moreover,SterlingrepresentsthatSterlingBankwillcontinuetoofferresidentialmortgagestoLMIindividuals throughthebank’sCommunityBankingteam.Sterlingexpectsthatthemergeralsowould enableittocompetemoreeffectivelywithnationalfinancialinstitutionsinitsassessment areasandimproveitsabilitytomeettheneedsof itscustomersandthecommunitiesinits assessmentareas.35 35 SterlinghascommittedtokeepopenallAstoriabranchesforaminimumof90dayspostconsummationand willnotmakedecisionsregardingbranchclosuresfor180daysinordertoevaluatethecombinedbranch network.Unrelatedtotheproposal,SterlingrepresentsthatSterlingBankplanstorelocateonebranchand closetwootherbranches,noneofwhicharelocatedinLMIcensustracts.SterlingrepresentsthatSterlingBank willcomplywithSection42oftheFederalDepositInsuranceAct(12U.S.C.§1831r-1)andtheJointPolicy StatementRegardingBranchClosings(64Fed.Reg.34844(1999))inconnectionwithanysuchclosings.

372 FederalReserveBulletin|December2017 ConclusiononConvenienceandNeeds TheBoardhasconsideredallof thefactsof record,includingtherecordsof therelevant depositoryinstitutionsinvolvedundertheCRA,theinstitutions’recordsof compliance withfairlendingandotherconsumerprotectionlaws,informationobtainedinconsultationswiththeOCC,confidentialsupervisoryinformation,informationprovidedbySterling,thepubliccommentsontheproposal,andotherpotentialeffectsof theproposalon theconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankActamendedsection4of theBHCActtorequiretheBoardtoconsider theextenttowhichaproposedacquisition,merger,orconsolidationwouldresultingreater risktothestabilityof theUnitedStatesbankingorfinancialsystem.36 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.37These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.38 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.39 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Afterconsummation,Sterlingwouldhaveapproximately $29billioninconsolidatedassetsand,byanyof anumberof alternativemeasuresof firm size,wouldnotbelikelytoposesystemicrisks.Boththeacquirerandthetargetare predominatelyengagedinavarietyof retailandcommercialbankingactivities.The pro-formaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibit anorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthat 36 Section604(e)oftheDodd-FrankAct,codifiedat12U.S.C.§1843(j)(2)(A)(withrespecttotheacquisitionof savingsassociations). 37 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 38 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneOrder. 39 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition.

LegalDevelopments:ThirdQuarter,2017 373 wouldcomplicateresolutionof thefirmintheeventof financialdistress.Inaddition,the organizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirms orthemarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Weighingof PublicBenefitsof theProposal Asnotedabove,inconnectionwithaproposalundersection4of theBHCAct,theBoard isrequiredto“considerwhetherperformanceof theactivitybyabankholdingcompanyor asubsidiaryof suchcompanycanreasonablybeexpectedtoproducebenefitstothepublic, suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.”40Asdiscussedabove,theBoardhasconsideredthattheproposedtransactionwouldprovidegreaterservices,productofferings,and geographicscopetocustomersof AstoriaBank.Inaddition,theacquisitionwouldensure continuityandstrengthof servicetocustomersof AstoriaBank. 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. Accordingly,theBoarddeterminesthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwithapproval.41 Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthatthenotice shouldbe,andherebyis,approved.42Inreachingitsconclusion,theBoardhasconsidered allthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderundertheBHC 40 12U.S.C.§1843(j)(2). 41 12U.S.C.§1843(j)(2)(A). 42 AcommenterrequestedthattheBoardholdapublichearingontheproposal.TheBoard’sregulationsprovide forahearingonanoticefiledundersection4oftheBHCActiftherearedisputedissuesofmaterialfactthat cannotberesolvedinsomeothermanner.12CFR225.25(a)(2).Underitsrules,theBoardalsomay,inits discretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoproviderelevant testimonywhenwrittencommentswouldnotadequatelyrepresenttheirviews.12CFR262.3(e).TheBoardhas consideredtherequestinlightofallthefactsofrecord.NoticeoftheproposalwaspublishedinrelevantnewspapersofgeneralcirculationonApril19,2017.ThecommentperiodendedonMay19,2017.IntheBoard’s view,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitteda writtencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentsdonotpresentthe commenter’sviewsadequatelyorwhyahearingwouldotherwisebenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

374 FederalReserveBulletin|December2017 Act.TheBoard’sapprovalisspecificallyconditionedoncompliancebySterlingwithallthe conditionsimposedinthisOrder,includingreceiptof allrequiredregulatoryapprovals,and onthecommitmentsmadetotheBoardinconnectionwiththeproposal.Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedin writingbytheBoardinconnectionwithitsfindingsanddecisionhereinand,assuch,may beenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethe15thcalendardayaftertheeffectivedate of thisOrderorlaterthanthreemonthsthereafterunlesssuchperiodisextendedforgood causebytheBoardortheFederalReserveBankof NewYorkactingpursuanttodelegated authority. Byorderof theBoardof Governors,effectiveAugust30,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard.

LegalDevelopments:ThirdQuarter,2017 375 The Toronto-Dominion Bank Toronto, Canada TD Group US Holdings LLC Wilmington, Delaware TD Bank US Holding Company Cherry Hill, New Jersey OrderApprovingtheAcquisitionof aSavingsandLoanHoldingCompanyandSharesin CertainNonbankingSubsidiaries FRBOrderNo.2017–23(September13,2017) TheToronto-DominionBank(“Toronto-Dominion”),Toronto,Canada,anditssubsidiaries,TDGroupUSHoldingsLLC,Wilmington,Delaware,andTDBankUSHolding Company(collectivelyandtogetherwithToronto-Dominion,“TD”),CherryHill,New Jersey,allfinancialholdingcompanieswithinthemeaningof theBankHoldingCompany Actof 1956(“BHCAct”),haverequestedtheBoard’sapprovalundersections4(c)(8)and (j)of theBHCActandsection225.24of theBoard’sRegulationY1toacquireScottrade FinancialServices,Inc.(“ScottradeFinancial”),TownandCountry,Missouri,andto mergeScottradeFinancial’swhollyownedsubsidiary,ScottradeBank,TownandCountry, Missouri,asavingsassociation,intoTD’swhollyownedsubsidiary,TDBank,National Association(“TDBank”),Wilmington,Delaware.2Inaddition,Toronto-Dominionand TDGroupUSHoldingsLLChaverequestedtheBoard’sapprovalundersection163(b)of theDodd-FrankWallStreetReformandConsumerProtectionActof 2010(“Dodd- FrankAct”)3toacquireadditionalsharesof itssubsidiary,TDAmeritradeHolding Corporation(“AmeritradeHC”),Omaha,Nebraska,whichisengagedinactivities describedinsection4(k)of theBHCAct. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(82FederalRegister11221-11222(February21,2017)).4Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandall commentsreceivedinlightof thefactorssetforthinsection4of theBHCAct. Toronto-Dominion,withconsolidatedassetsof approximately$923.3billion,isthesecond largestbankinCanadabyassetsize.5Toronto-Dominionprovidesretailandcommercial banking,wealthmanagement,insurance,andinvestmentbankingproductsandservices, andoperatesinNorthAmerica(includingtheUnitedStates),Europe,andAsia.Inthe UnitedStates,Toronto-DominioncontrolsTDBank,withtotalassetsof $268.2billion, andTDBankUSA,NationalAssociation(“TDBankUSA”),Wilmington,Delaware,with 1 12U.S.C.§§1843(c)(8)and(j);12CFR225.24. 2 ThemergerofScottradeBankintoTDBankissubjecttoapprovaloftheOfficeoftheComptrollerofthe Currency(“OCC”)pursuanttosection18(c)oftheFederalDepositInsuranceAct.12U.S.C.§1828(c).The OCCapprovedthebankmergeronMay18,2017. 3 Pub.L.No.111-203,124Stat.1376(2010).ThisacquisitionispartofarelatedtransactionbyAmeritradeHC toacquireScottradeFinancial’sbroker-dealersubsidiary,Scottrade,Inc.,TownandCountry,Missouri,under section4(k)oftheBHCAct.12U.S.C.§1843(k). 4 12CFR262.3(b). 5 AssetdataareasofJune30,2017,andnationwidedeposit-rankingdataareasofMarch31,2017,unless otherwisenoted.AssetandrankingdataforToronto-DominiononaconsolidatedbasisareasofApril30, 2017,andarebasedontheexchangerateasofthatdate.

376 FederalReserveBulletin|December2017 totalassetsof $22.2billion.Together,thebankshaveretailbankingoperationsinfifteen statesandtheDistrictof Columbia.6 ScottradeFinancial,withconsolidatedassetsof approximately$24.4billion,isthe71st largestinsureddepositoryorganizationintheUnitedStates.ScottradeFinancialcontrols depositsof approximately$15.7billion,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Scottrade FinancialcontrolsScottradeBank,withtotalassetsof $17billion,whichoperatesin Missouri.ScottradeFinancialisthethirdlargestinsureddepositoryorganizationin Missouri,withapproximately$14.7billionindeposits,whichrepresent8.84percentof the totaldepositsof insureddepositoryinstitutionsinthatstate.7 Onconsummationof theproposal,TD’sU.S.operationswouldhaveapproximately $391.8billioninconsolidatedassets,whichrepresent1.8percentof thetotalassetsof insureddepositoryorganizationsintheUnitedStates.8TDwouldcontroltotalU.S. depositsof approximately$265.6billion,whichrepresent2.1percentof thetotaldeposits of insureddepositoryinstitutionsintheUnitedStates.TDwouldbecomethethirdlargest insureddepositoryorganizationinMissouriwithapproximately$14.7billionindeposits, whichrepresent8.84percentof thetotaldepositsof insureddepositoryinstitutionsinthat state. FactorsGoverningBoardReviewof theTransaction TheBoardpreviouslyhasdeterminedbyregulationthattheoperationof asavingsassociationbyabankholdingcompanyiscloselyrelatedtobankingforpurposesof section4(c)(8)of theBHCAct.9TheBoardrequiresthatasavingsassociationacquiredby abankholdingcompanyconformitsdirectandindirectactivitiestothosepermissiblefora bankholdingcompanyundersection4of theBHCAct.TDhascommittedthatallthe activitiesof ScottradeFinancialanditssubsidiarieswillconformtothosepermissible undersection4of theBHCActandRegulationYorbedivested.10 Section4(j)(2)(A)of theBHCActrequirestheBoardtoconsiderwhethertheproposed acquisitionof ScottradeFinancial“canreasonablybeexpectedtoproducebenefitstothe public,suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,that outweighpossibleadverseeffects,suchasundueconcentrationof resources,decreasedor unfaircompetition,conflictsof interests,unsoundbankingpractices,orrisktothestability of theUnitedStatesbankingorfinancialsystem.”11Aspartof itsevaluationof these factors,theBoardreviewsthefinancialandmanagerialresourcesof thecompanies involved,theeffectof theproposaloncompetitionintherelevantmarkets,therisktothe stabilityof theUnitedStatesbankingorfinancialsystem,andthepublicbenefitsof the proposal.12Inactingonanoticetoacquireasavingsassociation,theBoardalsoreviews 6 TD’ssubsidiarybankshaveretailbankingoperationsinConnecticut,Delaware,Florida,Maine,Maryland, Massachusetts,NewHampshire,NewJersey,NewYork,NorthCarolina,Pennsylvania,RhodeIsland,South Carolina,Vermont,Virginia,andtheDistrictofColumbia.Inaddition,Toronto-Dominionoperatesafederal branchinNewYorkandastate-licensedagencyinTexas. 7 StatedepositandrankingdataareasofJune30,2016,unlessotherwisenoted. 8 Assetdataandnationwidedeposit-rankingdataforthecombinedorganizationareasofMarch31,2017. 9 12CFR225.28(b)(4)(ii). 10 Inthisinstance,TDwillimmediatelymergeScottradeBankintoTDBankandwillnotoperatethesavings associationindependently. 11 12U.S.C.§1843(j)(2)(A).Section604(e)oftheDodd-FrankActadded“risktothestabilityoftheUnited Statesbankingorfinancialsystem”tothelistofpossibleadverseeffects. 12 See12CFR225.26.Seee.g.,M&TBankCorporation,FRBOrder2015-27(September30,2015);Southside Bancshares,Inc.,FRBOrder2014-21(December10,2014);CapitalOneFinancialCorporation,FRBOrder

LegalDevelopments:ThirdQuarter,2017 377 therecordsof performanceof therelevantinsureddepositoryinstitutionsunderthe CommunityReinvestmentAct(“CRA”).13 Section163(b)of theDodd-FrankActrequirespriorBoardapprovalof anacquisitionby abankholdingcompanywithassetsof $50billionormoreof sharesof anycompanywith assetsof atleast$10billionthatisengagedinactivitiesdescribedinsection4(k)of the BHCAct.Toronto-Dominion,TDGroupUSHoldingsLLC,andAmeritradeHCexceed theserespectiveassetthresholds,andAmeritradeHCengagesinactivitiesunder section4(k)of theBHCAct.Accordingly,theproposedacquisitionof sharesof AmeritradeHCbyToronto-DominionandTDGroupUSHoldingsLLCrequiresthe Board’spriorapprovalundersection163(b)of theDodd-FrankAct.Inreviewinganotice undersection163(b)of theDodd-FrankAct,theBoardisrequiredtoconsiderthestandardslistedinsection4(j)(2)of theBHCAct.14Inaddition,section163(b)requiresthe Boardtoconsider“theextenttowhichtheproposedacquisitionwouldresultingreateror moreconcentratedriskstoglobalorUnitedStatesfinancialstabilityortheUnitedStates economy.”15 InterstateandDepositCapAnalyses TheDodd-FrankActamendedsection4of theBHCAct16toprovidethat,ingeneral,the Boardmaynotapproveanapplicationbyabankholdingcompanytoacquireaninsured depositoryinstitutionif thehomestateof thetargetinsureddepositoryinstitutionisa stateotherthanthehomestateof theapplicantandtheapplicantcontrolsorwould controluponconsummationof theproposedtransactionmorethan10percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Forpurposes of theBHCAct,thehomestateof TDisDelawareandthehomestateof ScottradeBank isMissouri.17Consummationof theproposalwouldresultinTDcontrolling2.1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates. Accordingly,inlightof allthefactsof record,theBoardisnotrequiredtodenythe proposalundersection4(i)of theBHCAct. CompetitiveConsiderations Aspartof theBoard’sconsiderationof thefactorsundersection4(j)(2)of theBHCAct, theBoardevaluatesthecompetitiveeffectsof aproposalinlightof allof thefactsof the record. TD,throughitsU.S.banksubsidiaries,operatesapproximately1,300retailbranchlocationsinfifteenstatesandtheDistrictof Columbiaandalsohasonlineoperations. ScottradeBankdoesnotoperateanyphysicalretailbranches;rather,itoffersbanking servicesexclusivelythroughaninternetplatform,consistingprimarilyof sweepaccountsto customersof Scottrade,Inc.TDBank,TDBankUSA,andScottradeBankcontrola 2012-2(February14,2012);BankofAmericaCorporation/Countrywide,94FederalReserveBulletinC81(2008); WachoviaCorporation,92FederalReserveBulletinC138(2006);andBancOneCorporation,83FederalReserve Bulletin602(1997). 13 12U.S.C.§2901etseq.;12CFR225.13(b)(3). 14 Dodd-FrankAct§163(b)(4),codifiedat12U.S.C.§5363(b).SeeMitsubishiUFJFinancialGroup,Inc.(Board OrderdatedJune14,2011). 15 Dodd-FrankAct§163(b)(4),codifiedat12U.S.C.§5363(b). 16 Dodd-FrankAct§623(b),codifiedat12U.S.C.§1843(i)(8). 17 Abankholdingcompany’shomestateisthestateinwhichthetotaldepositsofallbankingsubsidiariesofsuch companywerethelargestonthelaterofJuly1,1966,orthedateonwhichthecompanybecameabank holdingcompany.12U.S.C.§1841(o)(4)(C).Afederalsavingsassociation’shomestateisthestateinwhichthe homeofficeofthesavingsassociationislocated.12U.S.C.§§1828(c)(13)(C)(ii)(III)and1841(o)(4)(E).

378 FederalReserveBulletin|December2017 relativelysmallamountof internetdepositswhencomparedtotheamountof deposits takenovertheinternetasawhole.TDBankandTDBankUSA,ontheonehand,and ScottradeBank,ontheother,competeinlocalbankingmarketsinwhichTDBankand TDBankUSAofferretailbankingservicesthroughtheirbranchlocationsandthroughout theUnitedStatesthroughtheirinternetplatforms.However,becauseScottradeBank solicitsdepositsfromacrossthecountryonline,itisunlikelythatScottradeBankholdsa highconcentrationof internetdepositsinanylocalmarket,includingthoseinwhichTD BankandTDBankUSAhaveretailbranchesandinternetoperations.Basedonthesizeof ScottradeBank,thelargenumberof internet-basedcompetitors,andthediffuse geographicnatureof ScottradeBank’sinternetdeposits,theproposedtransactionwould notresultinamaterialincreaseinconcentrationinanysinglemarket,includinganyin whichTDBankandTDBankUSAhaveaphysicallocation.Consummationof the proposalwouldbeconsistentwithBoardprecedentandwithinthethresholdsinthe Departmentof Justice(“DOJ”)BankMergerCompetitiveReviewguidelines. TheDOJhasconductedareviewof thepotentialcompetitiveeffectsof theproposaland hasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevantbankingmarket.Inaddition,the appropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenot objectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthat competitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingproposalsundersection4(j)(2)of theBHCAct,theBoardconsidersthe financialandmanagerialresourcesandthefutureprospectsof theinstitutionsinvolved.In itsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizationsinvolvedonbothparent-onlyandconsolidatedbases,as wellasinformationaboutthefinancialconditionof thesubsidiarydepositoryinstitutions andtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof information,includingpublicandsupervisoryinformationregarding capitaladequacy,assetquality,liquidity,andearningsperformance,aswellasthepublic commentontheproposal.TheBoardevaluatesthefinancialconditionof thecombined organization,includingitscapitalposition,assetquality,liquidity,andearningsprospects, andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsidersthe abilityof theorganizationtoabsorbthecostsof theproposalandtocompleteeffectively theproposedintegrationof theoperationsof theinstitutions.Inassessingfinancialfactors, theBoardconsiderscapitaladequacytobeespeciallyimportant.TheBoardconsidersthe futureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialand managerialresourcesandtheproposedbusinessplan. TDanditssubsidiarydepositoryinstitutionsarewellcapitalizedandwouldremainsoon consummationof theproposal.Aspartof thetransaction,ScottradeBankwouldmerge withandintoTDBank,andamergersubsidiaryof AmeritradeHCwouldmergewithand intoScottradeFinancial.Theholdingcompanymergerwouldbestructuredasacashand

LegalDevelopments:ThirdQuarter,2017 379 shareexchange.18Inaddition,TDwouldexercisepreemptiverightstopurchaseadditional sharesof AmeritradeHCinordertomaintainitscurrentlevelof ownershipinterestin AmeritradeHC.Theassetquality,earnings,andliquidityof TDareconsistentwith approval.TDappearstohaveadequateresourcestoabsorbthecostsof theproposalandto completetheintegrationof theinstitutions’operations.Inaddition,thefutureprospectsof theinstitutionsundertheproposalareconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.19TheBoardhasreviewedtheexaminationrecords of TD’sU.S.operations,ScottradeFinancial,andScottradeBank,includingassessments of theirmanagement,risk-managementprograms,andoperations.Inaddition,theBoard hasconsideredinformationprovidedbyTD,thesupervisoryexperiencesthattheBoard andotherrelevantbanksupervisoryagencieshavehadwiththeorganizations,andthe organizations’recordsof compliancewithapplicablebanking,consumer,andantimoneylaunderinglaws,aswellasinformationprovidedbythecommenter. TDanditssubsidiarydepositoryinstitutionsareeachconsideredtobewellmanaged.TD’s existingrisk-managementprogramanditsdirectorsandseniormanagementareconsideredtobesatisfactory.TD’sdirectorsandseniorexecutiveofficershaveknowledgeof and experienceinthebankingandfinancialservicessectors.TDhasarecordof successfully integratingorganizationsintoitsoperationsandrisk-managementsystemsafter acquisitions. TheBoardalsohasconsideredTD’splansforimplementingtheproposal.TDhas conductedcomprehensiveduediligenceandisdevotingsignificantfinancialandother resourcestoaddressallaspectsof thepost-acquisitionintegrationprocessforthisproposal. TDwouldimplementitsrisk-managementpolicies,procedures,andcontrolsatthe combinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,TD’smanagementhastheexperienceandresourcestooperatethe combinedorganizationinasafeandsoundmanner. Basedonallthefactsof record,includingTD’ssupervisoryrecord,managerialandoperationalresources,andplansforoperatingthecombinedinstitutionafterconsummation, theBoardconcludesthatconsiderationsrelatingtothefinancialandmanagerialresources andfutureprospectsof theorganizationsinvolved,aswellastherecordsof effectivenessof TDandScottradeFinancialincombattingmoney-launderingactivities,areconsistentwith approval. ConvenienceandNeedsConsiderations Aspartof weighingthepossibleadverseeffectsof atransactionagainstitspublicbenefits asrequiredbysection4(j)(2)of theBHCAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.20Initsevaluation of theeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecredit needsof thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalon 18 Aspartofthetransaction,alloftheoutstandingsharesofScottradeFinancialwouldbeexchangedforno morethan4.95percentofAmeritradeHC’sproformaoutstandingsharesand$3.0billionincash.TDhasthe financialresourcestoeffecttheproposedtransaction. 19 TheBoardhaspreviouslydeterminedthatToronto-DominionissubjecttocomprehensiveconsolidatedsupervisionbytheOfficeoftheSuperintendentofFinancialInstitutionsinCanada.SeeTheToronto-Dominion Bank(BoardOrderdatedJuly22,2010). 20 12U.S.C.§1843(j)(2).

380 FederalReserveBulletin|December2017 theconvenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,21andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoodsinevaluatingbankexpansionaryproposals.22 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideloan applicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainother characteristics.TheBoardalsoconsiderstheassessmentsof otherrelevantsupervisors,the supervisoryviewsof examiners,othersupervisoryinformation,informationprovidedby theapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsiderthe institution’sbusinessmodel,itsmarketingandoutreachplans,theorganization’splans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallof thefactsof record,includingreportsof examinationof theCRAperformanceof TD Bank,TDBankUSA,andScottradeBank;thefairlendingandcompliancerecordsof eachbank;thesupervisoryviewsof theOCCandConsumerFinancialProtectionBureau (“CFPB”);confidentialsupervisoryinformation;informationprovidedbyTD;andthe publiccommentreceivedontheproposal. PublicCommentRegardingtheProposal Acommenterobjectedtotheproposal,assertingthatTDBankhasmadeinadequatehome purchaseandrefinanceloanstoLMIandminorityborrowers.Basedondatareported undertheHomeMortgageDisclosureActof 1975(“HMDA”)23,thecommenterargued thatTDBankdidnotadequatelyserveminorityorLMIborrowersinNewYorkCity.The commenteralsoarguedthatTDBankhasmadeinadequateinvestmentsinmultifamily residentialrealestate,communitydevelopmentloansandinvestments,andcharitablegifts toneighborhood-basedorganizations.ThecommenterassertedthatTDBankshouldmake investmentsinresidentialrealestateotherthanthroughlow-incomehousingtaxcredits. ThecommenteralsoallegedthatTDBankdoesnotofferproductsthatareaffordablefor LMIborrowersbecauseitslow-costcheckingaccountproducthasafeethatcannotbe waived,andanothercheckingaccountproducthasafeethatcanonlybewaivedif a customermaintainsaminimumbalancethatthecommenterbelievesistoohigh.Finally, thecommenterstatedthatTDBankshouldacceptNewYorkCity’smunicipalIDasa primaryformof identificationforcustomersseekingtoobtainbankingproducts.24 21 12U.S.C.§2901(b). 22 12U.S.C.§2903. 23 12U.S.C.§2801etseq. 24 ThecommenteralsostatedthattheBoardshouldnotapprovetheproposaluntilTDBanksubmitsaCRAplan withprospectivecommitmentsforcommunityinvestmentsandlendingactivity.TheBoardhasconsistently foundthatneithertheCRAnorthefederalbankingagencies’CRAregulationsrequiredepositoryinstitutions tomakepledgesorenterintocommitmentsoragreementswithanyorganizations.See,e.g.,UnitedBancshares, Inc.,FRBOrderNo.2017-10at12fn.28(April6,2017);HuntingtonBancsharesInc.,FRBOrderNo. 2016-13at32n.50(July29,2016);CITGroup,Inc.,FRBOrderNo.2015-20at24n.54(July19,2015); CitigroupInc.,88FederalReserveBulletin485(2002).Initsevaluation,theBoardreviewstheexistingCRA performancerecordofanapplicantandtheprogramsthattheapplicanthasinplacetoservethecreditneeds ofitsCRAassessmentareas.

LegalDevelopments:ThirdQuarter,2017 381 Businessof theInvolvedInstitutionsandResponsetotheComment TD,TDBank,andTDBankUSAofferabroadrangeof financialservicestoconsumers andbusinesses.Throughtheirbranchnetwork,TDBankandTDBankUSAoffera varietyof bankingproductstotheircustomers,includingreal-estate,commercialand consumerloans,anddepositproductsandservices.Inadditiontotraditionaldepositand loanproducts,TDBankalsoofferstrustandfinancialadvisoryservicestopersonal,business,corporate,andinstitutionalclients. ScottradeBankoffersonlineretailbankingproductsandservices,aswellascommercial lendingandcommercialequipmentfinancing.ScottradeBankprimarilyprovidesdeposit accountproductsandservicestocustomersof ScottradeInc.,includingsweepaccounts. Inresponsetothecomment,TDassertsthattherecordsof TDBankandTDBankUSA inmeetingtheconvenienceandneedsof thecommunitiestheyserveareconsistentwith approval. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews providedbytheappropriatefederalsupervisors.25 TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.26Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationinthenotice 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 developmentloandatacollectedandreportedundertheCRAregulations,toassessan institution’slendingactivitieswithrespecttoborrowersandgeographiesof different incomelevels.Theinstitution’slendingperformanceisbasedonavarietyof factors, including(1)thenumberandamountsof homemortgage,smallbusiness,smallfarm,and consumerloans(asapplicable)intheinstitution’sassessmentareas(“AAs”);(2)the geographicdistributionof thecompany’slending,includingtheproportionanddispersion of theinstitution’slendinginitsAAsandthenumberandamountsof loansinlow-, moderate-,middle-,andupper-incomegeographies;(3)thedistributionof loansbasedon borrowercharacteristics,including,forhomemortgageloans,thenumberandamountsof 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 26 12U.S.C.§2906.

382 FederalReserveBulletin|December2017 loanstolow-,moderate-,middle-,andupper-incomeindividuals;27(4)theinstitution’s communitydevelopmentlending,includingthenumberandamountsof communitydevelopmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMIindividualsand geographies. TheCRApermitsabanktoapplytoitsprimaryfederalregulatortobedesignatedasa wholesaleoralimited-purposebank.28TheCRAperformanceof awholesaleorlimitedpurposebankisassessedbyevaluatingthebank’scommunitydevelopmentactivities.29 Thisevaluationinvolvesanassessmentof (1)thenumberandamountsof community developmentloans(includingoriginationsandpurchasesof loans,andothercommunity developmentloandataprovidedbythebank,suchasdataonloansoutstanding,commitments,andlettersof credit),qualifiedinvestments,orcommunitydevelopmentservices; (2)theuseof innovativeorcomplexqualifiedinvestments,communitydevelopmentloans, orcommunitydevelopmentservices,andtheextenttowhichtheinvestmentsarenot routinelyprovidedbyprivateinvestors;and(3)thebank’sresponsivenesstocreditand communitydevelopmentneeds.30Basedonitsactivities,ScottradeBankisconsideredtobe awholesalebank. TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loanapplications,originations,anddenialsamongmembersof differentracialorethnicgroupsinlocal areas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesand programsataninstitutionformeetingitsobligationstoextendcreditfairly.However,other informationcriticaltoaninstitution’screditdecisionsisnotavailablefromHMDAdata.31 Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution. CRAPerformanceof TDBank TDBankwasassignedanoverall“Satisfactory”ratingbytheOCCatitsmostrecentCRA performanceevaluation,asof December31,2013(“TDBankEvaluation”).32TDBank received“HighSatisfactory”ratingsfortheLendingandServicetestsandan “Outstanding”ratingfortheInvestmentTest.ExaminersfoundthatTDBankprovideda relativelyhighlevelof communitydevelopmentservices. ExaminersfoundthatTDBank’soveralllendingactivitywasexcellent.Examinersnoted thatthedistributionbyTDBankof loanstogeographiesandborrowersof different incomelevelswasadequate.ExaminersfoundthatTDBankhadagoodlevelof communitydevelopmentlendingthathadapositiveimpactonTDBank’soveralllending. 27 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamountat origination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 28 12CFR228.25.Awholesalebankisonethatisnotinthebusinessofextendinghomemortgage,smallbusiness,smallfarm,orconsumerloanstoretailcustomers. 29 12CFR228.25(c). 30 Id. 31 Otherdatarelevanttocreditdecisionscouldincludecredithistories,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersmayanalyzesuchadditionalinformationbeforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 32 TheTDBankEvaluationwasconductedusingLargeInstitutionCRAExaminationProcedures.Examiners reviewedloansreportableunderHMDAandtheCRAfromJanuary1,2011,throughDecember31,2013.The evaluationperiodforcommunitydevelopmentloans,investments,andserviceswasfromJanuary1,2012, throughDecember31,2013.TheTDBankEvaluationcoveredTDBank’s72AAslocatedinfifteenstatesand sixmultistatemetropolitanareas(“MMAs”).Afull-scopereviewwasconductedinoneofficeofeachstateand MMA.Alimited-scopereviewwasconductedintheremainingAAs.

LegalDevelopments:ThirdQuarter,2017 383 TDBankreceiveda“HighSatisfactory”ratingfortheLendingTestintheNewYork- NorthernNewJersey-LongIslandMMA(“NewYorkMMA”),anareaof concernforthe commenter.Examinersconductedafull-scopereviewintheNewYorkMMAandnoted thatTDBankhadadequatedistributionof loanstoindividualsandbusinessesof different incomelevels.ExaminersnotedthatTDBankhadgoodperformanceforsmallloansto businessesof differentsizes,butpoorperformanceforhomemortgageloansbyincome levelof theborrower.ExaminersfoundthatTDBank’slevelof communitydevelopment lendingintheNewYorkMMAwasexcellentandflexible,whichpositivelyimpactedthe bank’sLendingTestperformance. ExaminersfoundthatTDBankhadanexcellentlevelof qualifiedinvestmentsthatwas responsivetotheneedsof itscommunities.IntheNewYorkMMA,TDBankreceivedan “Outstanding”ratingfortheInvestmentTest.ExaminersfoundthatTDBankmadeextensiveuseof innovativeorcomplexinvestmentstosupportcommunitydevelopmentinitiatives,particularlyforaffordablehousingdevelopment.ExaminersalsonotedthatTD Bank’sresponsivenesstotheinvestmentneedsof thecommunitiesintheNewYorkMMA wasexcellent.Examinersfoundthatasubstantialmajorityof TDBank’sinvestments wereinlow-incomehousingtaxcreditprojects,whichexaminersstatedwereaprimary needinthebank’sAAs. ExaminersfoundthatTDBankhadaccessibleofficelocationsandarelativelyhighlevelof communitydevelopmentservices.IntheNewYorkMMA,examinersassignedTDBanka “HighSatisfactory”ratingfortheServiceTest.ExaminersnotedthatTDBankprovided agoodlevelof communitydevelopmentservices,includingfirst-timehomebuyerseminars andfinancialliteracyclassesforstudentsincommunityschoolsandeconomicand affordablehousingorganizations.ExaminersfoundthatTDBank’sdeliverysystemswere accessibletoallgeographies,allcensustracks,andindividualsof differentincomelevels. Whileexaminersnotedthatthedistributionof branchesandfull-serviceATMsinLMI geographieswasbelowwhatwouldbeconsistentwiththenumberof LMIborrowersinthe NewYorkMMA,examinersfoundthatTDBank’s79branchesprovidedgoodaccessto LMIindividuals.ExaminersalsofoundthatTDBankmadeadequateuseof alternative deliverysystems,includingATMs,onlinebanking,andfreetelephonebanking.Examiners foundthatTDBank’srecordof openingandclosingbranchofficesdidnotadversely affect,butinsteadsignificantlyimproved,theaccessibilityof itsdeliverysystemstoLMI individuals. TDBank’sActivitiessincetheTDBankEvaluation TDstatesthat,sincetheTDBankEvaluation,TDBankhastakensignificantstepsto continueandimproveitsCRAperformance.Specifically,TDBankhasinitiatedtwomortgagelendingprograms,theTDRightStepaffordablemortgageloanproductandthe FannieMaeHomeReadyaffordablemortgageprogram.TheTDRightStepmortgage productprovidesborrowerswithflexiblefinancingoptions,includingdownpaymentsas lowas3percentwithoutarequirementtopurchaseprivatemortgageinsurance.Thismortgageproductalsohassimplifiedunderwritingandappraisalprocessesthataremore consumerfriendlythantraditionalprocesses.Sincebeginningtheprogramin2014,TD Bankhasclosedover3,100loansthroughtheTDRightStepprogram.TDBankalso beganparticipatinginFannieMae’sHomeReadyaffordablemortgageprogram,which providesflexiblefinancingoptionstoLMIborrowers.Sincejoiningtheprograminlate 2016,TDBankhasclosed113HomeReadyloans.

384 FederalReserveBulletin|December2017 CRAPerformanceof TDBankUSA TDBankUSAwasassignedanoverallCRAratingof “Outstanding”atitsmostrecent CRAperformanceevaluationbytheOCC,asof March31,2014(“TDBankUSAEvaluation”).TheTDBankUSAEvaluationwasconductedpursuanttoanOCC-approved CRAstrategicplan,whichspecifiedmeasurablegoalsformeetingthelending,investment, andserviceneedsof thebank’sassessmentarea.33TheTDBankUSAEvaluationincluded areviewof thebank’sperformancetowardmeetingthestrategicplangoalsinthedefined assessmentareaof thePortland-SouthPortland-Biddeford,Maine,MSAfor2011and 2012.34 ExaminersfoundthatTDBankUSAsubstantiallymetorexceededallof itsstrategicplan goalsinitsAA.Inaddition,examinersnotedthatthebanksupportedcommunity-based organizationsinNewYorkCitywithcapitallinesof credit.Examinersnotedthatthebank investedinlow-incomehousingtaxcreditstoconstructlow-incomehousingforthe elderly,andmadedepositsordonatedcertificatesof depositstolow-incomeandminorityownedcreditunions.ExaminersalsonotedthatTDBankUSAprovidedgrantsand donationstoorganizationsdedicatedtoprovidingaffordablehousing,servicesforLMI individuals,andlocaleconomicdevelopment. CRAPerformanceof ScottradeBank ScottradeBankwasassignedanoverallCRAratingof “Satisfactory”atitsmostrecent CRAperformanceevaluationbytheFDIC,asof April1,2013(“ScottradeBankEvaluation”).35 ExaminersfoundthatScottradeBank’slendinglevelswereadequateinlightof thebank’s capacityandthelendingopportunitiesavailabletoit.ExaminersnotedthatScottrade Bankmadecomplexcommunitydevelopmentloans,whichaidedinthedevelopmentof affordablehousing.ExaminersalsonotedthatScottradeBankmadeadditionalcommunity developmentloansoutsideof itsAA,whichfavorablyimpacteditsCRAevaluation. ExaminersfoundthatScottradeBankprovidedanadequatelevelof investmentstomeet communityneeds,mostof whichhelpedtoprovideaffordablehousingandneighborhood revitalization.ExaminersnotedthatScottradeBankalsoinvestedinamortgageloanpool thatonlylenttoLMIborrowers.ExaminersfoundthatScottradeBankmadecharitable donationsthatpromotedaffordablehousingandprovidedotherservicestoLMIindividuals.ExaminersalsonotedthatScottradeBankmadeinvestmentsoutsideof itsAAto promoteaffordablehousing,whichfavorablyimpacteditsCRAevaluation. ExaminersfoundthatScottradeBankprovidedanadequatelevelof servicesinitsAA. Examinersnotedthatthebank’semployeesvolunteeredwithseveralorganizationsthat providedservicestoLMIindividuals. 33 Underthefederalbankingagencies’CRAregulations,theappropriatefederalbankingagencywillassessa bank’srecordofmeetingthecreditneedsofitsassessmentareasunderastrategicplanif,amongotherthings, thebankinvitespubliccommentontheplanandtheplanisapprovedbysuchagency.See12CFR25.27.The OCCapprovedTDBankUSA’sstrategicplaninAugust2010. 34 Thebank’sstrategicplanalsopermitsthebanktorespondtotheneedsofcommunitiesinMaine,NewHampshire,Vermont,Massachusetts,Connecticut,RhodeIsland,andNewYork. 35 TheScottradeBankEvaluationwasconductedusingWholesaleorLimitedPurposeBankExaminationProcedures.ExaminersreviewedScottradeBank’scommunitydevelopmentactivitiesbothinsideandoutsideofits soleAAfromJuly8,2008,throughApril1,2013.Thebank’ssoleAAincludesSt.LouisCountyandSt.Louis CityCounty,bothinMissouri.

LegalDevelopments:ThirdQuarter,2017 385 Viewsof theOCCandCFPB Initsreviewof theproposal,theBoardconsultedwiththeOCCregardingTDBank’s CRA,consumercompliance,andfairlendingrecords,aswellaswiththeCFPBregarding TDBank’srecordof consumercompliance.TheOCCreviewedthebankmergerunderlyingthisproposal,includingthecommentreceivedbytheBoard. TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexamination of TDBankconductedbyOCCexaminers.TheBoardalsohasconsideredtheresultsof theOCC’smostrecentexaminationof TDBank’scompliancewiththeEqualCredit OpportunityAct36andtheFairHousingAct.37Inaddition,theBoardhasconsideredthe resultsof theCFPB’sconsumercomplianceexaminationof TDBank. TheBoardhastakentheconsultationswiththeOCCandtheCFPB,aswellastheinformationdiscussedabove,intoaccountinevaluatingthisproposal,includinginconsidering whetherTDhastheexperienceandresourcestoensurethattheorganizationeffectively implementspoliciesandprogramsthatwouldallowthecombinedorganizationtoserve effectivelythecreditneedsof allthecommunitieswithinthefirm’sAAs. AdditionalConvenienceandNeedsConsiderations TheBoardalsohasconsideredotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.TDrepresentsthat,asaresultof theproposal, existingcustomersof ScottradeBankwouldhaveaccesstoadditionalorexpandedservices, includingaccesstoretailbranchesandATMlocationsinitsmarketareas.Uponconsummationof thebankmerger,TDBankwouldoffertheformerdepositorsof ScottradeBank itsproductsandservices,includingadebitcard,freeATMwithdrawals,freeonlinebill payment,andasweepdepositprogramcomparabletothatcurrentlyofferedbyScottrade Bank.TDalsorepresentsthatdepositcustomersof ScottradeBank,manyof whomuse thebrokerageandwealthmanagementservicesof ScottradeFinancial’sothersubsidiaries, wouldhaveaccesstotheenhancedproductselectionandtradingplatformof Ameritrade HCanditssubsidiaries,includinginvestoreducationprograms,mobiletradingtechnology, morediverseinvestmentproductsincludingderivativesandforeignexchange,andgreater investmentguidanceandadvice.TDrepresentsthatthecombinedcompany’slargercapital andassetbasewouldallowittobeamoreeffectivecompetitorintheinvestmentadvisory andsecuritiesbrokeragemarketsandtocontinuetooffercompetitivepricesforitsservices. TDalsorepresentsthat,onbalance,nosignificantreductionsinproductsorservices wouldbeexpectedasaresultof theproposal.38 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA,theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws,confidentialsupervisoryinformation,informationprovidedbyTD,thepubliccommentontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. 36 15U.S.C.§1692etseq. 37 42U.S.C.§3601etseq. 38 TDrepresentsthatAmeritradeHCanditssubsidiarieswoulddiscontinueallbutafewoftheproprietaryproductscurrentlyofferedbyScottradeFinancial.However,TDrepresentsthattheproductsofAmeritradeHCand itssubsidiarieswouldprovideinvestorswithimprovedqualityandinvestmentoptions.

386 FederalReserveBulletin|December2017 TheBoardexpectsTDtoensurethatitssubsidiarybanksimplementeffectiveconsumer complianceandrisk-managementprogramsfollowingconsummationof theproposalthat arecommensuratewitheachbank’ssize,complexity,andnatureandscopeof operations. TheBoardwillcontinuetomonitorandevaluatetheseeffortsthroughitsongoingsupervisionof TDGroupU.S.HoldingsLLCandTDBankUSHoldingCompany,aswellas throughconsultationswiththeOCCandCFPB. FinancialStability TheDodd-FrankActadded“risktothestabilityof theUnitedStatesbankingorfinancial system”tothelistof possibleadverseeffectsthattheBoardmustweighagainstany expectedpublicbenefitsinconsideringaproposalundersection4(j)of theBHCActand requirestheBoardtoconsider“theextenttowhichtheproposedacquisitionwouldresult ingreaterormoreconcentratedriskstoglobalorUnitedStatesfinancialstabilityorthe UnitedStateseconomy”inconsideringanoticesubmittedpursuanttosection163(b)of theDodd-FrankAct.39 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theUnitedStates bankingorfinancialsystemortheUnitedStateseconomy,oronglobalorUnitedStates financialstability,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinancialsystem,theextenttowhichtheresultingfirmcontributestothecomplexityof the financialsystem,andtheextentof thecross-borderactivitiesof theresultingfirm.40These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.41 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystemortheU.SeconomyandriskstoglobalorUnitedStates financialstability.Boththeacquirerandthetargetareengagedinretailbanking,investmentadvisory,wealthmanagement,andsecuritiesbrokerageactivities.TDhas,andasa resultof theproposal,wouldcontinuetohave,small-to-moderatemarketsharesinthese productsandservicesonanationwidebasis.Theacquisitionwouldnothavemeaningful effectsonthecross-borderactivitiesof theacquirer;wouldnotleadtochangesintheinstitution’sorganizationalstructure,complexity,oruniquecharacteristicsthatwouldcomplicateitsresolution;norwoulditposeasignificantrisktothebankingorfinancialsystem, economy,orfinancialstability,intheeventof financialdistress.Inaddition,substitute providerswouldbereadilyavailableforthecriticalfinancialservicesprovidedbythepro formainstitution,andtheacquisitionwouldnotheightenitsinterconnectednesswithother firmsormarketsinwaysthatwouldsignificantlyraiseriskstothefinancialsystemor economyortofinancialstabilityintheeventof financialdistress. 39 Dodd-FrankAct§§163(b)(4),604(e)(1)and(f),codifiedat12U.S.C.5363(b)(4)and12U.S.C.§§1843(j)(2)(A) and1828(c)(5),respectively. 40 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 41 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder 2012-2(February14,2012).

LegalDevelopments:ThirdQuarter,2017 387 Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theUnitedStates bankingorfinancialsystemortheUnitedStateseconomyortoglobalorUnitedStates financialstability.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. AdditionalPublicBenefitsof theProposal Asnoted,inconnectionwithanoticeundersection4(c)(8)of theBHCActandnotice undersection163(b)of theDoddFrankAct,section4(j)(2)of theBHCActrequiresthe Boardto“considerwhetherperformanceof theactivitybyabankholdingcompanyora subsidiaryof suchcompanycanreasonablybeexpectedtoproducebenefitstothepublic, suchasgreaterconvenience,increasedcompetition,orgainsinefficiency,thatoutweigh possibleadverseeffects,suchasundueconcentrationof resources,decreasedorunfair competition,conflictsof interests,unsoundbankingpractices,orrisktothestabilityof the UnitedStatesbankingorfinancialsystem.”42Asdiscussedabove,theBoardhasconsideredthattheproposedtransactionwouldprovidegreaterservices,productofferings,and geographicscopetocustomersof ScottradeFinancialanditssubsidiaries.Inaddition,the acquisitionswouldensurecontinuityandstrengthof servicetothesecustomers. 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 theproposal.Accordingly,theBoarddeterminesthatthebalanceof thepublicbenefitsunderthestandardof section4(j)(2)of theBHCActisconsistentwith approval. Conclusion Basedontheforegoingandallthefactsof record,theBoardhasdeterminedthatthe proposalshouldbe,andherebyis,approved.Inreachingitsconclusion,theBoardhas consideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunder theBHCActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditioned oncompliancebyTDwithalltheconditionsimposedinthisorder,includingreceiptof all requiredregulatoryapprovals,andoncommitmentsmadetotheBoardinconnection withtheapplication.Forpurposesof thisaction,theconditionsandcommitmentsare deemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindings anddecisionhereinand,assuch,maybeenforcedinproceedingsunderapplicablelaw. Byorderof theBoardof Governors,effectiveSeptember13,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. 42 12U.S.C.§1843(j)(2)(A).

388 FederalReserveBulletin|December2017 Orders Issued Under Bank Merger Act Veritex Holdings, Inc. Dallas, Texas OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2017–18(July6,2017) VeritexHoldings,Inc.(“VeritexHoldings”),Dallas,Texas,abankholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2tomergewithSovereignBancshares, Inc.(“SovereignBancshares”),andtherebyindirectlyacquireSovereignBank,bothof Dallas,Texas. Inaddition,VeritexHoldings’subsidiarystatememberbank,VeritexCommunityBank (“VeritexBank”),Dallas,Texas,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewithSovereignBank, withVeritexBankasthesurvivingentity.3VeritexBankalsohasappliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeand branchesof SovereignBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(82FederalRegister8425(January25,2017)).5Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). VeritexHoldings,withconsolidatedassetsof approximately$1.4billion,isthe524th largestinsureddepositoryorganizationintheUnitedStates.6VeritexHoldingscontrols approximately$1.1billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.7 VeritexHoldingscontrolsVeritexBank,whichoperatesonlyinTexas.VeritexHoldingsis the64thlargestinsureddepositoryorganizationinTexas,controllingdepositsof approximately$1.0billion,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.8 SovereignBancshares,withconsolidatedassetsof approximately$1.1billion,isthe670th largestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $857.3millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Sovereign BancsharescontrolsSovereignBank,whichoperatesonlyinTexas.SovereignBancsharesis 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedintheAppendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofDecember31,2016,unlessotherwisenoted. 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsandloanassociations,andsavingsbanks. 8 Stateassetdata,marketshare,andrankingdataareasofJune30,2016,unlessotherwisenoted.

LegalDevelopments:ThirdQuarter,2017 389 the80thlargestinsureddepositoryorganizationinTexas,controllingdepositsof approximately$814.7million,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. Onconsummationof thisproposal,VeritexHoldingswouldbecomethe338thlargest insureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$2.5billion,whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnitedStates.VeritexHoldingswouldcontrolconsolidateddeposits of approximately$2.0billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryorganizationsintheUnitedStates.VeritexHoldingswould becomethe38thlargestinsureddepositoryorganizationinTexas,controllingdeposits representinglessthan1percentof thetotaldepositsof insureddepositoryinstitutionsin thatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.9Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitionortendto createamonopolyinanybankingmarket,unlesstheanticompetitiveeffectsof the proposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposal inmeetingtheconvenienceandneedsof thecommunitytobeserved.10 VeritexHoldingsandSovereignBancshareshavesubsidiarydepositoryinstitutionsthat competedirectlyintheDallas,Texas,bankingmarket(“Dallasmarket”).11TheBoardhas consideredthecompetitiveeffectsof theproposalinthisbankingmarket.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthemarket;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)thatVeritexHoldingswouldcontrol;12theconcentrationlevelsof market depositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”);13andothercharacteristicsof themarket. 9 12U.S.C.§§1842(c)(1)and1828(c)(5). 10 12U.S.C.§§1842(c)(1)(B)and1828(c)(5)(B). 11 TheDallasmarketincludesDallasandRockwallcounties;thesoutheasternquadrantofDentonCounty, includingDentonandLewisville;thesouthwesternquadrantofCollinCounty,includingMcKinneyand Plano;thecommunitiesofForneyandTerrellinKaufmanCounty;andMidlothian,WaxahachieandFerrisin EllisCounty,allinTexas. 12 LocaldepositandmarketsharedataareasofJune30,2016,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70Federal ReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html.

390 FederalReserveBulletin|December2017 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheDallasmarket.Onconsummation of theproposal,theDallasmarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,accordingtotheDOJBankMergerGuidelines.ThechangeinHHIinthis marketwouldbesmall,andnumerouscompetitorswouldremaininthemarket.14 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe Dallasmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheDallasmarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof the institutionsinvolved.15Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancialconditionof theorganizationsinvolvedonbothparent-only andconsolidatedbases,aswellasinformationregardingthefinancialconditionof the subsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapital adequacy,assetquality,andearningsperformance,aswellaspubliccommentsonthe proposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization, includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtocompletetheproposedintegration of theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiders capitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerial resourcesandtheproposedbusinessplan. VeritexHoldingsandSovereignBancsharesarebothwellcapitalized,andthecombined entitywouldremainsoonconsummationof theproposedtransaction.Theproposed transactionisabankholdingcompanymerger,withasubsequentmergerof VeritexBank andSovereignBank.16Theassetquality,earnings,andliquidityof bothVeritexBank 14 VeritexHoldingsoperatesthe23rdlargestdepositoryinstitutionintheDallasmarket,controllingapproximately$1.0billionindeposits,whichrepresentlessthan1percentofmarketdeposits.SovereignBancshares operatesthe28thlargestdepositoryinstitutioninthesamemarket,controllingapproximately$539.7millionin deposits,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,VeritexHoldingswouldbecomethe16thlargestdepositoryorganizationinthemarket,controlling depositsofapproximately$1.6billion,whichrepresentlessthan1percentofmarketdeposits.TheHHIforthe Dallasmarketwouldincreaseby1pointto1792,and121competitorswouldremaininthemarket. 15 12U.S.C.§§1842(c)(2),(5),and(6),and1828(c)(5)and(11). 16 Toeffecttheholdingcompanymerger,awhollyownedsubsidiaryofVeritexHoldingsformedtofacilitatethe transactionwouldmergewithSovereignBancshares,withSovereignBancsharesasthesurvivingentity,and immediatelythereafterSovereignBancshareswouldmergewithVeritexHoldings,withVeritexHoldingsasthe survivingentity.Uponconsummationofthatmerger,eachshareofSovereignBancsharescommonstock wouldbeentitledtoreceiveaportionoftheaggregatemergerconsideration,whichwouldconsistofVeritex Holdingscommonstockandcash.SovereignBankwouldthenmergewithandintoVeritexBank,withVeritex Bankasthesurvivingentity.VeritexHoldingshasthefinancialresourcestoeffectthetransaction.

LegalDevelopments:ThirdQuarter,2017 391 andSovereignBankareconsistentwithapproval,andVeritexHoldingsappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of VeritexHoldings,SovereignBancshares,andtheirsubsidiarydepositoryinstitutions, includingassessmentsof theirmanagement,risk-managementsystems,andoperations.In addition,theBoardhasconsideredinformationprovidedbyVeritexHoldings;theBoard’s supervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththe organizations;andtheorganizations’recordsof compliancewithapplicablebanking, consumerprotection,andanti-money-launderinglaws. VeritexHoldings,SovereignBancshares,andtheirsubsidiarydepositoryinstitutionsare consideredtobewellmanaged.VeritexHoldingshasarecordof successfullyintegrating organizationsintoitsoperationsandrisk-managementsystemsafteracquisitions.Veritex Holdings’directorsandseniorexecutiveofficershaveknowledgeof andexperienceinthe bankingandfinancialservicessectors,anditsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredVeritexHoldings’plansforimplementingtheproposal. VeritexHoldingshasconductedcomprehensiveduediligenceandisdevotingsignificant financialandotherresourcestoaddressallaspectsof thepost-integrationprocessforthis proposal.VeritexHoldingswouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,VeritexHoldings’managementhastheexperienceand resourcestooperatethecombinedorganizationinasafeandsoundmanner,andVeritex HoldingsplanstointegrateSovereignBancshares’existingmanagementandpersonnelina mannerthataugmentsVeritexHoldings’management.17 Basedonallthefactsof record,includingthesupervisoryrecordsof VeritexHoldings, SovereignBancshares,andtheirsubsidiarybanks,managerialandoperationalresources, andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludes thatconsiderationsrelatingtothefinancialandmanagerialresourcesandfutureprospects of theorganizationsinvolvedintheproposal,aswellastherecordsof effectivenessof VeritexHoldingsandSovereignBancsharesincombatingmoney-launderingactivities,are consistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.18Initsevaluationof theeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the 17 Onconsummation,SovereignBancshares’presidentandchiefexecutiveofficer,aswellasthechairmanofits boardofdirectors,willbeappointedtotheboardsofdirectorsofVeritexHoldingsandVeritexBank.Additionally,oneoftheseindividualsisexpectedtobeappointedvicechairmanoftheboardofdirectorsofVeritex Holdings. 18 12U.S.C.§§1842(c)(2)and1828(c)(5).

392 FederalReserveBulletin|December2017 relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).19The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods,inevaluatingbankexpansionaryproposals.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheirrecentfair 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 VeritexBank andSovereignBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisoryviewsof theFDIC;confidentialsupervisoryinformation;informationprovidedby VeritexHoldings;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal TheBoardreceivedcommentsfromonecommenteropposingtheproposal.The commenterallegedthatVeritexBankdiscriminatesagainstAfricanAmericansand “redlines”AfricanAmericanneighborhoods,particularlyintheDallasandHouston areas,22bothinTexas,withrespecttoitsbranching,marketing,andlendingactivities.23 ThecommenteralsoallegedthatVeritexBankhasdesignateditsCRAassessmentareaina mannerthatexcludesmajorityAfricanAmericanneighborhoodsinDallas.Inaddition, thecommenterallegedthatSovereignBankalsodiscriminatesagainstAfricanAmericans andredlinesAfricanAmericanneighborhoods. Businessesof theInvolvedInstitutionsandResponsetoComments VeritexHoldingsandVeritexBankofferarangeof financialproductsandservicestoindividualcustomersandbusinesses.VeritexBankisafull-serviceretailbankofferingagricultural,commercial,homepurchase,homeimprovement,homeequity,andvehicleloans. Throughitsnetworkof 11branches,VeritexBankoffersawiderangeof depositproducts includingvariouscheckingaccounts,savingsaccounts,certificatesof deposit,individual retirementaccounts,moneymarketaccounts,andNOWaccounts.VeritexBankalso providesautomatedtellermachines,debitcards,andinternetbanking. SovereignBancsharesandSovereignBankofferdepositandloanproductsandspecializein commercialbankingactivities.SovereignBankoffersarangeof financialproductsand 19 12U.S.C.§2901etseq.;12CFR225.13(b)(3). 20 12U.S.C.§2901(b). 21 12U.S.C.§2903. 22 VeritexcurrentlyhasnobranchlocationsinHouston. 23 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.SeeInteragencyFairLendingExaminationProcedures(August2009),availableathttps://www.ffiec.gov/pdf/fairlend.pdf.

LegalDevelopments:ThirdQuarter,2017 393 servicestoindividualcustomersandbusinesses,includingbusinessloans,commercialreal estatelending,andconsumerdepositproducts. VeritexHoldingsdeniesthecommenter’sallegationsof discriminatorylendingand redliningwithrespecttothebranching,marketing,andlendingactivitiesof VeritexBank. VeritexHoldingsassertsthatVeritexBankmaintainsappropriatecontrolstoensure compliancewithapplicablefairlendinglawsandregulations,andassertsthatVeritexBank designatedtheentiretyof twocountiesintheDallasareaasitsCRAassessmentarea,24in parttoensurethatnoLMIorhighminoritycensustractswereexcludedorneglected. VeritexHoldingsfurtherassertsthatVeritexBank’smanagementiscommittedtoensuring thatnogeographicareasareexcludedbybranchlocationdecisions.Withrespecttofair lending,VeritexHoldingsassertsthatthebankhasimplementedpoliciesandproceduresto ensurefairlendingcompliance,includinganequalcreditopportunitypolicyandafair lendingpolicy,amongothers.VeritexHoldingsrepresentsthatVeritexBankmonitorsand reviewsloanpoliciesandpracticesforthepurposeof measuringcompliancewithfair lendinglawsandequalcreditopportunityrequirements,andthatthismonitoringincludes internalandexternalaudits,aswellastrainingprograms. Inresponsetothecommenter’scriticismthatVeritexBankhasnoadvertisingormarketing effortsdirectedatAfricanAmericancommunities,VeritexHoldingsassertsthatVeritex Bankhasdirectedadvertisingandmarketingeffortstowardsindividualsandsmallbusinessesinareastypicallyunderservedbybanks,includingAfricanAmericancommunities. VeritexHoldingsrepresentsthatthesemarketingeffortsincludepartnershipswithvarious communityorganizations,includingonethatfacilitatesmicrolendingtolow-and moderate-incomeindividuals. ThecommenteralsonotedthatSovereignBankdiscriminatesagainstAfricanAmericans andredlinesinAfricanAmericanneighborhoods.VeritexHoldingsnotesthataspartof its communitydevelopmentactivities,amajorityof SovereignBank’scommunitydevelopmentloanshavebeentoborrowersinpredominantlyminoritycensustracts.VeritexHoldingsrepresentsthataspartof SovereignBank’sCRAefforts,ithasmadequalifieddonationstoorganizationsthathelptosupportfinancialliteracyandmoneymanagementto individualsincensustractsthatareover50percentminority,aswellastoorganizations thatfocusonhousing,endinghomelessness,andprovidingothersocialservicestargetedto LMIindividualsintheDallasmetropolitanarea.Further,VeritexHoldingsrepresentsthat, throughSovereignBankbranchlocations,bankpersonnelprovidecommunitydevelopmentservicestoorganizationslocatedinpredominantlyminoritycensustractsandmeet withdifferentcommunitygroups,includinganallianceforthehomeless,whichhelpsthe bankbetterunderstandtheneedsof thecommunitiesitserves.VeritexHoldingsalsorepresentsthatSovereignBankhasimplementedprocessestocomplywithanti-discrimination requirements,includingtheestablishmentof afairlendingcommitteethatreviews,among otherthings,high-rateloansandconsumerloanswithoriginationfees. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontotheinformationprovidedbythepubliccommenters andtheapplicant’sresponsetocomments.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews 24 Thesecounties,theDallasandCollincounties,aredefinedbelow.

394 FederalReserveBulletin|December2017 providedbytheappropriatefederalsupervisors.25Inthiscase,theBoardconsideredthe viewsof itssupervisorystaff andof examinersfromtheFederalReserveBankof Dallas (“ReserveBank”)andtheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.26Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities.27 Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailableHomeMortgageDisclosureAct(“HMDA”)28data,automated loanreports,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.29Intermediatesmallbanksaresubjecttothelendingtest,aswellasacommunitydevelopmenttest thatevaluatesthenumberandamountof theircommunitydevelopmentloansandqualifiedinvestments;theextenttowhichtheyprovidecommunitydevelopmentservices;and theirresponsivenesstocommunitydevelopmentlending,investment,andserviceneeds.30 CRAPerformanceof VeritexBank VeritexBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheReserveBank,asof January23,2017(“VeritexBankEvaluation”).31Thebankreceived“Satisfactory”ratingsforeachof theLendingTestandthe CommunityDevelopmentTest.TheVeritexBankEvaluationincludedfull-scopeevaluationsof DallasandCollincountiesintheDallas-Plano-IrvingMetropolitanDivision,an areaof concerntothecommenter. Examinersconcludedthatthebank’sperformancedemonstratedareasonableresponsivenesstocreditneedsinitsassessmentarea.Examinersnotedthatasubstantialmajorityof 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 26 12U.S.C.§2906. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 28 12U.S.C.§2801etseq. 29 See12CFR228.26(b). 30 See12CFR228.26(c). 31 TheVeritexBankEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,examinersreviewedHMDAloansreportedbyVeritexBankin2014and2015andsmall businessloansoriginatedbythebankbetweenApril1,2016,andSeptember30,2016.FortheCommunity DevelopmentTest,examinersreviewedcommunitydevelopmentlending,investments,andservicesbasedon datafromNovember12,2013,throughJanuary23,2017.

LegalDevelopments:ThirdQuarter,2017 395 thebank’sHMDAandsmallbusinessloanswereoriginatedinsideitsassessmentarea. Examinersfoundthatthebank’snetloan-to-depositratiowasconsideredreasonable,given thebank’ssizeandfinancialcondition,thecreditneedsof theassessmentarea,andthe competitivelocalbankingenvironment. Examinersalsofoundthatthebank’sdistributionof lendingtoborrowersreflecteda reasonablepenetrationamongindividualsof differentincomelevels(includingLMI borrowers)andthatthegeographicdispersionof thebank’slendingwasreasonablegiven theperformancecontext.Examinersdeterminedthatthedistributionof HMDAloansby borrowerincomelevelwasreasonablegiventhehighlevelof competitionintheassessment areaandlowvolumeof loansoriginatedtoLMIborrowersbytheaggregatelenders.Loans weregenerallymadeincloseproximitytothebank’sbranches,andtherewereno conspicuousgapsoranomaliesinthelendingpatterns.Thedistributionof theremainder of banklendinginmiddle-andupper-incomegeographiesdidnotaffecttheconclusions aboutthebank’sperformanceconsideringitslendinginLMIgeographies.Withrespectto smallbusinesslending,examinersfoundgeographicdistributiontobereasonable. ExaminersalsodeterminedthatVeritexBank’sresponsivenesstocommunitydevelopment needswasadequateconsideringthebank’scapacityanditsprimaryfocusasacommerciallender.Examinersnotedthatthebankapplieditscommunitydevelopmentresources strategicallytomeetcommunityneeds,primarilythroughqualifiedloansandcommunity servicestargetedtoLMIindividualsinitscommunity,andthatthebankprovidedcommunitydevelopmentservicesthroughitsbranchesinLMIareas.Examinersfoundthatthe bankprovidedahighlevelof retailservicesinitsassessmentarea.Specifically,examiners foundVeritexBank’sdeliverysystemstobeaccessibletogeographiesandindividualsof differentincomelevelsinitsassessmentarea.Examinersalsonotedthatthebank’srecord of openingandclosingbrancheshadnotadverselyaffectedtheaccessibilityof itsdelivery systems,particularlytoLMIgeographiesandindividuals,andthatitsservicesdidnotvary inawaythatinconvenienceditsassessmentarea,particularlyLMIgeographiesand individuals. CRAPerformanceof SovereignBank SovereignBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof March30,2015(“SovereignBankEvaluation”).32SovereignBankreceiveda“Satisfactory”ratingfortheLendingTestandan “Outstanding”ratingfortheCommunityDevelopmentTest.AlthoughSovereignBank’s overallratingtookintoconsiderationitsperformanceineachof itsMSAAAs,examiners gavesignificantlymoreweighttothebank’srecordsintheDallas,TexasMSAAAdueto thehighervolumeof loansinthatarea. FortheLendingTest,examinersevaluatedSovereignBank’ssmallbusinessloans.Basedon thisevaluation,examinersfoundthatSovereignBank’sloan-to-depositratioreflected reasonableresponsivenesstocreditneedsinitsassessmentareasgivenitssizeandfinancial 32 TheSovereignBankEvaluationwasconductedusingIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,examinersreviewedsmallbusinessloansoriginatedbythebankfromJanuary1,2014, throughDecember31,2014.Becausecommercialloanscomprisedapproximately49percentofthebank’sloan portfolioanditsprimaryproductline,examinersfocusedtheLendingTestonsmallbusinessloans.Forthe CommunityDevelopmentTest,examinersreviewedthebank’squalifiedcommunitydevelopmentlending, investments,andserviceactivitiesfromJune19,2012,throughMarch30,2015. TheSovereignBankEvaluationincludedafull-scopereviewofperformanceintheDallas-FortWorth- Arlington,TexasMetropolitanStatisticalAreaAssessmentArea(“Dallas,TexasMSAAA”);andalimitedscopereviewofperformanceintheAustin-RoundRock,TexasMSAassessmentareaandtheHouston-The Woodlands-SugarLand,TexasMSAassessmentarea.

396 FederalReserveBulletin|December2017 condition.ExaminersfoundthatSovereignBankoriginatedamajorityof itslending withinthebank’sassessmentareas.Specifically,examinersnotedthatSovereignBank originatedamajorityof itssmallbusinessloansbynumberanddollarvolumeinsideof its assessmentareas.ExaminersfoundthatSovereignBankdisplayedareasonablelevelof penetrationregardingitsdistributionof loansbasedonborrowerprofileandthatthe bank’srecordof lendingtobusinessesof differentsizesreflectedareasonableperformance. ExaminersalsofoundthatSovereignBankdemonstratedareasonablerecordof geographicallydistributingitsloansthroughouttheassessmentareas.Examinersfound thatthebank’slendinginmoderate-incomeareasreflectedreasonableperformance,but lendinginlow-incomecensustractsdemonstratedpoorperformance.However,examiners notedthatthegeographicdistributionof thebank’ssmallbusinessloansreflectedareasonablerecordof lendingwithintheassessmentareaswhenperformancecontextfactorsthat mitigatethebank’ssmallbusinessloanoriginationsinLMIcensustractswereconsidered. Theseperformancecontextfactorsinclude(1)thebank’sconcentratedmarketingeffortsin LMIareastoincreasesmallbusinessloanvolumethroughitsSmallBusinessAdministrationLoanPrograms,suchasbymailingoutlettersadvertisingtheprogramineachassessmentarea,and(2)thebank’stargetingof businesses,andspecificallythosewithgross annualrevenuesof lessthan$1million,inthebank’slow-incomecensustracts.Overall, examinersnotedthat,consideringeffortsmadetoincreasesmallbusinesslendinginLMI areasandtheheavyconcentrationof bankcompetitionintheDallasMSAAA,thebank’s geographicdistributionof smallbusinessloansreflectedreasonabledispersion. Withrespecttocommunitydevelopment,examinersconsideredSovereignBank’scommunitydevelopmentloans,communitydevelopmentinvestments,andcommunitydevelopmentservices.ExaminersfoundthatSovereignBankdemonstratedanexcellentrecord regardingitscommunitydevelopmentlending.ExaminersalsofoundthatSovereignBank exhibitedanadequaterecordregardingitscommunitydevelopmentinvestmentsanddonations.Specifically,examinersnotedthatthebankhadadequateresponsivenesstocommunitydevelopmentneedscombinedwithanadequatelevelregardingthenumberand dollarvolumeof communitydevelopmentinvestmentsanddonations.Examinersfound thatSovereignBankestablishedanexcellentrecordof providingcommunitydevelopment servicestoLMIindividualsthroughitscontributionof financialexpertiseandinvolvement inactivitiesdirectedatLMIindividualsandfamilies.ExaminersfurthernotedthatSovereignBankprovidedarangeof bankingproductsandservicestomeettheneedsof consumerandcommercialcustomersandthatitsbranchofficesanddeliverysystemswere readilyaccessibletoLMIborrowers. SovereignBank’sEffortssincetheSovereignBankEvaluation VeritexHoldingsrepresentsthatsincetheSovereignBankEvaluation,SovereignBankhas workedtocontinuetoserveitscommunitiesthroughitssmallbusinesslending,community serviceactivities,outreachefforts,investments,anddonations.Specifically,VeritexHoldingsrepresentsthatsinceitslastevaluation,SovereignBankhascontinuedtoprovidefor communitydevelopmentservicesthroughnon-profitorganizationstoLMIindividualsand thatthebank’semployeeshavecontinuedtoserveitscommunitiesthroughworkonthe boardsof directorsof non-profitorganizations.VeritexHoldingsrepresentsthatSovereign Bank’sCRAcommitteemeetswithdifferentcommunitygroups,whichhelpsthebank understandtheneedsof thecommunitiesitserves. AdditionalSupervisoryReviews TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexaminationsof VeritexBankconductedbyReserveBankexaminers,whichincludedareviewof thecompliancemanagementprogramandthebanks’compliancewithconsumerprotec-

LegalDevelopments:ThirdQuarter,2017 397 tionlawsandregulations.Aspartof theconsumercomplianceexaminations,ReserveBank examinersalsoevaluatedVeritexBank’sfairlendingmanagementprogram,includingthe bank’sfair-lending-relatedpractices,policies,procedures,andinternalcontrols. TheBoardalsohasconsideredtheresultsof arecentconsumercomplianceexaminationof SovereignBankconductedbyFDICexaminers,whichincludedareviewof thebank’s compliancemanagementsystemandthebank’scompliancewithconsumerprotectionlaws, includingfairlendinglawsandregulations. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.VeritexHoldingsrepresentsthatithasnoplansto discontinueanysignificantproductorservicecurrentlyofferedbyVeritexBankorSovereignBank.Specifically,VeritexBankrepresentsthatitwillcontinuetooffercustomersa rangeof depositandcreditproductsandservicesthatbenefitthecommunitiesinwhich VeritexBankandSovereignBankeachpresentlyconductbusiness,includingthosecredit productsandservicesthatfulfilltheneedsof LMIdemographics.VeritexBankrepresents that,followingtheproposedtransaction,customersof SovereignBankwouldhaveaccess toacomplementof productsandservicesthataremoreexpansivethanthosecurrently availabletoSovereignBankcustomers,includingresidentialmortgageloanproducts,and thatSovereignBankcustomerswouldalsohaveincreasedaccesstoVeritexBank’soffices bytelephoneandonlineapplications,whichmayincreaseaccesstobankingservices.In addition,VeritexBankassertsthatcustomersof bothinstitutionswouldbenefitfroma moreexpansivebranchandATMnetwork.Followingtheproposedtransaction,Veritex Bankrepresentsthatitwillcontinuetoprovidealevelof serviceconsistentwithVeritex Bank’scurrentCRAperformance. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyVeritexBank,publiccommentsontheproposal,andthepotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’s“risktothestabilityof theUnitedStatesbankingorfinancial system.”33 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinan- 33 Dodd-FrankAct§§604(d)and(f),Pub.L.No.111-203,124Stat.1376,1601–1602(2010),codifiedat12U.S.C. §§1842(c)(7)and1828(c)(5).

398 FederalReserveBulletin|December2017 cialsystem,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 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.36 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominantlyengagedinavarietyof consumerandcommercial bankingactivities.37Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complexinterrelationships,or uniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financial distress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches VeritexBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof SovereignBank.38TheBoardhasassessedthefactorsitisrequiredtoconsider 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 36 SeePeoplesUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 37 VeritexHoldingsprimarilyofferscommercialandconsumerbankingservices,mortgagebankingservices, commercialrealestatelending,andtreasurymanagement.SovereignBancsharesprimarilyofferscommercial andconsumerbankingservices,commercialrealestatelending,andtreasurymanagement.Ineachofthe activitiesinwhichitengages,VeritexHoldingshas,andasaresultoftheproposalwouldcontinuetohave,a smallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices. 38 See12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebrancheson thesametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthatwasabranchofanybankparticipatinginthe mergerpriortoFebruary25,1927,orthatunderstatelawmaybeestablishedasanewbranchoftheresulting bankorretainedasanexistingbranchoftheresultingbank.See12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofVeritexBank’sbrancheswouldbepermissibleunderapplicablestatelaw.SeeTex.Fin.Code §§32.203;32.301(c).

LegalDevelopments:ThirdQuarter,2017 399 whenreviewinganapplicationunderthatsection.39Specifically,theBoardhasconsidered VeritexBank’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentin bankpremises.40Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobe consistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.41Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof this proposalisspecificallyconditionedoncompliancebyVeritexHoldingsandVeritexBank withalltheconditionssetforthinthisOrder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveJuly6,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. Appendix BranchestoBeEstablishedbyVeritexBank 1. 600West5thStreet,Austin,Texas78701 2. 150SouthBellBoulevard,CedarPark,Texas78613 3. 17950PrestonRoad,Suite100,Dallas,Texas75252 4. 6060SherryLane,Dallas,Texas75225 5. 7255NorthStateHighway161,Irving,Texas75039 39 12U.S.C.§322;12CFR208.6. 40 Uponconsummationoftheproposedtransaction,VeritexBank’sinvestmentsinbankpremiseswouldremain withinlegalrequirements,under12CFR208.21. 41 TheBoardconstruesthecommentreceivedontheproposaltoincludearequestthattheBoardholdpublic hearingsontheproposal.Section3(b)oftheBHCActdoesnotrequirethattheBoardholdapublichearing onanyapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimely writtenrecommendationofdenialoftheapplication.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhas notreceivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underitsrules,theBoard may,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoprovide relevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Noticeoftheproposalwaspublishedinthe FederalRegisteronJanuary25,2017,andintherelevantnewspaperofgeneralcirculation(TheDallasMorning News)onJanuary13,January20,andFebruary10,2017.ThecommentperiodendedonFebruary12,2017. IntheBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,in fact,submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’s requestdoesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbe clarifiedbyapublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnot presentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.For thesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnot requiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

400 FederalReserveBulletin|December2017 6. 3800MatlockRoad,Arlington,Texas,76015 7. 2438EastSouthlakeBoulevard,Southlake,Texas76092 8. 2800West7thStreet,FortWorth,Texas76107 9. 5111SanFelipe,Houston,Texas77056 10. 777PostOakBoulevard,Suite700,Houston,Texas77056

LegalDevelopments:ThirdQuarter,2017 401 Synovus Bank Columbus, Georgia OrderApprovingtheAcquisitionof AssetsandAssumptionof Liabilities FRBOrderNo.2017–22(September6,2017) SynovusBank,thestatememberbanksubsidiaryof SynovusFinancialCorp.(“Synovus Financial”),bothof Columbus,Georgia,hasrequestedtheBoard’sapprovalunder section18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)1toacquire substantiallyalltheassetsof,andassumethedepositliabilitiesof,World’sForemostBank, astatenonmembercredit-cardbanksubsidiaryof Cabela’sIncorporated(“Cabela’s”), bothof Sidney,Nebraska. Undertheproposal,SynovusBankwouldassumeallof thedepositsof World’sForemost Bank(totalingapproximately$1.2billion),aswellasapproximately$4.1billionin nondepositliabilities.SynovusBankalsowouldacquiresubstantiallyallof theassetsof World’sForemostBank(equalingapproximately$5.7billion),includingcredit-cardloans andrelatedassets.2 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeengiveninaccordancewiththeBankMergerActandtheBoard’sRulesof Procedure.3Thetimeforsubmittingcommentshasexpired,andtheBoardhasconsideredthe proposalandallcommentsreceivedinlightof thefactorssetforthintheBankMergerAct. SynovusFinancial,withconsolidatedassetsof approximately$30.7billion,isthe59th largestdepositoryorganizationintheUnitedStatesbyassets.4SynovusFinancialisthe 50thlargestinsureddepositoryorganizationintheUnitedStatesbydeposits,controlling depositsthroughSynovusBankof approximately$25.1billion,whichrepresentlessthan 1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnited States.SynovusBankhasofficesinAlabama,Florida,Georgia,SouthCarolina,and Tennessee. World’sForemostBank,withtotalassetsof approximately$5.7billion,operatesasingle bankingofficeinSidney,Nebraska.Thebankisacredit-cardbankand,assuch,engages onlyinalimitedsetof lendinganddeposit-takingactivities.5World’sForemostBankisthe 11thlargestdepositoryorganizationinNebraska,controllingdepositsof approximately $1.2billion,whichrepresent1.9percentof thetotalamountof depositsof insureddepositoryinstitutionsinNebraska. Onconsummationof theproposal,SynovusFinancialwouldcontrolapproximately $26.3billionindepositsthroughSynovusBank.SynovusFinancialwouldbecomethe53rd 1 12U.S.C.§1828(c). 2 InatransactionnotsubjecttoBoardapproval,SynovusBankproposestoselltoCapitalOneBank(USA), NationalAssociation(“CapitalOneBank”),GlenAllen,Virginia,alloftheassetsacquiredfromWorld’sForemostBank.CapitalOneBankalsowouldassumeapproximately$4.1billioninnondepositliabilitiesofWorld’s ForemostBank. 3 12U.S.C.1828(c)(3);12CFR262.3(b). 4 Nationaldeposit,ranking,andmarket-sharedataareasofMarch31,2017.Statedepositrankingdataareas ofJune30,2016.TotalassetsareasofJune30,2017.Inthiscontext,insureddepositoryinstitutionsinclude commercialbanks,savingsbanks,andsavingsassociations. 5 Asacredit-cardbank,World’sForemostBankengagesonlyincredit-cardoperations,doesnotacceptdemand deposits,doesnotacceptdepositsoflessthan$100,000,andotherwiseconformstotherequirementsof section2(c)(2)(F)oftheBankHoldingCompanyActof1956(“BHCAct”).12U.S.C.§1841(c)(2)(F).World’s ForemostBankisnota“bank”forpurposesoftheBHCAct,andCabela’sisnotabankholdingcompany.

402 FederalReserveBulletin|December2017 largestinsureddepositoryorganizationintheUnitedStatesbyassetsandwouldbecome the49thlargestinsureddepositoryorganizationintheUnitedStatesbydeposits.6 Forpurposesof section44of theFDIActandtheBankMergerAct,thehomestateof SynovusBankisGeorgia,andthehomestateof World’sForemostBankisNebraska.7 SynovusBankiswellcapitalizedandwellmanagedunderapplicablelawandhasa“Satisfactory”ratingundertheCommunityReinvestmentActof 1977(“CRA”).Theproposed acquisitionof depositsandassetsof World’sForemostBankwouldnotbeprohibitedby thelawof anystateinwhichWorld’sForemostBankislocated. InterstateandDepositCapAnalyses Section44of theFederalDepositInsuranceAct(“FDIAct”)generallyprovidesthat,if certainconditionsaremet,theBoardmayapproveanapplicationbyabanktoengagein aninterstatetransactionwithabankthathasadifferenthomestatewithoutregardto whetherthetransactionwouldotherwisebeprohibitedunderstatelaw.8TheBoardmay notapproveanapplicationunderthissectionthatwouldpermitanout-of-statebankto engageinaninterstatetransactionwithabankinahoststateif thebanktobeacquired hasnotbeeninexistenceforthelesserof thestatestatutoryminimumperiodof timeor fiveyears.9Inaddition,theBoardmaynotapproveaninterstateapplicationunderthis sectionif thebank,uponconsummationof theproposedtransaction,wouldcontrolmore than10percentof thetotaldepositsof insureddepositoryinstitutionsintheUnitedStates or,incertaincircumstances,thebank,uponconsummation,wouldcontrol30percentor moreof thetotaldepositsof insureddepositoryinstitutionsinanystateinwhichthe acquirerandtargethaveoverlappingbranches.10TheBankMergerActincludesaprohibitiononapprovalof interstatetransactionswheretheapplicantcontrols,or,uponconsummationof theproposedtransaction,wouldcontrol,morethan10percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.11 Forpurposesof section44of theFDIActandtheBankMergerAct,thehomestateof SynovusBankisGeorgia,andthehomestateof World’sForemostBankisNebraska.12 SynovusBankiswellcapitalizedandwellmanagedunderapplicablelawandhasa“Satisfactory”ratingundertheCommunityReinvestmentActof 1977(“CRA”).Theproposed acquisitionof depositsandassetsof World’sForemostBankwouldnotbeprohibitedby thelawof anystateinwhichWorld’sForemostBankislocated. Onconsummationof theproposedtransaction,SynovusBankwouldcontrollessthan 1percentof thetotalamountof consolidateddepositsof insureddepositoryinstitutionsin theUnitedStates.TheBoardhasconsideredallotherrequirementsundersection44of the FDIActandtheBankMergerAct.Inlightof allthefactsof therecord,theBoardmay approvetheproposalundersection44of theFDIActandtheinterstatemergerprovisions of theBankMergerAct. 6 Forpurposesoftheserankings,theBoardassumesthatSynovusBankwouldretainalloftheassetsandliabilitiesthatwouldbeacquiredthroughtheproposal.Thisapproachisdiscussedfurtherbelow. 7 Astatebank’shomestateisthestatebywhichthebankischartered.12U.S.C.§§1828(c)(13)(C)(ii)and 1831u(g)(4).AlthoughWorld’sForemostBankisnotconsideredtobeabankforpurposesoftheBHCAct,it isabankforpurposesofsection44oftheFDIActandtheBankMergerAct. 8 12U.S.C.§1831u(a)(1). 9 12U.S.C.§1831u(a)(5). 10 12U.S.C.§1831u(b)(2). 11 12U.S.C.§1828(c)(13). 12 Astatebank’shomestateisthestatebywhichthebankischartered.12U.S.C.§§1828(c)(13)(C)(ii)and 1831u(g)(4).AlthoughWorld’sForemostBankisnotconsideredtobeabankforpurposesoftheBHCAct,it isabankforpurposesofsection44oftheFDIActandtheBankMergerAct.

LegalDevelopments:ThirdQuarter,2017 403 CompetitiveConsiderations TheBankMergerActprohibitstheBoardfromapprovinganapplicationif theproposal wouldresultinamonopolyorwouldbeinfurtheranceof anyattempttomonopolizethe businessof banking.13TheBankMergerActalsoprohibitstheBoardfromapprovinga proposalthatwouldsubstantiallylessencompetitionortendtocreateamonopolyinany relevantmarket,unlesstheBoardfindsthattheanticompetitiveeffectsof theproposed transactionareclearlyoutweighedinthepublicinterestbytheprobableeffectof thetransactioninmeetingtheconvenienceandneedsof thecommunitiestobeserved.14 SynovusBankandWorld’sForemostBankdonotcompetedirectlyinanylocalretail bankingmarket.TheDepartmentof Justicehasconductedareviewof thepotential competitiveeffectsof theproposalandhasadvisedtheBoardthatconsummationof the proposalwouldnotlikelyhaveasignificantlyadverseeffectoncompetitioninanyrelevant bankingmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedan opportunitytocommentandhavenotobjectedtotheproposal. Basedonallthefactsof record,theBoardconcludesthatconsummationof theproposal wouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesinanyrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations InreviewingaproposalundertheBankMergerAct,theBoardconsidersthefinancialand managerialresourcesandthefutureprospectsof theexistingandproposedinstitutions.15 Initsevaluationof financialfactors,theBoardreviewsinformationregardingthefinancial conditionof theorganizations,aswellasinformationregardingthefinancialconditionof theorganizations’significantnonbankingoperations.Inthisevaluation,theBoard considersavarietyof publicandsupervisoryinformationregardingcapitaladequacy,asset quality,liquidity,andearningsperformance.TheBoardevaluatesthefinancialcondition of thecombinedorganization,includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalso considerstheabilityof theorganizationtoabsorbthecostsof theproposalandto completeeffectivelytheproposedintegrationof theoperationsof theinstitutions.In assessingfinancialfactors,theBoardconsiderscapitaladequacytobeespeciallyimportant. TheBoardconsidersthefutureprospectsof theorganizationsintheproposalinlightof theirfinancialandmanagerialresourcesandtheproposedbusinessplan. TheBoardconsideredthisproposalwithandwithoutregardtotheproposedsaleof the assetsandliabilitiesof World’sForemostBanktoCapitalOneBankbySynovusBank.16 SynovusBankandWorld’sForemostBankarewellcapitalized,andSynovusBankwould remainsoonconsummationof theproposal,includingif itweretoretainsubstantially 13 12U.S.C.§1828(c)(5)(A). 14 12U.S.C.§1828(c)(5)(B). 15 12U.S.C.§1828(c)(5). 16 CommentersallegedthattheproposalhasbeenstructuredtoevadetherequirementsoftheBankMergerAct. CommentersalsoobjecttotheinvolvementofCapitalOneBankinthetransaction,allegingthatCapitalOne Bankhasmanagerialweaknessesanddeficienciesinitscomplianceandanti-money-launderingprograms. CapitalOneBankisanationalbank;theOfficeoftheComptrolleroftheCurrency(“OCC”),andnotthe Board,determineswhetheracombinationresultinginanationalbankrequirespriorapprovalundertheBank MergerAct.TheBoardhasconsultedwiththeOCCinconnectionwiththisproposalandunderstandsthatthe OCCdoesnotobjecttoCapitalOneBank’sacquisitionofthecredit-cardloansandrelatedassetsand assumptionofnondepositliabilitiesofWorld’sForemostBankfromSynovusBank.

404 FederalReserveBulletin|December2017 allof World’sForemostBank’sassetsandliabilities.SynovusBankappearstohave adequatefinancialresourcestoabsorbthecostsof acquiringandintegratingsubstantially allof World’sForemostBank’sassetsanddeposits.Theassetquality,earnings,and liquidityof SynovusBankandWorld’sForemostBankareconsistentwithapproval.In addition,futureprospectsareconsideredconsistentwithapproval. TheBoardalsohasconsideredthemanagerialresourcesof theexistinginstitutionsandof SynovusBankafterconsummationof theproposal.TheBoardhasconsideredSynovus Bank’splansforimplementingtheproposalandhasreviewedtheexaminationrecordsof SynovusBankandWorld’sForemostBank,includingassessmentsof theirmanagement, risk-managementsystems,andoperations.Inaddition,theBoardhasconsideredSynovus Bank’srecordof compliancewithapplicablebanking,consumerprotection,andantimoney-launderinglaws. SynovusBankisconsideredtobewellmanaged,anditsboardof directorsandsenior managementhavesubstantialbankingexperience.Moreover,SynovusBankhasconducted comprehensiveduediligenceandisdevotingsufficientfinancialandotherresourcesto addressthepost-integrationprocessforthisproposal.SynovusBankappearstohavethe managerialandoperationalresourcestoaddressallaspectsof thepost-integrationprocess. SynovusBankalsowouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,SynovusBank’smanagementhastheexperienceand resourcestoensurethatthebankoperatesinasafeandsoundmannerafterconsummation of theproposal. Basedonallthefactsof record,includingSynovusBank’ssupervisoryrecord,managerial andoperationalresources,plansforoperatingthecombinedinstitutionafterconsummation,andpubliccommentsontheproposal,theBoardconcludesthatconsiderations relatingtothefinancialandmanagerialresourcesandfutureprospectsof theexistingand proposedorganizations,aswellastherecordsof effectivenessof SynovusBankand World’sForemostBankincombattingmoney-launderingactivities,areconsistentwith approval. ConvenienceandNeedsConsiderations InactingonaproposalundertheBankMergerAct,theBoardconsiderstheeffectsof the proposalontheconvenienceandneedsof thecommunitiestobeserved.17Initsevaluation of theeffectof theproposalontheconvenienceandneedsof thecommunitiestobeserved, theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneeds of thecommunitiestheyserve,aswellasotherpotentialeffectsof theproposalonthe convenienceandneedsof thecommunitiestobeserved.Inthisevaluation,theBoard placesparticularemphasisontherecordsof therelevantdepositoryinstitutionsunderthe CRA.TheCRArequiresthefederalfinancialsupervisoryagenciestoencourageinsured depositoryinstitutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichthey operate,consistentwiththeirsafeandsoundoperation,18andrequirestheappropriate federalfinancialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingto meetthecreditneedsof itsentirecommunity,includinglow-andmoderate-income (“LMI”)neighborhoods,inevaluatingbankexpansionaryproposals.19 17 12U.S.C.§1828(c)(5). 18 12U.S.C.§2901(b). 19 12U.S.C.§2903.

LegalDevelopments:ThirdQuarter,2017 405 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandrecentfair lendingexaminations.Fairlendinglawsrequirealllendinginstitutionstoprovideapplicantswithequalaccesstocredit,regardlessof theirrace,ethnicity,orcertainothercharacteristics.TheBoardalsoconsidersassessmentsof otherrelevantsupervisors,thesupervisoryviewsof examiners,othersupervisoryinformation,informationprovidedbytheapplicant,andcommentsreceivedontheproposal.TheBoardalsomayconsidertheapplicant institution’sbusinessmodel,itsmarketingandoutreachplans,theorganizations’plans afterconsummation,andanyotherinformationtheBoarddeemsrelevant. Inassessingtheconvenienceandneedsfactorinthiscase,theBoardhasconsideredallthe factsof record,includingreportsof examinationof theCRAperformanceof Synovus BankandWorld’sForemostBank;thefairlendingandcompliancerecordsof bothbanks; thesupervisoryviewsof theFederalDepositInsuranceCorporation(“FDIC”)andthe ConsumerFinancialProtectionBureau(“CFPB”);confidentialsupervisoryinformation; informationprovidedbySynovusBank;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal TheBoardreceivedcommentsfromacommenterwhoobjectedtotheproposal,alleging, basedondatafor2015reportedundertheHomeMortgageDisclosureActof 1975 (“HMDA”),20thatSynovusBankmadeadisproportionatelylownumberof home purchaseloanstoAfricanAmericanandHispanicborrowers,ascomparedtowhite borrowers,intheAtlanta–SandySprings–Roswell,Georgia,MetropolitanStatisticalArea (“AtlantaMSA”);thatSynovusBankmadeadisproportionatelylownumberof home purchaseloanstoAfricanAmericanborrowersintheBirmingham–Hoover,Alabama, MSA(“BirminghamMSA”);andthatSynovusMortgagemadeadisproportionatelylow numberof homemortgageloanstoAfricanAmericanandHispanicborrowersinthe Charlotte–Concord–Gastonia,NorthCarolina–SouthCarolinaMSA(“Charlotte MSA”).21AsecondcommenterobjectedtotheproposalallegingthatSynovusBank’s CRAandfairlendingrecordsareworsethanthoseof itspeerinstitutionsinseveral markets,includingAtlantaandColumbus,bothinGeorgia;ColumbiaandCharleston, bothinSouthCarolina;Nashville,Tennessee;andCharlotte,NorthCarolina.The commenteralsoallegedthatSynovusBankreceived“lowsatisfactory”ratingsforitsCRA lendingtestperformanceinSouthCarolinaandtheChattanooga,Tennessee–Georgia, MSA(“ChattanoogaMSA”),anda“needstoimprove”ratingforthebank’sperformance inthestateof Tennessee.Thecommenteralsoallegedthatthebankmakestoofewhome mortgageloanstoAfricanAmericanandLMIborrowersandinminoritycensustracts. ThecommenterassertedthatSynovusBankshouldincreaseitslevelof communitydevelopmentlendingandinvestmentandthatSynovusBankhasnotdemonstratedthata significantpublicbenefitwouldresultfromtheproposal. Businessof theInvolvedInstitutionsandResponsetoComments SynovusFinancialandSynovusBankofferarangeof financialproductsandservicesto individualsandbusinesses.ThroughitsbranchnetworkinAlabama,Florida,Georgia, SouthCarolina,andTennessee,SynovusBankoffersbankingproductsandservicestoits 20 12U.S.C.§2801etseq. 21 Acommenteralsoobjectedtotheproposalonthebasisofallegeddisparitiesinthenumberofconventional homepurchaseloansCapitalOneBankdeniedforAfricanAmericanandHispanicborrowersascomparedto whiteborrowers.ThecommenteralsonotedthatCapitalOneBankproposestoclosebranchesinLaurel, Gaithersburg,Frederick,andMerrifield,allinMaryland.CapitalOneBank’srecordofHMDAlendingand branchclosingsarebeyondthejurisdictionoftheBoardtoconsiderwhenreviewingtheapplicationby SynovusBankundertheBankMergerAct.AnyreviewofCapitalOneBank’scomplianceandHMDAlending recordsandbranchclosingproposalswouldbewithinthepurviewoftheOCC.

406 FederalReserveBulletin|December2017 customers,includingconsumer-andcommercial-bankingservices,mortgagelending, treasurymanagement,andinvestmentservices. World’sForemostBankisacredit-cardbankthatengagesinonlyalimitedsetof lending anddeposit-takingactivities.Thebankhasoneretailofficeandacceptsonlycertaintypes of deposits. Inresponsetothecommenters’allegations,SynovusBankstatesthatithasoperatedasa community-orientedfinancialinstitutionsinceitsfoundingandthatitoffersavarietyof loananddepositproductsandotherservicesthatmeetthefinancialneedsof itscommunities,includingLMIindividualsandsmallbusinesses.SynovusBankrepresentsthatithas implementedpoliciesandprocedurestoensurecompliancewithallconsumer-protection andfairlendinglawsandregulationsandconductsregularreviewsof itspoliciesand procedures.SynovusBankfurtherrepresentsthatitisinvolvedwithcommunitydevelopmentorganizationsthatfocusoneconomicdevelopmentandaffordablehousingopportunitiesforLMIindividualsandcommunities. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performancerecordinlightof examinationsbytheappropriatefederalsupervisorsof the CRAperformancerecordsof therelevantinstitution,aswellasinformationandviews providedbytheappropriatefederalsupervisors.22 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’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 thecompany’slending,includingtheproportionanddispersion of theinstitution’slendinginitsassessmentareasandthenumberandamountsof loans inlow-,moderate-,middle-,andupper-incomegeographies;(3)thedistributionof loans basedonborrowercharacteristics,including,forhomemortgageloans,thenumberand 22 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81Fed.Reg.48506,48548 (July25,2016). 23 12U.S.C.§2906.

LegalDevelopments:ThirdQuarter,2017 407 amountsof loanstolow-,moderate-,middle-,andupper-incomeindividuals;24(4)the institution’scommunitydevelopmentlending,includingthenumberandamountsof communitydevelopmentloansandtheircomplexityandinnovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticestoaddressthecreditneedsof LMI individualsandgeographies. TheCRApermitsabanktoapplytoitsprimaryfederalregulatortobedesignatedasa wholesaleoralimited-purposebank.25TheCRAperformanceof awholesaleorlimitedpurposebankisassessedbyevaluatingthebank’scommunitydevelopmentactivities.26 Thisevaluationinvolvesanassessmentof (1)thenumberandamountsof community developmentloans(includingoriginationsandpurchasesof loans,andothercommunity developmentloandataprovidedbythebank,suchasdataonloansoutstanding,commitments,andlettersof credit),qualifiedinvestments,orcommunitydevelopmentservices; (2)theuseof innovativeorcomplexqualifiedinvestments,communitydevelopmentloans, orcommunitydevelopmentservices,andtheextenttowhichtheinvestmentsarenot routinelyprovidedbyprivateinvestors;and(3)thebank’sresponsivenesstocreditand communitydevelopmentneeds.27Basedonitsbusinessactivities,World’sForemostBank hasbeendesignatedasalimited-purposebank. Asnotedabove,twocommentersallegethatHMDAdatareportedfor2015bySynovus BankshowthatSynovusBankmadeadisproportionatelylownumberof conventional homepurchaseandrefinanceloanstominorityborrowersinseveralof itsassessment areas.TheBoardisconcernedwhenHMDAdatareflectdisparitiesintheratesof loan applications,originations,anddenialsamongmembersof differentracialorethnicgroups inlocalareas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesandprogramsataninstitutionformeetingitsobligationstoextendcreditfairly. However,otherinformationcriticaltoaninstitution’screditdecisionsisnotavailablefrom HMDAdata.28Consequently,HMDAdatadisparitiesmustbeevaluatedinthecontextof otherinformationregardingthelendingrecordof aninstitution.Inthiscase,asnoted above,theBoardhasconsideredallthefactsof record,includingthefairlendingand compliancerecordsof bothbanks;thesupervisoryviewsof theFDICandtheCFPB; confidentialsupervisoryinformation;informationprovidedbySynovusBank;andthe publiccommentsreceivedontheproposal. CRAPerformanceof SynovusBank SynovusBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheFDIC,asof October7,2013(“SynovusBankEvaluation”).29 24 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloanstobusinessesand farmswithgrossannualrevenuesof$1millionorless;smallbusinessandsmallfarmloansbyloanamountat origination;andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals.See, e.g.,12CFR228.22(b)(3). 25 12CFR228.25.Alimited-purposebankisonethatoffersonlyanarrowproductline(suchascredit-cardor motor-vehicleloans)toaregionalorbroadermarketandforwhichadesignationasalimited-purposebankis ineffect.Awholesalebankisonethatisnotinthebusinessofextendinghomemortgage,smallbusiness,small farm,orconsumerloanstoretailcustomers. 26 12CFR228.25(c). 27 Id. 28 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws. 29 TheSynovusBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.FDICexaminersreviewedhomemortgagelendingfrom2011throughJune30,2013.FDICexaminersreviewedsmallbusinessandcommunitydevelopmentloansfrom2011throughJune30,2013.FDICexaminersreviewed communitydevelopmentloans,donations(investments),andcommunitydevelopmentservicesfromJanuary1, 2011,throughSeptember30,2013.TheSynovusBankEvaluationcoveredSynovusBank’s45assessmentareas

408 FederalReserveBulletin|December2017 SynovusBankreceived“HighSatisfactory”ratingsfortheLendingTestandServiceTest anda“LowSatisfactory”ratingfortheInvestmentTest. FDICexaminersfoundthatSynovusBank’soveralllendinglevelsreflectedexcellent responsivenesstoassessmentareacreditneeds.Accordingtoexaminers,thebank’s geographicdistributionof loansreflectedverygoodpenetrationthroughoutthebank’s assessmentareas.Examinersalsofoundthatthebank’sdistributionof borrowersreflected goodpenetrationamongretailcustomersof differentincomelevelsandbusinesscustomers of differentsizes.FDICexaminersnotedthatSynovusBankexhibitedagoodrecordof servingthecreditneedsof themosteconomicallydisadvantagedareasof itsassessment areas,whichincludelow-incomeindividualsandverysmallbusinesses.Examinersalso foundthatSynovusBankusedinnovativeandflexiblelendingprogramstoserveitsassessmentareacreditneeds.ExaminersnotedthatSynovusBankmadeanadequatelevelof communitydevelopmentloans. Inseveralareasof concerntothecommenters,FDICexaminersfoundthatSynovus Bank’sdistributionof borrowersreflectedeitheragoodoranadequatepenetrationof smallbusinessloansandamongindividualsof differentincomelevels,includingLMIindividuals.30FDICexaminersnotedthatthebank’sgeographicdistributionof smallbusinessandhomemortgageloansreflectedeithergoodoradequatepenetrationthroughout manyof thebank’sassessmentareas.31ExaminersfurthernotedthatSynovusBank providedagoodarrayof innovativeorflexiblelendingprogramsinmanyareasof concern tothecommenters.32FDICexaminersalsonotedthatthebank’srecordof community developmentlendingwaseitherexcellent,good,oradequateinmanyof thebank’sassessmentareas.33 IntheChattanoogaMSA,anotherareaof concerntoacommenter,FDICexaminers foundthatthebank’ssmallbusinesslendinginLMIcensustractswasgenerallyadequate. ExaminersnotedthatSynovusBank’sdistributionof homemortgageloansintheassessmentareareflectedlimitedoriginationsinmoderate-andlow-incomegeographies.FDIC examinersfurthernotedthatsmallbusinesslendingamongbusinessesof differentsizeswas generallyadequate,andthebankoriginatedalimitednumberof homemortgageloansto LMIborrowers. FDICexaminersfoundthatSynovusBankhadanadequatelevelof qualifiedcommunity developmentinvestmentsandgrants.Examinersnotedthattheseinvestmentsandgrants exhibitedagoodresponsivenesstocreditandcommunitydevelopmentneeds.Thebank madequalifiedinvestmentsinmortgagebackedsecuritiescollateralizedbymortgageloans madetoLMIborrowers.ThebankalsoinvestedinU.S.HousingandUrbanDeveloplocatedinfivestatesandtwomultistateMSAs:Alabama;Florida;Georgia;SouthCarolina;Tennessee;the ChattanoogaMSA;andtheColumbus,Georgia–Alabama,MSA(“ColumbusMSA”).TheSynovusBank Evaluationincludedafull-scopereviewof11oftheseassessmentareas,includingbothmultistateMSAsand theAtlantaMSA;theBirminghamMSA;theColumbia,SouthCarolina,MSA(“ColumbiaMSA”);the Charleston–NorthCharleston,SouthCarolina,MSA(“CharlestonMSA”);andtheNashville–Davidson– Murfreesboro–Franklin,Tennessee,MSA(“NashvilleMSA”).Alimited-scopereviewwasconductedinthe remaining34assessmentareas.TheSynovusBankEvaluationwasreleasedonSeptember1,2015. 30 Examinersnotedgoodpenetrationofsmallbusinessloansandamongindividualsofdifferentincomelevelsin theCharleston,Columbia,Columbus,andNashvilleMSAs,aswellasinTennessee.Examinersfoundadequate penetrationintheAtlantaMSA. 31 Examinersnotedthatthebank’sdistributionofsmallbusinessandhomemortgageloansreflectedgood penetrationintheBirmingham,Charleston,andColumbusMSAs,aswellasinTennessee.Examinersfound adequatepenetrationintheColumbiaMSAandinSouthCarolina. 32 TheseareasincludetheColumbia,Columbus,andCharlestonMSAsandSouthCarolina. 33 ExaminersnotedexcellentcommunitydevelopmentlendingintheCharlestonMSA,goodcommunitydevelopmentlendingintheAtlantaMSAandinSouthCarolina,andadequatecommunitydevelopmentlendinginthe ColumbusMSAandinTennessee.

LegalDevelopments:ThirdQuarter,2017 409 mentbonds,Low-IncomeHousingTaxcreditfunds,SmallBusinessInvestmentCorporationfunds,andcommunityreinvestmentpartnerprojects. FDICexaminersfoundthatSynovusBank’sdeliverysystemswereaccessibletoessentially allportionsof thebank’sassessmentareas.Examinersalsonotedthat,totheextent changeshavebeenmade,SynovusBankdidnotadverselyaffecttheaccessibilityof its deliverysystemsinLMIgeographiesortoLMIindividuals.FDICexaminersfurthernoted thatthebankprovidedarelativelyhighlevelof communitydevelopmentservices.ExaminersindicatedthatSynovusBank’sofficersandemployeesservedinpositionsatlocaland statewideorganizationsthataddressawiderangeof communityneeds,includingafocus onaffordablehousing,economicdevelopment,smallbusinessdevelopment,financial education,servicesforat-riskyouth,andservicestoLMIindividualsandareas. Inseveralareasof concerntothecommenters,FDICexaminersfoundthatthebank’s deliverysystemswereeitheraccessibletoessentiallyallportionsof thebank’sassessment areasorwerereasonablyaccessibletoessentiallyallportionsof thebank’sassessment areas.34ExaminersalsonotedthatSynovusBankprovidedeitherahighoranadequate levelof communitydevelopmentservicesthatbenefitedorganizationswithinthebank’s assessmentareas.35Inseveralareasof concerntothecommenters,examinersnotedthatthe bank’sservicesweretailoredtotheneedsof itsassessmentareas.36 IntheNashvilleMSA,anotherareaof concerntoacommenter,FDICexaminersnoted thatthebank’sdeliverysystemswereaccessibletolimitedportionsof theassessmentarea. Examinersalsofoundthatthebankprovidedalimitedlevelof communitydevelopment serviceswithintheassessmentarea. InTennessee,anotherareaof concerntoacommenter,FDICexaminersnotedthat SynovusBankprovidedanadequatelevelof communitydevelopmentservicesthat benefitedorganizationsthroughoutTennessee.Examinersfurthernotedthattheofficers, directors,andemployeesof thebankwereinvolvedincommunitydevelopmentorganizationsthatprovidedaffordablehousing,smallbusinessassistance,economicdevelopment, andcommunityservicesforLMIindividualsandincomeareas.Examinersnotedthatno branchesorATMswerelocatedinLMIcensustracts. SynovusBank’sEffortssincethe2013CRAEvaluation SynovusBankrepresentsthatithascontinuedtohelpservethecreditneedsof allof its assessmentareassincetheSynovusBankEvaluation.SynovusBankrepresentsthatithas originatedcommunitydevelopmentloansthatwereresponsivetocommunityneeds, includingloansforLMIindividualsandinLMIgeographies.SynovusBankalsorepresents thatitparticipatesinastatewidelendingconsortiumthatprovidesaffordablehousing throughoutAlabama. Inaddition,SynovusBankrepresentsthatitprovidesanadequatelevelof qualifiedCRA investmentsthatareresponsivetocommunitydevelopmentneeds,includingfundingfor low-incomehousingprojectsandinvestmentsinmortgage-backedsecuritiesthatarecollateralizedbymortgageloansmadetoLMIborrowers.SynovusBankrepresentsthatitsoffi- 34 Examinersnotedthatthebank’sdeliverysystemswereaccessibletoessentiallyallportionsofthebank’sassessmentareasintheAtlanta,Chattanooga,andColumbusMSAs,andwerereasonablyaccessibleinthe Birmingham,Charleston,andColumbiaMSAs,aswellasinSouthCarolina. 35 ExaminersnotedthatthebankprovidedahighlevelofcommunitydevelopmentservicesintheAtlantaand BirminghamMSAsandanadequatelevelintheChattanooga,Columbia,andColumbusMSAs,aswellasin SouthCarolina. 36 TheseareasincludetheChattanoogaandColumbusMSAsandSouthCarolina.

410 FederalReserveBulletin|December2017 cers,directors,andemployeesengageinactivitiesthatsupportaffordablehousingforLMI individualsandeconomicdevelopmentof LMIgeographies.Thebankfurtherrepresents thatitparticipatesinprogramswiththeSmallBusinessAdministrationtohelpmeetthe creditneedsof smallbusinesses.SynovusBankalsorepresentsthatithasaCRAmortgage loanprogramthatprovidesLMIborrowersintheAtlantaandBirminghamMSAswith financingforpurchasesorrefinancingforowner-occupiedresidencesandanotherCRA mortgageloanprogramofferedinthebank’sfive-statefootprintthatprovidesdownpaymentassistancetoLMIborrowers. CRAPerformanceof World’sForemostBank World’sForemostBankwasassignedanoverall“Satisfactory”ratingatitsmostrecent CRAperformanceevaluationbytheFDIC,asof August18,2014(“World’sForemost BankEvaluation”).37 FDICexaminersnotedthatWorld’sForemostBankhadanadequatelevelof community developmentservicesandqualifiedinvestments.Examinersfoundthatthebankoccasionallyusedinnovativeandcomplexqualifiedinvestmentsandcommunitydevelopment services.Further,FDICexaminersnotedthatthebank’squalifiedinvestmentshelpedto provideaffordablehousingandrevitalizeandstabilizeunderservednonmetropolitan middle-incomegeographiesandprovidedcommunityservicestoLMIindividuals.ExaminersalsofoundthatWorld’sForemostBankexhibitedadequateresponsivenesstocredit andcommunityeconomicdevelopmentneedsinitsassessmentarea.Examinersnotedthat thebankprovidedcommunitydevelopmentactivitiesthatsupportedhealthservices,education,publicsafety,publicservices,andaffordablehousing.38 World’sForemostBank’sEffortssincethe2014CRAEvaluation SynovusBankrepresentsthatWorld’sForemostBankhascontinuedtohelpmeetthe communitydevelopmentneedsof itsassessmentareasincetheWorld’sForemostBank Evaluation.SynovusBankrepresentsthatWorld’sForemostBankhascontinuedto provideCRA-qualifiedinvestmentsandcommunitydevelopmentservices.SynovusBank alsorepresentsthatWorld’sForemostBank’sinvestmentssupporteconomicdevelopment projects,helptoprovideaffordablehousing,andprovideservicesforat-riskyouthand woundedveterans.SynovusBankrepresentsthatWorld’sForemostBank’scommunity developmentservicessupportfinancialliteracyandprovidementoringtoyoungpeople. AdditionalSupervisoryViews TheBoardhasconsideredtheresultsof arecentconsumercompliancereviewconducted byexaminersof theFederalReserveBankof Atlanta(“ReserveBank”),whichincludeda 37 TheWorld’sForemostBankEvaluationwasconductedusinglimitedpurposeCRAexaminationprocedures. Thelimitedpurposeevaluationreviewedthebank’scommunitydevelopmentlending;qualifiedinvestmentsor communitydevelopmentservices;useofinnovativeorcomplexqualifiedinvestments;communitydevelopment loansorcommunitydevelopmentservices;andthebank’sresponsivenesstocommunitydevelopmentcredit needswithinitsassessmentarea.TheevaluationperiodwasfromFebruary19,2013,toAugust18,2014.The World’sForemostBankEvaluationincludedareviewofthebank’sassessmentareainCheyenneCounty, Nebraska. 38 OnecommenterallegedthatWorld’sForemostBankpreviouslyreceivedless-than-satisfactoryCRAratings duetoviolationsoftheEqualCreditOpportunityActandtheUnfairorDeceptiveActsorPracticesprovision oftheFederalTradeCommissionAct.Asof2014,FDICexaminersfoundWorld’sForemostBank’sCRA performancetobe“Satisfactory.”NoconsumercompliancefunctionsofWorld’sForemostBankwouldbe acquiredbySynovusBankaspartoftheproposal.

LegalDevelopments:ThirdQuarter,2017 411 reviewof SynovusBank’sconsumercomplianceriskmanagementprogram.39TheFDIC andtheCFPBalsohaveconductedexaminationsof SynovusBank’scompliancewithfair lendinglawsandregulations.Aspartof itsconsumercomplianceexaminationin2013,the FDICconductedareviewof thebank’sfairlendingpolicies,procedures,andpractices, includingareviewof thebank’sresidentialmortgageproducts,itsunderwritingandpricing practices,anditslendingpolicies.TheCFPBalsoconductedafairlendingreviewof the mortgageoriginationactivitiesof SynovusBankanditswhollyownedsubsidiary,Synovus MortgageCorporation,includingareviewof thebank’scomplianceprogram,policies andprocedures,andtraining. TheBoardhastakentheresultsof theseexaminationsintoaccountinevaluatingthis proposal,includinginconsideringwhetherSynovusBankhastheexperienceandresources toensurethatthecombinedorganizationwouldeffectivelyimplementpoliciesand programsthatwouldallowthecombinedorganizationtoservethecreditneedsof allthe communitieswithinthefirm’sassessmentareas. AdditionalConvenienceandNeedsConsiderations TheBoardalsohasconsideredotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.SynovusBankrepresentsthatitwould continuetoofferthesameproductsandservicesandthat,asaresultof theproposal,the bankwillnotchangeordiscontinueanyproductsorservicescurrentlybeingoffered. SynovusBankfurtherrepresentsthattheincreaseindepositswillallowthebanktoprovide greaterretailbankingandcommunitydevelopmentservicestoallof thecommunitiesit serves,includingLMIneighborhoodsthroughincreasedloangenerationinitsretail, commercial,andmortgageprograms.40 ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtherecordsof therelevant depositoryinstitutionsundertheCRA;theinstitutions’recordsof compliancewithfair lendingandotherconsumerprotectionlaws;supervisoryviewsof theFDICandCFPB; confidentialsupervisoryinformation;informationprovidedbySynovusBank;public commentsontheproposal;andotherpotentialeffectsof theproposalontheconvenience andneedsof thecommunitiestobeserved.Basedonthatreview,theBoardconcludesthat theconvenienceandneedsfactorisconsistentwithapproval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) added“risktothestabilityof theUnitedStatesbankingorfinancialsystem”asafactor thatmustbeconsideredundertheBankMergerAct.41 39 SynovusBankwassubjecttotheFDIC’sjurisdictionuntilNovember2016whenitbecameastatemember bank.PriortotheBoard’sapprovalofSynovusBank’smembershipapplication,ReserveBankexaminers conductedareviewofSynovusBank’spolicies,procedures,practices,andsystems. 40 OnecommenterurgedtheBoardtoapprovetheapplicationontheconditionthatSynovusBankadoptand successfullyimplementacommunitybenefitsplan.TheBoardhasconsistentlyfoundthatneithertheCRAnor thefederalbankingagencies’CRAregulationsrequiredepositoryinstitutionstomakepledgesorenterinto commitmentsoragreementswithanyorganization.See,e.g.,CITGroup,Inc.,FRBOrderNo.2015-20at24 n.54(July19,2015);CitigroupInc.,88FederalReserveBulletin485(2002);FifthThirdBancorp,80Federal ReserveBulletin838,841(1994).Initsevaluation,theBoardreviewstheexistingCRAperformancerecordof anapplicantandtheprogramsthattheapplicanthasinplacetoservethecreditneedsofitsCRAassessment areas. 41 Dodd-FrankAct§604(f),Pub.L.No.111-203,124Stat.1376,1602(2010),amending12U.S.C.§1828(c)(5).

412 FederalReserveBulletin|December2017 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.42These categoriesarenotexhaustive,andadditionalcategoriescouldinformtheBoard’sdecision.Inadditiontothesequantitativemeasures,theBoardconsidersqualitativefactors, suchastheopaquenessandcomplexityof aninstitution’sinternalorganization,thatare indicativeof therelativedegreeof difficultyof resolvingtheresultingfirm.Afinancial institutionthatcanberesolvedinanorderlymannerislesslikelytoinflictmaterialdamage tothebroadereconomy.43 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.44 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Theproforma organizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complexinterrelationships,oruniquecharacteristicsthatwouldcomplicateresolutionof theresultingbankintheeventof financialdistress.Inaddition,the resultingbankwouldnotbeacriticalservicesproviderorsointerconnectedwithother firmsorthemarketsthatitwouldposesignificantrisktothefinancialsystemintheevent of financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.45Inreachingitsconclusion,theBoardhasconsid- 42 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 43 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 44 SeePeople’sUnitedFinancial,Inc.,FRBOrderNo.2017-08at25–26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 45 AcommenterrequestedthattheBoardholdpublichearingsormeetingsontheproposal.TheBankMerger ActdoesnotrequirethattheBoardholdapublicmeetingorapublichearingonanyapplication.Underits rules,theBoardmay,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsan opportunitytoproviderelevanttestimonywhenwrittencommentswouldnotadequatelyrepresenttheirviews. TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.IntheBoard’sview,the commenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submittedwritten

LegalDevelopments:ThirdQuarter,2017 413 eredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BankMergerActandotherapplicablestatutes.TheBoard’sapprovalisspecificallyconditionedoncompliancebySynovusBankwithallof theconditionsimposedinthisorder, includingreceiptof allrequiredregulatoryapprovals,andonthecommitmentsmadetothe Boardinconnectionwiththeapplication.Forpurposesof thisaction,theconditionsand commitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnection withitsfindingsanddecisionhereinand,assuch,maybeenforcedinproceedingsunder applicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisorderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardortheReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveSeptember6,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. commentsthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdidnotidentify disputedissuesoffactmaterialtotheBoard’sdecisionthatwouldbeclarifiedbyapublicmeeting.Inaddition, therequestdidnotdemonstratewhywrittencommentsdonotpresentthecommenter’sviewsadequatelyor whyahearingormeetingotherwisewouldbenecessaryorappropriate.Forthesereasons,andbasedonallthe factsofrecord,theBoardhasdeterminedthatapublichearingormeetingisnotrequiredorwarrantedinthis case.Accordingly,therequestforapublichearingormeetingontheproposalisdenied.

414 FederalReserveBulletin|December2017 Orders Issued Under Federal Reserve Act Veritex Holdings, Inc. Dallas, Texas OrderApprovingtheMergerof BankHoldingCompanies,theMergerof Banks,andthe Establishmentof Branches FRBOrderNo.2017–18(July6,2017) VeritexHoldings,Inc.(“VeritexHoldings”),Dallas,Texas,abankholdingcompanywithin themeaningof theBankHoldingCompanyActof 1956(“BHCAct”),1hasrequestedthe Board’sapprovalundersection3of theBHCAct2tomergewithSovereignBancshares, Inc.(“SovereignBancshares”),andtherebyindirectlyacquireSovereignBank,bothof Dallas,Texas. Inaddition,VeritexHoldings’subsidiarystatememberbank,VeritexCommunityBank (“VeritexBank”),Dallas,Texas,hasrequestedtheBoard’sapprovalundersection18(c)of theFederalDepositInsuranceAct(“BankMergerAct”)tomergewithSovereignBank, withVeritexBankasthesurvivingentity.3VeritexBankalsohasappliedundersection9of theFederalReserveAct(“FRA”)toestablishandoperatebranchesatthemainofficeand branchesof SovereignBank.4 Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublished(82FederalRegister8425(January25,2017)).5Thetimeforsubmitting commentshasexpired,andtheBoardhasconsideredtheproposalandallcomments receivedinlightof thefactorssetforthinsection3of theBHCAct,theBankMergerAct, andtheFRA.AsrequiredbytheBankMergerAct,areportonthecompetitiveeffectsof themergerwasrequestedfromtheUnitedStatesAttorneyGeneral,andacopyof the requesthasbeenprovidedtotheFederalDepositInsuranceCorporation(“FDIC”). VeritexHoldings,withconsolidatedassetsof approximately$1.4billion,isthe524th largestinsureddepositoryorganizationintheUnitedStates.6VeritexHoldingscontrols approximately$1.1billioninconsolidateddeposits,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsintheUnitedStates.7 VeritexHoldingscontrolsVeritexBank,whichoperatesonlyinTexas.VeritexHoldingsis the64thlargestinsureddepositoryorganizationinTexas,controllingdepositsof approximately$1.0billion,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate.8 SovereignBancshares,withconsolidatedassetsof approximately$1.1billion,isthe670th largestinsureddepositoryorganizationintheUnitedStates,controllingapproximately $857.3millioninconsolidateddeposits,whichrepresentlessthan1percentof thetotal amountof depositsof insureddepositoryinstitutionsintheUnitedStates.Sovereign BancsharescontrolsSovereignBank,whichoperatesonlyinTexas.SovereignBancsharesis 1 12U.S.C.§1841etseq. 2 12U.S.C.§1842. 3 12U.S.C.§1828(c). 4 12U.S.C.§321.TheselocationsarelistedintheAppendix. 5 12CFR262.3(b). 6 Nationalassetdata,marketshare,andrankingdataareasofDecember31,2016,unlessotherwisenoted. 7 Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,creditunions,savingsandloanassociations,andsavingsbanks. 8 Stateassetdata,marketshare,andrankingdataareasofJune30,2016,unlessotherwisenoted.

LegalDevelopments:ThirdQuarter,2017 415 the80thlargestinsureddepositoryorganizationinTexas,controllingdepositsof approximately$814.7million,whichrepresentlessthan1percentof thetotaldepositsof insured depositoryinstitutionsinthatstate. Onconsummationof thisproposal,VeritexHoldingswouldbecomethe338thlargest insureddepositoryorganizationintheUnitedStates,withconsolidatedassetsof approximately$2.5billion,whichrepresentlessthan1percentof thetotalassetsof insureddepositoryinstitutionsintheUnitedStates.VeritexHoldingswouldcontrolconsolidateddeposits of approximately$2.0billion,whichrepresentlessthan1percentof thetotalamountof depositsof insureddepositoryorganizationsintheUnitedStates.VeritexHoldingswould becomethe38thlargestinsureddepositoryorganizationinTexas,controllingdeposits representinglessthan1percentof thetotaldepositsof insureddepositoryinstitutionsin thatstate. CompetitiveConsiderations Section3of theBHCActandtheBankMergerActprohibittheBoardfromapprovinga proposalthatwouldresultinamonopolyorwouldbeinfurtheranceof anattemptto monopolizethebusinessof bankinginanyrelevantmarket.9Bothstatutesalsoprohibitthe Boardfromapprovingaproposalthatwouldsubstantiallylessencompetitionortendto createamonopolyinanybankingmarket,unlesstheanticompetitiveeffectsof the proposalareclearlyoutweighedinthepublicinterestbytheprobableeffectof theproposal inmeetingtheconvenienceandneedsof thecommunitytobeserved.10 VeritexHoldingsandSovereignBancshareshavesubsidiarydepositoryinstitutionsthat competedirectlyintheDallas,Texas,bankingmarket(“Dallasmarket”).11TheBoardhas consideredthecompetitiveeffectsof theproposalinthisbankingmarket.Inparticular,the Boardhasconsideredthenumberof competitorsthatwouldremaininthemarket;therelativesharesof totaldepositsininsureddepositoryinstitutionsinthemarket(“market deposits”)thatVeritexHoldingswouldcontrol;12theconcentrationlevelsof market depositsandtheincreaseintheselevelsasmeasuredbytheHerfindahl-HirschmanIndex (“HHI”)undertheDepartmentof JusticeBankMergerCompetitiveReviewguidelines (“DOJBankMergerGuidelines”);13andothercharacteristicsof themarket. 9 12U.S.C.§§1842(c)(1)and1828(c)(5). 10 12U.S.C.§§1842(c)(1)(B)and1828(c)(5)(B). 11 TheDallasmarketincludesDallasandRockwallcounties;thesoutheasternquadrantofDentonCounty, includingDentonandLewisville;thesouthwesternquadrantofCollinCounty,includingMcKinneyand Plano;thecommunitiesofForneyandTerrellinKaufmanCounty;andMidlothian,WaxahachieandFerrisin EllisCounty,allinTexas. 12 LocaldepositandmarketsharedataareasofJune30,2016,andarebasedoncalculationsinwhichthe depositsofthriftinstitutionsareincludedat50percent.TheBoardpreviouslyhasindicatedthatthriftinstitutionshavebecome,orhavethepotentialtobecome,significantcompetitorstocommercialbanks.See,e.g., MidwestFinancialGroup,75FederalReserveBulletin386(1989)andNationalCityCorporation,70Federal ReserveBulletin743(1984).Thus,theBoardregularlyhasincludedthriftdepositsinthemarketsharecalculationona50percentweightedbasis.See,e.g.,FirstHawaiian,Inc.,77FederalReserveBulletin52(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),availableatwww.justice.gov/opa/pr/ 2010/August/10-at-938.html.

416 FederalReserveBulletin|December2017 Consummationof theproposalwouldbeconsistentwithBoardprecedentandwithinthe thresholdsintheDOJBankMergerGuidelinesfortheDallasmarket.Onconsummation of theproposal,theDallasmarketwouldremainmoderatelyconcentrated,asmeasuredby theHHI,accordingtotheDOJBankMergerGuidelines.ThechangeinHHIinthis marketwouldbesmall,andnumerouscompetitorswouldremaininthemarket.14 TheDOJalsohasconductedareviewof thepotentialcompetitiveeffectsof theproposal andhasadvisedtheBoardthatconsummationof theproposalwouldnotlikelyhavea significantlyadverseeffectoncompetitioninanyrelevantbankingmarket,includingthe Dallasmarket.Inaddition,theappropriatebankingagencieshavebeenaffordedanopportunitytocommentandhavenotobjectedtotheproposal. Basedonallof thefactsof record,theBoardconcludesthatconsummationof the proposalwouldnothaveasignificantlyadverseeffectoncompetitionorontheconcentrationof resourcesintheDallasmarketorinanyotherrelevantbankingmarket.Accordingly,theBoarddeterminesthatcompetitiveconsiderationsareconsistentwithapproval. Financial,Managerial,andOtherSupervisoryConsiderations Inreviewingaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsidersthefinancialandmanagerialresourcesandthefutureprospectsof the institutionsinvolved.15Initsevaluationof thefinancialfactors,theBoardreviewsinformationregardingthefinancialconditionof theorganizationsinvolvedonbothparent-only andconsolidatedbases,aswellasinformationregardingthefinancialconditionof the subsidiarydepositoryinstitutionsandtheorganizations’significantnonbankingoperations.Inthisevaluation,theBoardconsidersavarietyof information,includingcapital adequacy,assetquality,andearningsperformance,aswellaspubliccommentsonthe proposal.TheBoardevaluatesthefinancialconditionof thecombinedorganization, includingitscapitalposition,assetquality,liquidity,earningsprospects,andtheimpactof theproposedfundingof thetransaction.TheBoardalsoconsiderstheabilityof the organizationtoabsorbthecostsof theproposalandtocompletetheproposedintegration of theoperationsof theinstitutions.Inassessingfinancialfactors,theBoardconsiders capitaladequacytobeespeciallyimportant.TheBoardconsidersthefutureprospectsof theorganizationsinvolvedintheproposalinlightof theirfinancialandmanagerial resourcesandtheproposedbusinessplan. VeritexHoldingsandSovereignBancsharesarebothwellcapitalized,andthecombined entitywouldremainsoonconsummationof theproposedtransaction.Theproposed transactionisabankholdingcompanymerger,withasubsequentmergerof VeritexBank andSovereignBank.16Theassetquality,earnings,andliquidityof bothVeritexBank 14 VeritexHoldingsoperatesthe23rdlargestdepositoryinstitutionintheDallasmarket,controllingapproximately$1.0billionindeposits,whichrepresentlessthan1percentofmarketdeposits.SovereignBancshares operatesthe28thlargestdepositoryinstitutioninthesamemarket,controllingapproximately$539.7millionin deposits,whichrepresentlessthan1percentofmarketdeposits.Onconsummationoftheproposedtransaction,VeritexHoldingswouldbecomethe16thlargestdepositoryorganizationinthemarket,controlling depositsofapproximately$1.6billion,whichrepresentlessthan1percentofmarketdeposits.TheHHIforthe Dallasmarketwouldincreaseby1pointto1792,and121competitorswouldremaininthemarket. 15 12U.S.C.§§1842(c)(2),(5),and(6),and1828(c)(5)and(11). 16 Toeffecttheholdingcompanymerger,awhollyownedsubsidiaryofVeritexHoldingsformedtofacilitatethe transactionwouldmergewithSovereignBancshares,withSovereignBancsharesasthesurvivingentity,and immediatelythereafterSovereignBancshareswouldmergewithVeritexHoldings,withVeritexHoldingsasthe survivingentity.Uponconsummationofthatmerger,eachshareofSovereignBancsharescommonstock wouldbeentitledtoreceiveaportionoftheaggregatemergerconsideration,whichwouldconsistofVeritex Holdingscommonstockandcash.SovereignBankwouldthenmergewithandintoVeritexBank,withVeritex Bankasthesurvivingentity.VeritexHoldingshasthefinancialresourcestoeffectthetransaction.

LegalDevelopments:ThirdQuarter,2017 417 andSovereignBankareconsistentwithapproval,andVeritexHoldingsappearstohave adequateresourcestoabsorbthecostsof theproposalandtocompletetheintegrationof theinstitutions’operations.Inaddition,futureprospectsareconsideredconsistentwith approval. TheBoardalsohasconsideredthemanagerialresourcesof theorganizationsinvolvedand of theproposedcombinedorganization.TheBoardhasreviewedtheexaminationrecords of VeritexHoldings,SovereignBancshares,andtheirsubsidiarydepositoryinstitutions, includingassessmentsof theirmanagement,risk-managementsystems,andoperations.In addition,theBoardhasconsideredinformationprovidedbyVeritexHoldings;theBoard’s supervisoryexperiencesandthoseof otherrelevantbanksupervisoryagencieswiththe organizations;andtheorganizations’recordsof compliancewithapplicablebanking, consumerprotection,andanti-money-launderinglaws. VeritexHoldings,SovereignBancshares,andtheirsubsidiarydepositoryinstitutionsare consideredtobewellmanaged.VeritexHoldingshasarecordof successfullyintegrating organizationsintoitsoperationsandrisk-managementsystemsafteracquisitions.Veritex Holdings’directorsandseniorexecutiveofficershaveknowledgeof andexperienceinthe bankingandfinancialservicessectors,anditsrisk-managementprogramappearsconsistentwithapprovalof thisexpansionaryproposal. TheBoardalsohasconsideredVeritexHoldings’plansforimplementingtheproposal. VeritexHoldingshasconductedcomprehensiveduediligenceandisdevotingsignificant financialandotherresourcestoaddressallaspectsof thepost-integrationprocessforthis proposal.VeritexHoldingswouldimplementitsrisk-managementpolicies,procedures,and controlsatthecombinedorganization,andtheseareconsideredacceptablefromasupervisoryperspective.Inaddition,VeritexHoldings’managementhastheexperienceand resourcestooperatethecombinedorganizationinasafeandsoundmanner,andVeritex HoldingsplanstointegrateSovereignBancshares’existingmanagementandpersonnelina mannerthataugmentsVeritexHoldings’management.17 Basedonallthefactsof record,includingthesupervisoryrecordsof VeritexHoldings, SovereignBancshares,andtheirsubsidiarybanks,managerialandoperationalresources, andplansforoperatingthecombinedinstitutionafterconsummation,theBoardconcludes thatconsiderationsrelatingtothefinancialandmanagerialresourcesandfutureprospects of theorganizationsinvolvedintheproposal,aswellastherecordsof effectivenessof VeritexHoldingsandSovereignBancsharesincombatingmoney-launderingactivities,are consistentwithapproval. ConvenienceandNeedsConsiderations Inactingonaproposalundersection3of theBHCActandtheBankMergerAct,the Boardconsiderstheeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.18Initsevaluationof theeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved,theBoardconsiderswhethertherelevantinstitutionsarehelpingtomeetthecreditneedsof thecommunitiestheyserve,aswellasother potentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobe served.Inthisevaluation,theBoardplacesparticularemphasisontherecordsof the 17 Onconsummation,SovereignBancshares’presidentandchiefexecutiveofficer,aswellasthechairmanofits boardofdirectors,willbeappointedtotheboardsofdirectorsofVeritexHoldingsandVeritexBank.Additionally,oneoftheseindividualsisexpectedtobeappointedvicechairmanoftheboardofdirectorsofVeritex Holdings. 18 12U.S.C.§§1842(c)(2)and1828(c)(5).

418 FederalReserveBulletin|December2017 relevantdepositoryinstitutionsundertheCommunityReinvestmentAct(“CRA”).19The CRArequiresthefederalfinancialsupervisoryagenciestoencourageinsureddepository institutionstohelpmeetthecreditneedsof thelocalcommunitiesinwhichtheyoperate, consistentwiththeirsafeandsoundoperation,20andrequirestheappropriatefederal financialsupervisoryagencytoassessadepositoryinstitution’srecordof helpingtomeet thecreditneedsof itsentirecommunity,includinglow-andmoderate-income(“LMI”) neighborhoods,inevaluatingbankexpansionaryproposals.21 Inaddition,theBoardconsidersthebanks’overallcompliancerecordsandtheirrecentfair 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 VeritexBank andSovereignBank;thefairlendingandcompliancerecordsof bothbanks;thesupervisoryviewsof theFDIC;confidentialsupervisoryinformation;informationprovidedby VeritexHoldings;andthepubliccommentsreceivedontheproposal. PublicCommentsRegardingtheProposal TheBoardreceivedcommentsfromonecommenteropposingtheproposal.The commenterallegedthatVeritexBankdiscriminatesagainstAfricanAmericansand “redlines”AfricanAmericanneighborhoods,particularlyintheDallasandHouston areas,22bothinTexas,withrespecttoitsbranching,marketing,andlendingactivities.23 ThecommenteralsoallegedthatVeritexBankhasdesignateditsCRAassessmentareaina mannerthatexcludesmajorityAfricanAmericanneighborhoodsinDallas.Inaddition, thecommenterallegedthatSovereignBankalsodiscriminatesagainstAfricanAmericans andredlinesAfricanAmericanneighborhoods. Businessesof theInvolvedInstitutionsandResponsetoComments VeritexHoldingsandVeritexBankofferarangeof financialproductsandservicestoindividualcustomersandbusinesses.VeritexBankisafull-serviceretailbankofferingagricultural,commercial,homepurchase,homeimprovement,homeequity,andvehicleloans. Throughitsnetworkof 11branches,VeritexBankoffersawiderangeof depositproducts includingvariouscheckingaccounts,savingsaccounts,certificatesof deposit,individual retirementaccounts,moneymarketaccounts,andNOWaccounts.VeritexBankalso providesautomatedtellermachines,debitcards,andinternetbanking. SovereignBancsharesandSovereignBankofferdepositandloanproductsandspecializein commercialbankingactivities.SovereignBankoffersarangeof financialproductsand 19 12U.S.C.§2901etseq.;12CFR225.13(b)(3). 20 12U.S.C.§2901(b). 21 12U.S.C.§2903. 22 VeritexcurrentlyhasnobranchlocationsinHouston. 23 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.SeeInteragencyFairLendingExaminationProcedures(August2009),availableathttps://www.ffiec.gov/pdf/fairlend.pdf.

LegalDevelopments:ThirdQuarter,2017 419 servicestoindividualcustomersandbusinesses,includingbusinessloans,commercialreal estatelending,andconsumerdepositproducts. VeritexHoldingsdeniesthecommenter’sallegationsof discriminatorylendingand redliningwithrespecttothebranching,marketing,andlendingactivitiesof VeritexBank. VeritexHoldingsassertsthatVeritexBankmaintainsappropriatecontrolstoensure compliancewithapplicablefairlendinglawsandregulations,andassertsthatVeritexBank designatedtheentiretyof twocountiesintheDallasareaasitsCRAassessmentarea,24in parttoensurethatnoLMIorhighminoritycensustractswereexcludedorneglected. VeritexHoldingsfurtherassertsthatVeritexBank’smanagementiscommittedtoensuring thatnogeographicareasareexcludedbybranchlocationdecisions.Withrespecttofair lending,VeritexHoldingsassertsthatthebankhasimplementedpoliciesandproceduresto ensurefairlendingcompliance,includinganequalcreditopportunitypolicyandafair lendingpolicy,amongothers.VeritexHoldingsrepresentsthatVeritexBankmonitorsand reviewsloanpoliciesandpracticesforthepurposeof measuringcompliancewithfair lendinglawsandequalcreditopportunityrequirements,andthatthismonitoringincludes internalandexternalaudits,aswellastrainingprograms. Inresponsetothecommenter’scriticismthatVeritexBankhasnoadvertisingormarketing effortsdirectedatAfricanAmericancommunities,VeritexHoldingsassertsthatVeritex Bankhasdirectedadvertisingandmarketingeffortstowardsindividualsandsmallbusinessesinareastypicallyunderservedbybanks,includingAfricanAmericancommunities. VeritexHoldingsrepresentsthatthesemarketingeffortsincludepartnershipswithvarious communityorganizations,includingonethatfacilitatesmicrolendingtolow-and moderate-incomeindividuals. ThecommenteralsonotedthatSovereignBankdiscriminatesagainstAfricanAmericans andredlinesinAfricanAmericanneighborhoods.VeritexHoldingsnotesthataspartof its communitydevelopmentactivities,amajorityof SovereignBank’scommunitydevelopmentloanshavebeentoborrowersinpredominantlyminoritycensustracts.VeritexHoldingsrepresentsthataspartof SovereignBank’sCRAefforts,ithasmadequalifieddonationstoorganizationsthathelptosupportfinancialliteracyandmoneymanagementto individualsincensustractsthatareover50percentminority,aswellastoorganizations thatfocusonhousing,endinghomelessness,andprovidingothersocialservicestargetedto LMIindividualsintheDallasmetropolitanarea.Further,VeritexHoldingsrepresentsthat, throughSovereignBankbranchlocations,bankpersonnelprovidecommunitydevelopmentservicestoorganizationslocatedinpredominantlyminoritycensustractsandmeet withdifferentcommunitygroups,includinganallianceforthehomeless,whichhelpsthe bankbetterunderstandtheneedsof thecommunitiesitserves.VeritexHoldingsalsorepresentsthatSovereignBankhasimplementedprocessestocomplywithanti-discrimination requirements,includingtheestablishmentof afairlendingcommitteethatreviews,among otherthings,high-rateloansandconsumerloanswithoriginationfees. Recordsof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontotheinformationprovidedbythepubliccommenters andtheapplicant’sresponsetocomments.Inparticular,theBoardevaluatesaninstitution’sperformancerecordinlightof examinationsbytheappropriatefederalsupervisorsof theCRAperformancerecordsof therelevantinstitutions,aswellasinformationandviews 24 Thesecounties,theDallasandCollincounties,aredefinedbelow.

420 FederalReserveBulletin|December2017 providedbytheappropriatefederalsupervisors.25Inthiscase,theBoardconsideredthe viewsof itssupervisorystaff andof examinersfromtheFederalReserveBankof Dallas (“ReserveBank”)andtheFDIC. TheCRArequiresthattheappropriatefederalfinancialsupervisorforadepositoryinstitutionprepareawrittenevaluationof theinstitution’srecordof helpingtomeetthecredit needsof itsentirecommunity,includingLMIneighborhoods.26Aninstitution’smost recentCRAperformanceevaluationisaparticularlyimportantconsiderationintheapplicationsprocessbecauseitrepresentsadetailed,on-siteevaluationbytheinstitution’s primaryfederalsupervisorof theinstitution’soverallrecordof lendinginitscommunities.27 Ingeneral,federalfinancialsupervisorsapplyalendingtesttoevaluatetheperformanceof asmallinsureddepositoryinstitutioninhelpingtomeetthecreditneedsof thecommunitiesitserves.Thelendingtestspecificallyevaluatestheinstitution’slending-relatedactivities todeterminewhethertheinstitutionishelpingtomeetthecreditneedsof individualsand geographiesof allincomelevels.Aspartof thelendingtest,examinersreviewandanalyze aninstitution’savailableHomeMortgageDisclosureAct(“HMDA”)28data,automated loanreports,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.29Intermediatesmallbanksaresubjecttothelendingtest,aswellasacommunitydevelopmenttest thatevaluatesthenumberandamountof theircommunitydevelopmentloansandqualifiedinvestments;theextenttowhichtheyprovidecommunitydevelopmentservices;and theirresponsivenesstocommunitydevelopmentlending,investment,andserviceneeds.30 CRAPerformanceof VeritexBank VeritexBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheReserveBank,asof January23,2017(“VeritexBankEvaluation”).31Thebankreceived“Satisfactory”ratingsforeachof theLendingTestandthe CommunityDevelopmentTest.TheVeritexBankEvaluationincludedfull-scopeevaluationsof DallasandCollincountiesintheDallas-Plano-IrvingMetropolitanDivision,an areaof concerntothecommenter. Examinersconcludedthatthebank’sperformancedemonstratedareasonableresponsivenesstocreditneedsinitsassessmentarea.Examinersnotedthatasubstantialmajorityof 25 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 26 12U.S.C.§2906. 27 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 28 12U.S.C.§2801etseq. 29 See12CFR228.26(b). 30 See12CFR228.26(c). 31 TheVeritexBankEvaluationwasconductedusingtheIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,examinersreviewedHMDAloansreportedbyVeritexBankin2014and2015andsmall businessloansoriginatedbythebankbetweenApril1,2016,andSeptember30,2016.FortheCommunity DevelopmentTest,examinersreviewedcommunitydevelopmentlending,investments,andservicesbasedon datafromNovember12,2013,throughJanuary23,2017.

LegalDevelopments:ThirdQuarter,2017 421 thebank’sHMDAandsmallbusinessloanswereoriginatedinsideitsassessmentarea. Examinersfoundthatthebank’snetloan-to-depositratiowasconsideredreasonable,given thebank’ssizeandfinancialcondition,thecreditneedsof theassessmentarea,andthe competitivelocalbankingenvironment. Examinersalsofoundthatthebank’sdistributionof lendingtoborrowersreflecteda reasonablepenetrationamongindividualsof differentincomelevels(includingLMI borrowers)andthatthegeographicdispersionof thebank’slendingwasreasonablegiven theperformancecontext.Examinersdeterminedthatthedistributionof HMDAloansby borrowerincomelevelwasreasonablegiventhehighlevelof competitionintheassessment areaandlowvolumeof loansoriginatedtoLMIborrowersbytheaggregatelenders.Loans weregenerallymadeincloseproximitytothebank’sbranches,andtherewereno conspicuousgapsoranomaliesinthelendingpatterns.Thedistributionof theremainder of banklendinginmiddle-andupper-incomegeographiesdidnotaffecttheconclusions aboutthebank’sperformanceconsideringitslendinginLMIgeographies.Withrespectto smallbusinesslending,examinersfoundgeographicdistributiontobereasonable. ExaminersalsodeterminedthatVeritexBank’sresponsivenesstocommunitydevelopment needswasadequateconsideringthebank’scapacityanditsprimaryfocusasacommerciallender.Examinersnotedthatthebankapplieditscommunitydevelopmentresources strategicallytomeetcommunityneeds,primarilythroughqualifiedloansandcommunity servicestargetedtoLMIindividualsinitscommunity,andthatthebankprovidedcommunitydevelopmentservicesthroughitsbranchesinLMIareas.Examinersfoundthatthe bankprovidedahighlevelof retailservicesinitsassessmentarea.Specifically,examiners foundVeritexBank’sdeliverysystemstobeaccessibletogeographiesandindividualsof differentincomelevelsinitsassessmentarea.Examinersalsonotedthatthebank’srecord of openingandclosingbrancheshadnotadverselyaffectedtheaccessibilityof itsdelivery systems,particularlytoLMIgeographiesandindividuals,andthatitsservicesdidnotvary inawaythatinconvenienceditsassessmentarea,particularlyLMIgeographiesand individuals. CRAPerformanceof SovereignBank SovereignBankwasassignedanoverallratingof “Satisfactory”atitsmostrecentCRA performanceevaluationbytheFDIC,asof March30,2015(“SovereignBankEvaluation”).32SovereignBankreceiveda“Satisfactory”ratingfortheLendingTestandan “Outstanding”ratingfortheCommunityDevelopmentTest.AlthoughSovereignBank’s overallratingtookintoconsiderationitsperformanceineachof itsMSAAAs,examiners gavesignificantlymoreweighttothebank’srecordsintheDallas,TexasMSAAAdueto thehighervolumeof loansinthatarea. FortheLendingTest,examinersevaluatedSovereignBank’ssmallbusinessloans.Basedon thisevaluation,examinersfoundthatSovereignBank’sloan-to-depositratioreflected reasonableresponsivenesstocreditneedsinitsassessmentareasgivenitssizeandfinancial 32 TheSovereignBankEvaluationwasconductedusingIntermediateSmallBankCRAExaminationProcedures. FortheLendingTest,examinersreviewedsmallbusinessloansoriginatedbythebankfromJanuary1,2014, throughDecember31,2014.Becausecommercialloanscomprisedapproximately49percentofthebank’sloan portfolioanditsprimaryproductline,examinersfocusedtheLendingTestonsmallbusinessloans.Forthe CommunityDevelopmentTest,examinersreviewedthebank’squalifiedcommunitydevelopmentlending, investments,andserviceactivitiesfromJune19,2012,throughMarch30,2015. TheSovereignBankEvaluationincludedafull-scopereviewofperformanceintheDallas-FortWorth- Arlington,TexasMetropolitanStatisticalAreaAssessmentArea(“Dallas,TexasMSAAA”);andalimitedscopereviewofperformanceintheAustin-RoundRock,TexasMSAassessmentareaandtheHouston-The Woodlands-SugarLand,TexasMSAassessmentarea.

422 FederalReserveBulletin|December2017 condition.ExaminersfoundthatSovereignBankoriginatedamajorityof itslending withinthebank’sassessmentareas.Specifically,examinersnotedthatSovereignBank originatedamajorityof itssmallbusinessloansbynumberanddollarvolumeinsideof its assessmentareas.ExaminersfoundthatSovereignBankdisplayedareasonablelevelof penetrationregardingitsdistributionof loansbasedonborrowerprofileandthatthe bank’srecordof lendingtobusinessesof differentsizesreflectedareasonableperformance. ExaminersalsofoundthatSovereignBankdemonstratedareasonablerecordof geographicallydistributingitsloansthroughouttheassessmentareas.Examinersfound thatthebank’slendinginmoderate-incomeareasreflectedreasonableperformance,but lendinginlow-incomecensustractsdemonstratedpoorperformance.However,examiners notedthatthegeographicdistributionof thebank’ssmallbusinessloansreflectedareasonablerecordof lendingwithintheassessmentareaswhenperformancecontextfactorsthat mitigatethebank’ssmallbusinessloanoriginationsinLMIcensustractswereconsidered. Theseperformancecontextfactorsinclude(1)thebank’sconcentratedmarketingeffortsin LMIareastoincreasesmallbusinessloanvolumethroughitsSmallBusinessAdministrationLoanPrograms,suchasbymailingoutlettersadvertisingtheprogramineachassessmentarea,and(2)thebank’stargetingof businesses,andspecificallythosewithgross annualrevenuesof lessthan$1million,inthebank’slow-incomecensustracts.Overall, examinersnotedthat,consideringeffortsmadetoincreasesmallbusinesslendinginLMI areasandtheheavyconcentrationof bankcompetitionintheDallasMSAAA,thebank’s geographicdistributionof smallbusinessloansreflectedreasonabledispersion. Withrespecttocommunitydevelopment,examinersconsideredSovereignBank’scommunitydevelopmentloans,communitydevelopmentinvestments,andcommunitydevelopmentservices.ExaminersfoundthatSovereignBankdemonstratedanexcellentrecord regardingitscommunitydevelopmentlending.ExaminersalsofoundthatSovereignBank exhibitedanadequaterecordregardingitscommunitydevelopmentinvestmentsanddonations.Specifically,examinersnotedthatthebankhadadequateresponsivenesstocommunitydevelopmentneedscombinedwithanadequatelevelregardingthenumberand dollarvolumeof communitydevelopmentinvestmentsanddonations.Examinersfound thatSovereignBankestablishedanexcellentrecordof providingcommunitydevelopment servicestoLMIindividualsthroughitscontributionof financialexpertiseandinvolvement inactivitiesdirectedatLMIindividualsandfamilies.ExaminersfurthernotedthatSovereignBankprovidedarangeof bankingproductsandservicestomeettheneedsof consumerandcommercialcustomersandthatitsbranchofficesanddeliverysystemswere readilyaccessibletoLMIborrowers. SovereignBank’sEffortssincetheSovereignBankEvaluation VeritexHoldingsrepresentsthatsincetheSovereignBankEvaluation,SovereignBankhas workedtocontinuetoserveitscommunitiesthroughitssmallbusinesslending,community serviceactivities,outreachefforts,investments,anddonations.Specifically,VeritexHoldingsrepresentsthatsinceitslastevaluation,SovereignBankhascontinuedtoprovidefor communitydevelopmentservicesthroughnon-profitorganizationstoLMIindividualsand thatthebank’semployeeshavecontinuedtoserveitscommunitiesthroughworkonthe boardsof directorsof non-profitorganizations.VeritexHoldingsrepresentsthatSovereign Bank’sCRAcommitteemeetswithdifferentcommunitygroups,whichhelpsthebank understandtheneedsof thecommunitiesitserves. AdditionalSupervisoryReviews TheBoardhasconsideredtheresultsof themostrecentconsumercomplianceexaminationsof VeritexBankconductedbyReserveBankexaminers,whichincludedareviewof thecompliancemanagementprogramandthebanks’compliancewithconsumerprotec-

LegalDevelopments:ThirdQuarter,2017 423 tionlawsandregulations.Aspartof theconsumercomplianceexaminations,ReserveBank examinersalsoevaluatedVeritexBank’sfairlendingmanagementprogram,includingthe bank’sfair-lending-relatedpractices,policies,procedures,andinternalcontrols. TheBoardalsohasconsideredtheresultsof arecentconsumercomplianceexaminationof SovereignBankconductedbyFDICexaminers,whichincludedareviewof thebank’s compliancemanagementsystemandthebank’scompliancewithconsumerprotectionlaws, includingfairlendinglawsandregulations. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.VeritexHoldingsrepresentsthatithasnoplansto discontinueanysignificantproductorservicecurrentlyofferedbyVeritexBankorSovereignBank.Specifically,VeritexBankrepresentsthatitwillcontinuetooffercustomersa rangeof depositandcreditproductsandservicesthatbenefitthecommunitiesinwhich VeritexBankandSovereignBankeachpresentlyconductbusiness,includingthosecredit productsandservicesthatfulfilltheneedsof LMIdemographics.VeritexBankrepresents that,followingtheproposedtransaction,customersof SovereignBankwouldhaveaccess toacomplementof productsandservicesthataremoreexpansivethanthosecurrently availabletoSovereignBankcustomers,includingresidentialmortgageloanproducts,and thatSovereignBankcustomerswouldalsohaveincreasedaccesstoVeritexBank’soffices bytelephoneandonlineapplications,whichmayincreaseaccesstobankingservices.In addition,VeritexBankassertsthatcustomersof bothinstitutionswouldbenefitfroma moreexpansivebranchandATMnetwork.Followingtheproposedtransaction,Veritex Bankrepresentsthatitwillcontinuetoprovidealevelof serviceconsistentwithVeritex Bank’scurrentCRAperformance. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordsof therelevant depositoryinstitutionsinvolved,theinstitutions’recordsof compliancewithfairlending andotherconsumerprotectionlaws,confidentialsupervisoryinformation,information providedbyVeritexBank,publiccommentsontheproposal,andthepotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthat review,theBoardconcludesthattheconvenienceandneedsfactorisconsistentwith approval. FinancialStability TheDodd-FrankWallStreetReformandConsumerProtectionAct(“Dodd-FrankAct”) amendedsection3of theBHCActandtheBankMergerActtorequiretheBoardto consideraproposal’s“risktothestabilityof theUnitedStatesbankingorfinancial system.”33 Toassessthelikelyeffectof aproposedtransactiononthestabilityof theU.S.bankingor financialsystem,theBoardconsidersavarietyof metricsthatcapturethesystemic“footprint”of theresultingfirmandtheincrementaleffectof thetransactiononthesystemic footprintof theacquiringfirm.Thesemetricsincludemeasuresof thesizeof theresulting firm,theavailabilityof substituteprovidersforanycriticalproductsandservicesofferedby theresultingfirm,theinterconnectednessof theresultingfirmwiththebankingorfinan- 33 Dodd-FrankAct§§604(d)and(f),Pub.L.No.111-203,124Stat.1376,1601–1602(2010),codifiedat12U.S.C. §§1842(c)(7)and1828(c)(5).

424 FederalReserveBulletin|December2017 cialsystem,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 TheBoard’sexperiencehasshownthatproposalsinvolvinganacquisitionof lessthan $10billioninassets,orthatresultsinafirmwithlessthan$100billionintotalassets,are generallynotlikelytoposesystemicrisks.Accordingly,theBoardpresumesthataproposal doesnotraisematerialfinancialstabilityconcernsif theassetsinvolvedfallbeloweitherof thesesizethresholds,absentevidencethatthetransactionwouldresultinasignificant increaseininterconnectedness,complexity,cross-borderactivities,orotherriskfactors.36 Inthiscase,theBoardhasconsideredinformationrelevanttoriskstothestabilityof the U.S.bankingorfinancialsystem.Theproposalinvolvesatargetthatislessthan$10billion inassetsandaproformaorganizationof lessthan$100billioninassets.Boththeacquirer andthetargetarepredominantlyengagedinavarietyof consumerandcommercial bankingactivities.37Theproformaorganizationwouldhaveminimalcross-borderactivitiesandwouldnotexhibitanorganizationalstructure,complexinterrelationships,or uniquecharacteristicsthatwouldcomplicateresolutionof thefirmintheeventof financial distress.Inaddition,theorganizationwouldnotbeacriticalservicesproviderorsointerconnectedwithotherfirmsorthemarketsthatitwouldposeasignificantrisktothefinancialsystemintheeventof financialdistress. Inlightof allthefactsandcircumstances,thistransactionwouldnotappeartoresultin meaningfullygreaterormoreconcentratedriskstothestabilityof theU.S.bankingor financialsystem.Basedontheseandallotherfactsof record,theBoarddeterminesthat considerationsrelatingtofinancialstabilityareconsistentwithapproval. Establishmentof Branches VeritexBankhasappliedundersection9of theFRAtoestablishbranchesatthecurrent locationsof SovereignBank.38TheBoardhasassessedthefactorsitisrequiredtoconsider 34 ManyofthemetricsconsideredbytheBoardmeasureaninstitution’sactivitiesrelativetotheU.S.financial system. 35 Forfurtherdiscussionofthefinancialstabilitystandard,seeCapitalOneFinancialCorporation,FRBOrder No.2012-2(February14,2012). 36 SeePeoplesUnitedFinancial,Inc.,FRBOrderNo.2017-08at25-26(March16,2017).Notwithstandingthis presumption,theBoardhastheauthoritytoreviewthefinancialstabilityimplicationsofanyproposal.For example,anacquisitioninvolvingaglobalsystemicallyimportantbankcouldwarrantafinancialstability reviewbytheBoard,regardlessofthesizeoftheacquisition. 37 VeritexHoldingsprimarilyofferscommercialandconsumerbankingservices,mortgagebankingservices, commercialrealestatelending,andtreasurymanagement.SovereignBancsharesprimarilyofferscommercial andconsumerbankingservices,commercialrealestatelending,andtreasurymanagement.Ineachofthe activitiesinwhichitengages,VeritexHoldingshas,andasaresultoftheproposalwouldcontinuetohave,a smallmarketshareonanationwidebasis,andnumerouscompetitorswouldremainfortheseservices. 38 See12U.S.C.§321.Undersection9oftheFRA,statememberbanksmayestablishandoperatebrancheson thesametermsandconditionsasareapplicabletotheestablishmentofbranchesbynationalbanks.Thus,state memberbanksmayretainanybranchfollowingamergerthatwasabranchofanybankparticipatinginthe mergerpriortoFebruary25,1927,orthatunderstatelawmaybeestablishedasanewbranchoftheresulting bankorretainedasanexistingbranchoftheresultingbank.See12U.S.C.§§36(b)(2)and(c).Uponconsummation,allofVeritexBank’sbrancheswouldbepermissibleunderapplicablestatelaw.SeeTex.Fin.Code §§32.203;32.301(c).

LegalDevelopments:ThirdQuarter,2017 425 whenreviewinganapplicationunderthatsection.39Specifically,theBoardhasconsidered VeritexBank’sfinancialcondition,management,capital,actionsinmeetingtheconvenienceandneedsof thecommunitiestobeserved,CRAperformance,andinvestmentin bankpremises.40Forthereasonsdiscussedinthisorder,theBoardfindsthosefactorstobe consistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheproposal shouldbe,andherebyis,approved.41Inreachingitsconclusion,theBoardhasconsideredallthefactsof recordinlightof thefactorsthatitisrequiredtoconsiderunderthe BHCAct,theBankMergerAct,theFRA,andotherapplicablestatutes.Approvalof this proposalisspecificallyconditionedoncompliancebyVeritexHoldingsandVeritexBank withalltheconditionssetforthinthisOrder,includingreceiptof allrequiredregulatory approvals,andonthecommitmentsmadetotheBoardinconnectionwiththeapplication. Forpurposesof thisaction,theconditionsandcommitmentsaredeemedtobeconditionsimposedinwritingbytheBoardinconnectionwithitsfindingsanddecisionherein and,assuch,maybeenforcedinproceedingsunderapplicablelaw. Theproposalmaynotbeconsummatedbeforethefifteenthcalendardayaftertheeffective dateof thisOrderorlaterthanthreemonthsthereafter,unlesssuchperiodisextendedfor goodcausebytheBoardorbytheReserveBank,actingunderdelegatedauthority. Byorderof theBoardof Governors,effectiveJuly6,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. Appendix BranchestoBeEstablishedbyVeritexBank 1. 600West5thStreet,Austin,Texas78701 2. 150SouthBellBoulevard,CedarPark,Texas78613 3. 17950PrestonRoad,Suite100,Dallas,Texas75252 4. 6060SherryLane,Dallas,Texas75225 5. 7255NorthStateHighway161,Irving,Texas75039 39 12U.S.C.§322;12CFR208.6. 40 Uponconsummationoftheproposedtransaction,VeritexBank’sinvestmentsinbankpremiseswouldremain withinlegalrequirements,under12CFR208.21. 41 TheBoardconstruesthecommentreceivedontheproposaltoincludearequestthattheBoardholdpublic hearingsontheproposal.Section3(b)oftheBHCActdoesnotrequirethattheBoardholdapublichearing onanyapplicationunlesstheappropriatesupervisoryauthoritiesforthebanktobeacquiredmakeatimely writtenrecommendationofdenialoftheapplication.12U.S.C.§1842(b);12CFR225.16(e).TheBoardhas notreceivedsucharecommendationfromtheappropriatesupervisoryauthorities.Underitsrules,theBoard may,initsdiscretion,holdapublichearingifappropriatetoallowinterestedpersonsanopportunitytoprovide relevanttestimonywhenwrittencommentswouldnotadequatelypresenttheirviews.TheBoardhasconsideredthecommenter’srequestinlightofallthefactsofrecord.Noticeoftheproposalwaspublishedinthe FederalRegisteronJanuary25,2017,andintherelevantnewspaperofgeneralcirculation(TheDallasMorning News)onJanuary13,January20,andFebruary10,2017.ThecommentperiodendedonFebruary12,2017.In theBoard’sview,thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact, submittedawrittencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’s requestdoesnotidentifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbe clarifiedbyapublichearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnot presentthecommenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.For thesereasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnot requiredorwarrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

426 FederalReserveBulletin|December2017 6. 3800MatlockRoad,Arlington,Texas,76015 7. 2438EastSouthlakeBoulevard,Southlake,Texas76092 8. 2800West7thStreet,FortWorth,Texas76107 9. 5111SanFelipe,Houston,Texas77056 10. 777PostOakBoulevard,Suite700,Houston,Texas77056

LegalDevelopments:ThirdQuarter,2017 427 Regions Bank Birmingham, Alabama OrderApprovingtheEstablishmentof Branches FRBOrderNo.2017–19(July18,2017) RegionsBank,astatememberbanksubsidiaryof RegionsFinancialCorporation,bothof Birmingham,Alabama,hasrequestedtheBoard’sapprovalundersection9of theFederal ReserveAct(“FRA”)1andtheBoard’sRegulationH2toestablishbranchesinGeorgia, Indiana,Missouri,Tennessee,andTexas,assetforthinAppendixA. Noticeof theproposal,affordinginterestedpersonsanopportunitytosubmitcomments, hasbeenpublishedinaccordancewiththeBoard’sRulesof Procedure.3Thetimefor submittingcommentshasexpired,andtheBoardhasconsideredtheproposalandthe commentsreceivedinlightof thefactorsspecifiedintheFRA. RegionsBank,withtotalassetsof $123.6billion,isthe21stlargestdepositoryorganization intheUnitedStates,controllingapproximately$99.3billionindeposits,whichrepresent lessthan1percentof thetotalamountof depositsof insureddepositoryinstitutionsinthe UnitedStates.4RegionsBankoperatesin15stateswith1,527branches,andthebank’s mainofficeisinBirmingham,Alabama.5 Undersection208.6of theBoard’sRegulationH,6whichimplementssection9of the FRA,thefactorsthattheBoardmustconsiderinactingonbranchapplicationsinclude (1)thefinancialhistoryandconditionof theapplyingbankandthegeneralcharacterof its management;(2)theadequacyof thebank’scapitalanditsfutureearningsprospects; (3)theconvenienceandneedsof thecommunitytobeservedbythebranch;(4)inthecase of brancheswithdeposit-takingcapability,thebank’sperformanceundertheCommunity 1 12U.S.C.§321. 2 12CFRpart208. 3 12CFR262.3(b). 4 StatedepositdataareasofJune30,2016,unlessotherwisenoted.Inthiscontext,insureddepositoryinstitutionsincludecommercialbanks,savingsandloanassociations,andsavingsbanks. TotalassetsareasofMarch31,2017.NationalassetrankinganddepositdataareasofDecember31,2016. InGeorgia,RegionsBankisthe6thlargestdepositoryorganization,with124branches,controllingapproximately$5.9billionindeposits,whichrepresentapproximately2.6percentofthetotalamountofdepositsin thatstate. InIndiana,RegionsBankisthe12thlargestdepositoryorganization,with55branches,controllingapproximately$2.8billionindeposits,whichrepresentapproximately2.4percentofthetotalamountofdepositsin thatstate. InMissouri,RegionsBankisthe11thlargestdepositoryorganization,with57branches,controllingapproximately$2.3billionindeposits,whichrepresentapproximately1.4percentofthetotalamountofdepositsin thatstate. InTennessee,RegionsBankisthe2ndlargestdepositoryorganization,with230branches,controllingapproximately$17.7billionindeposits,whichrepresentapproximately12.9percentofthetotalamountofdepositsin thatstate. InTexas,RegionsBankisthe14thlargestdepositoryorganization,with76branches,controllingapproximately $6.0billionindeposits,whichrepresentapproximately1percentofthetotalamountofdepositsofinsured depositoryinstitutionsinthatstate. 5 RegionsBankconductsitsbankingoperationsthroughbranchlocationsacrossthefollowing15states:Florida, Tennessee,Alabama,Mississippi,Georgia,Louisiana,Arkansas,Texas,Missouri,Illinois,Indiana,South Carolina,Kentucky,Iowa,NorthCarolina. 6 12CFR208.6(b).

428 FederalReserveBulletin|December2017 ReinvestmentAct(“CRA”);7and(5)whetherthebank’sinvestmentinbankpremisesin establishingthebranchsatisfiescertaincriteria.8 TheBoardhasconsideredtheapplicationinlightof thesefactorsandthepubliccomment receivedontheproposal.Onecommenterobjectedtotheproposal,allegingthatRegions BankdiscriminatesagainstAfricanAmericansand“redlines”AfricanAmericanneighborhoods,particularlyintheDallasandHoustonareas,bothinTexas,withrespecttoits branching,marketing,lending,andcommunitydevelopmentactivities.9 Financial,Managerial,andOtherSupervisoryConsiderations Inconsideringthefinancialhistoryandcondition,earningsprospects,andcapital adequacyof RegionsBank,theBoardhasreviewedreportsof examination,othersupervisoryinformation,publiclyreportedandotherfinancialinformation,informationprovided byRegionsBank,andthecommentreceivedontheproposal.RegionsBankiswellcapitalizedandwouldremainsouponconsummationof theproposal.Theassetquality,earnings,andliquidityof RegionsBankareconsistentwithapproval,andRegionsBank appearstohaveadequateresourcestoabsorbthecostsof theproposal. Inaddition,futureearningsprospectsareconsideredconsistentwithapproval.TheBoard alsohasreviewedRegionsBank’sproposedinvestmentinthebranchesandconcludes thatitsinvestmentisconsistentwithregulatorylimitationsoninvestmentinbankpremises.10 InconsideringRegionsBank’smanagerialresources,theBoardhasreviewedthebank’s examinationrecord,includingassessmentsof itsmanagement,risk-managementsystems, andoperations.TheBoardalsohasconsidereditssupervisoryexperienceswithRegions Bankandthebank’srecordof compliancewithapplicablebankinglaws,including consumerprotectionandanti-money-launderinglaws.RegionsBankisconsideredtobe wellmanaged.RegionsBank’sdirectorsandseniorexecutiveofficershavesubstantial knowledgeof andexperienceinthebankingandfinancialservicessectors,andthebank’s risk-managementprogramappearsconsistentwithapproval. Basedonthisreviewandallthefactsof record,theBoardconcludesthatRegionsBank’s management,financialhistoryandcondition,capitaladequacy,andfutureearningsprospects,aswellastheeffectivenessof RegionsBankincombattingmoney-launderingactivities,areconsistentwithapprovalof theproposal. ConvenienceandNeedsConsiderations Inconsideringtheeffectsof theproposalontheconvenienceandneedsof thecommunities tobeserved,theBoardconsiderswhethertherelevantinstitutionishelpingtomeetthe 7 12U.S.C.§2901etseq. 8 12CFR208.21(a).12U.S.C.§321.Undersection9oftheFRA,astatememberbankmayestablishand operatebranchesonthesametermsandconditionsasareapplicabletotheestablishmentofbranchesby nationalbanks.Thus,astatememberbankmayestablishbranchesatanypointinastateinwhichthebankhas itsmainofficeorabranch.See12U.S.C.§36(c)(2).RegionsBankhasbranchesinGeorgia,Indiana,Missouri, Tennessee,andTexas,andispermittedtoestablishadditionalbranchesundereachstate’slaws.SeeGa.Code Ann.§7-1-628.6;Ind.Code§28-2-18-24;Tenn.CodeAnn.§§45-2-614and45-2-1412;Mo.Rev.Stat.§362.107; andTex.Fin.CodeAnn.§203.006. 9 Redliningisthepracticeofprovidingunequalaccesstocredit,orunequaltermsofcredit,becauseoftherace, color,nationalorigin,orotherprohibitedcharacteristicsoftheresidentsoftheareainwhichacreditseeker residesorwillresideorinwhichapropertytobemortgagedislocated.SeeInteragencyFairLendingExaminationProcedures(August2009),availableathttps//www.ffiec.gov/pdf/fairlend.pdf. 10 12CFR208.21(a).

LegalDevelopments:ThirdQuarter,2017 429 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,inevaluatingbankbranchingproposal.13 Inaddition,theBoardconsidersthebank’soverallcompliancerecordandtheresultsof 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 Regions Bank,thefairlendingandcompliancerecordsof thebank,confidentialsupervisoryinformation,informationprovidedbyRegionsBank,andthepubliccommentreceivedonthe proposal. Summaryof PublicCommentsonConvenienceandNeeds Inthiscase,theBoardreceivedcommentsfromacommenterobjectingtotheproposal, allegingthatRegionsBankhasengagedindiscriminatorypracticesinDallasandHouston. Specifically,thecommenterallegesthatRegionsBankengagesinredlininginthese areas.ThecommenterallegesthatRegionsBankdisfavorscertainAfricanAmericanneighborhoodsinHoustonandDallasandhaslimiteditslending,marketingactivities, communitydevelopmentactivities,andbranchinginthoseareas. Businessof theApplicant RegionsBankoffersabroadrangeof retailandcommercialbankingproductsto consumersandbusinesses.Throughitsnetworkof branches,thebankoffersavarietyof bankingproductsincludingcommercial,residential,agricultural,andconsumerloans, personalcheckingandsavingsaccounts,businesscheckingandsavingsaccounts,money marketaccounts,cashmanagementproductsandservices,foreignexchangeservices,credit cards,merchantservices,andwealthmanagementservices. Recordof PerformanceundertheCRA InevaluatingtheconvenienceandneedsfactorandCRAperformance,theBoardconsiders substantialinformationinadditiontoinformationprovidedbypubliccommentersandthe responsetocommentsbytheapplicant.Inparticular,theBoardevaluatesaninstitution’s performanceinlightof examinationsandothersupervisoryinformationandinformation 11 12CFR208.6(b)(3). 12 12U.S.C.§2901(b). 13 12U.S.C.§2903.

430 FederalReserveBulletin|December2017 andviewsprovidedbytheappropriatefederalsupervisors.14Inthiscase,theBoardconsideredtheinformationcollectedbyandthefindingsof examinersfromtheFederalReserve Bankof Atlanta(“ReserveBank”),whoconductedanon-siteCRAperformanceevaluationof RegionsBank. 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’sdatareportedunderHomeMortgageDisclosureAct(“HMDA”),in additiontosmallbusiness,smallfarm,andcommunitydevelopmentloandatacollected andreportedundertheCRAregulations,toassessaninstitution’slendingactivitieswith respecttoborrowersandgeographiesof differentincomelevels.Theinstitution’slending performanceisbasedonavarietyof factors,including(1)thenumberandamountsof homemortgage,smallbusiness,smallfarm,andconsumerloans(asapplicable)intheinstitution’sassessmentareas;(2)thegeographicdistributionof theinstitution’slending, includingtheproportionanddispersionof theinstitution’slendinginitsassessmentareas andthenumberandamountsof loansinlow-,moderate-,middle-,andupper-income geographies;(3)thedistributionof loansbasedonborrowercharacteristics,includingfor homemortgageloans,thenumberandamountsof loanstolow-,moderate-,middle-,and upper-incomeindividuals;16(4)theinstitution’scommunitydevelopmentlending,including thenumberandamountsof communitydevelopmentloansandtheircomplexityand innovativeness;and(5)theinstitution’suseof innovativeorflexiblelendingpracticesto addressthecreditneedsof LMIindividualsandgeographies. TheBoardisconcernedwhencommentersassertthatdatareflectdisparitiesintheratesof loanapplications,originations,ordenialsamongmembersof differentracialorethnic groupsinlocalareas.Thesetypesof disparitiesmayindicateweaknessesintheadequacyof policiesandprogramsataninstitutionformeetingitsobligationstoextendcreditfairly. However,otherinformationcriticaltoaninstitution’screditdecisionstypicallyisnotavailabletocommenters.17Consequently,theseallegeddisparitiesmustbeevaluatedinthe contextof otherinformationregardingthelendingrecordof aninstitution. 14 SeeInteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister48506, 48548(July25,2016). 15 12U.S.C.§2906. 16 Examinersalsoconsiderthenumberandamountsofsmallbusinessandsmallfarmloansmadetobusinesses andfarmswithgrossannualrevenuesof$1millionorless,smallbusinessandsmallfarmloansbyloanamount atorigination,andconsumerloans,ifapplicable,tolow-,moderate-,middle-,andupper-incomeindividuals. See,e.g.,12CFR228.22(b)(3). 17 Otherdatarelevanttocreditdecisionscouldincludecredithistory,debt-to-incomeratios,andloan-to-value ratios.Accordingly,whenconductingfairlendingexaminations,examinersanalyzesuchadditionalinformation beforereachingadeterminationregardinganinstitution’scompliancewithfairlendinglaws.

LegalDevelopments:ThirdQuarter,2017 431 CRAPerformanceof RegionsBank RegionsBankwasassignedanoverall“Satisfactory”ratingatitsmostrecentCRAperformanceevaluationbytheReserveBank,asof April1,2016(“RegionsBankEvaluation”).18Thebankreceiveda“HighSatisfactory”ratingfortheLendingTest,theInvestmentTest,andtheServiceTest.19 ExaminersfoundthatRegionsBank’soveralllendingactivitywasresponsivetothecredit needsinallof itsassessmentareas,andtherewerenoconspicuousgapsinlendingactivity byincomecategory.Accordingtoexaminers,thebankoriginatedasubstantialmajority of itsloansinsideitsassessmentareas.Examinersnotedthatthedistributionof thebank’s borrowersof differentincomelevelsandbusinessesof differentsizeswasgoodandthatthe bank’soverallgeographicdistributionof HMDAandsmallbusinessloansreflectedgood penetrationthroughoutLMIareas.Further,examinersnotedthatthebankmadean adequatelevelof communitydevelopmentloans,themajorityof whichwereforaffordable housingandcommunityservicesandthatthebankwasresponsivetothecommunitydevelopmentneedsthroughoutitsassessmentareas. ExaminersratedRegionsBank’sperformanceinTexasundertheLendingTestas“Low Satisfactory.”Examinersfoundthatthedistributionof thebank’sborrowersreflectedgood penetrationamongindividualsof differentincomelevelsandbusinessesof differentsizes andthatthegeographicdistributionof itsloansreflectedadequatepenetrationthroughout Texas.Further,examinersfoundthatthebankmadeanadequatelevelof community developmentloansinTexasandwasresponsivetocommunitydevelopmentandcredit needs.InHouston,anareaof concernforthecommenter,thebank’slendingperformance wasconsideredadequate,andexaminersnotedthatthebankmadeanadequatelevelof communitydevelopmentloans.InDallas,anotherareaof concernforthecommenter,the bank’slendingperformancewasfoundtohaveexceededitsstate-widelending performance. Examinersfoundthat,bothoverallandinTexas,RegionsBankmadeasignificantlevelof qualifiedcommunitydevelopmentinvestmentsinresponsetocommunitydevelopment needs.ExaminersratedRegionsBank’sinvestmentperformanceinTexasas“HighSatisfactory.”Examinersfoundthatthemajorityof RegionsBank’sinvestmentsinTexaswere concentratedintheAustinorHoustonassessmentareasandthatthebank’sinvestment performancewasgoodintheHoustonassessmentarea.Inaddition,thebank’sperformanceintheDallasMetropolitanStatisticalArea(“MSA”)wasfoundtohaveexceededits state-wideinvestmentperformanceinTexas,duetothebank’sstrongmixof contributionsandinvestmentsthatwereresponsivetolocalcommunitydevelopmentandcredit needs. 18 TheRegionsBankEvaluationwasconductedusingLargeBankCRAExaminationProcedures.Examiners reviewedHMDAandsmallbusinesslendingactivitiesreportedbythebankfromJanuary1,2014,through December31,2015.Theevaluationperiodforcommunitydevelopmentlending,investments,andserviceswas July1,2014,throughMarch31,2016. 19 RegionsBank’sassessmentareasaresetforthinAppendixB.ThecommenterallegedthatRegionsBank’sdefinitionsoftheHoustonandDallasassessmentareasarbitrarilyexcludeAfricanAmericanneighborhoodsinthe HoustonandDallasareas.TheBoard’sregulationsprohibitthedelineationofaCRAassessmentareathat reflectsillegaldiscrimination.12CFR228.41(e)(2).Assessmentareasgenerallyshouldincludeentirepolitical subdivisions.InteragencyQuestionsandAnswersRegardingCommunityReinvestment,81FederalRegister 48506,48549(July25,2016).TheHoustonassessmentareacomprisestheentiretyofBrazoria,FortBend, Galveston,HarrisandMontgomeryCounties.TheDallasassessmentareacomprisestheentiretyofCollin, Dallas,DentonandRockwellCounties.ReserveBankexaminersfoundthatthebank’sassessmentareaswere appropriate.

432 FederalReserveBulletin|December2017 ExaminersfoundthatRegionsBank’sretaildeliverysystemswerereasonablyaccessibleto geographiesandindividualsof differentincomelevelslocatedinitsassessmentareas. ExaminersfurthernotedthatRegionsBank’sopeningandclosingof branchesgenerally didnotadverselyaffecttheaccessibilityof bankingservicestoLMIgeographiesand/or individuals.Further,examinersfoundthatthebankingservicesandbusinesshoursdidnot varyinawaythatinconveniencedanyportionof thebank’sassessmentareas,including LMIgeographiesandindividuals.Moreover,examinersfoundthatRegionsBankprovided ahighlevelof communitydevelopmentservicesthatbenefitedallof itsassessmentareas, includingTexas. ExaminersratedRegionsBank’sserviceperformanceinTexasas“HighSatisfactory.”In theHoustonassessmentarea,examinersconcludedthat,althoughRegionsBank’sbranch distributionwasweakinLMIgeographies,therehadbeennochangetotheaccessibilityof retailservicesforLMIgeographiesand/orindividualsandmanybrancheshadextended hours,includingbrancheslocatedinLMIgeographies.ExaminersalsofoundthatRegions Bank’sdeliveryservicesandhoursof operationdidnotvaryinawaythatwouldinconvenienceLMIgeographiesorindividuals.Inaddition,examinersfoundthatRegionsBank providedarelativelyhighlevelof communitydevelopmentservicesintheHoustonassessmentarea.IntheDallasassessmentarea,examinersconcludedthatRegionsBank’sservice performancewasconsistentwithitsstate-wideserviceperformance. RegionsBank’sEffortssincethe2016CRAEvaluation RegionsBankrepresentsthatsincetheRegionsBankEvaluation,ithascontinuedtooffer severallendinganddepositproductsspecificallydesignedforLMIpopulationsthatare utilizedbyindividualsandbusinessesinLMIand/orminoritycensustracts.Accordingto RegionsBank,suchproductsincludeaRegionsLineof Credit,whichhasbeenusedby customersinHoustonandDallas,its“RegionsNOWBanking”suiteof services,whichis designedfortheunbankedandunderbankedcustomerswhopreferapay-as-you-go approachtomanagingtheirfinances,andits“SavingsAccountSecuredLoans”andlines of creditthatallowborrowerstousetheirsavingsaccountsascollateral.RegionsBankalso representsthatitoffersaffordablemortgageproductsforLMIborrowers,includingsome productsthatprovidelow-incomehomebuyerswithdown-paymentassistanceandno requirementtocarrymortgageinsurance,whichlowersmonthlypayments. RegionsBankrepresentsthatithascontinuedtoservethebankingneedsof itsassessment areas,includingtheHoustonandDallasassessmentareas,throughcommunitydevelopmentlending,investments,andservices.Forexample,thebankrepresentsthatithasmade 264communitydevelopmentloanssincetheRegionsBankEvaluation,includingtwoloans intheHoustonandDallasmarkets.RegionsBankalsorepresentsthatithasmadea numberof communitydevelopmentinvestmentsthatsupportorganizationsthatfocuson LMIandminorityindividualsandcommunities,includinganinvestmentthatsupported affordablehousingintheDallasassessmentarea.RegionsBankrepresentsthatitengages inmarketingandoutreach,includingtargetedradioandadvertisingcampaigns,toachieve lendingpenetrationinLMIandminoritycensustracts,includingthosetractsinthe HoustonandDallasassessmentareas.Additionally,RegionsBankrepresentsthatbank employeeshaveactivelyparticipatedinavarietyof volunteeractivitiesinitsassessment areas,includingeventsthattargetprimarilyLMIandminorityindividualsandsmallbusinessowners,suchasparticipatinginfinancialliteracyclassesinDallas.

LegalDevelopments:ThirdQuarter,2017 433 AdditionalSupervisoryViews TheBoardhasconsideredtheresultsof arecentconsumercomplianceexamination conductedbyReserveBankexaminers.Inaddition,theBoardhasconsultedwiththe ConsumerFinancialProtectionBureauconcerningthebank’ssupervisoryrecord. AdditionalConvenienceandNeedsConsiderations TheBoardalsoconsidersotherpotentialeffectsof theproposalontheconvenienceand needsof thecommunitiestobeserved.Thebankassertsthattheproposedbranches,some of whichwillincludeenhancedtechnologiesandexpandedservices,willprovideadditionalconveniencetocustomersof thebank. ConclusiononConvenienceandNeedsConsiderations TheBoardhasconsideredallthefactsof record,includingtheCRArecordof Regions Bank,thebank’srecordof compliancewithfairlendingandotherconsumerprotection laws,confidentialsupervisoryinformation,informationprovidedbyRegionsBank,the publiccommentsontheproposal,andotherpotentialeffectsof theproposalontheconvenienceandneedsof thecommunitiestobeserved.Basedonthatreview,theBoard concludesthattheconvenienceandneedsfactorisconsistentwithapproval. Conclusion Basedontheforegoingandallthefactsof record,theBoarddeterminesthattheapplicationshouldbe,andherebyis,approved.20TheBoard’sapprovalisspecificallyconditioned onRegionsBank’scompliancewithallthecommitmentsmadetotheBoardinconnectionwiththeproposalaswellasallconditionsimposedinthisorder.Forpurposesof this action,theconditionsandcommitmentsaredeemedtobeconditionsinwritingbythe Boardinconnectionwithitsfindingsanddecisionhereinand,assuch,maybeenforcedin proceedingsunderapplicablelaw. Approvalof thisapplicationisalsosubjecttotheestablishmentof theproposedbranches withinoneyearof thedateof thisorder,unlesssuchperiodisextendedbytheBoardorthe ReserveBank,actingunderauthoritydelegatedbytheBoard. Byorderof theBoardof Governors,effectiveJuly18,2017. Votingforthisaction:ChairYellen,ViceChairmanFischer,andGovernorsPowelland Brainard. 20 TheBoardconstruesthecommentreceivedontheproposaltoincludearequestthattheBoardholdpublic hearingsontheproposal.Underitsrules,theBoardmay,initsdiscretion,holdapublichearingifappropriate toallowinterestedpersonsanopportunitytoproviderelevanttestimonywhenwrittencommentswouldnot adequatelypresenttheirviews.12CFR262.3(e).TheBoardhasconsideredthecommenter’srequestinlightof allthefactsofrecord.Noticeoftheproposalwaspublishedinrelevantnewspapersofgeneralcirculationon March24andApril12,2017.ThecommentperiodsendedonApril8andApril27,2017.IntheBoard’sview, thecommenterhashadampleopportunitytosubmitcommentsontheproposaland,infact,submitteda writtencommentthattheBoardhasconsideredinactingontheproposal.Thecommenter’srequestdoesnot identifydisputedissuesoffactthatarematerialtotheBoard’sdecisionandthatwouldbeclarifiedbyapublic hearing.Inaddition,therequestdoesnotdemonstratewhythewrittencommentdoesnotpresentthe commenter’sviewsadequatelyorwhyahearingotherwisewouldbenecessaryorappropriate.Forthese reasons,andbasedonallthefactsofrecord,theBoardhasdeterminedthatapublichearingisnotrequiredor warrantedinthiscase.Accordingly,therequestforapublichearingontheproposalisdenied.

434 FederalReserveBulletin|December2017 AppendixA BranchestoBeEstablishedbyRegionsBank GeorgiaBranches ‰ AcworthStilesboroOaksBranch MarsHillRoadandStilesboroRoad Acworth,Georgia30101 ‰ ParksideWestBranch DallasHighwayandCastellRoad Marietta,Georgia30064 IndianaBranches ‰ Marion-UniversityMarketplaceBranch SouthWesternAvenue/Outparcelof UniversityMarketplace Marion,Indiana46953 MissouriBranches ‰ DelmarBranch 6680DelmarBoulevard UniversityCity,Missouri63130 ‰ DesPeresBranch NortheastCornerof ManchesterRoadandBoppRoad,HardCorner DesPeres,Missouri63131 ‰ FlorissantBranch 100NorthHighway67 Florissant,Missouri63031 ‰ JungermannRoadBranch JungermannRoadandGlenParkDrive St.Charles,Missouri63376 ‰ LakeSt.LouisBranch 701CivicCenterDrive LakeSt.Louis,Missouri63367 ‰ MidRiversMallBranch NortheastCornerof MidRiversMallDriveandNorthSt.PetersParkway;2Lots Northof Intersection St.Peters,Missouri63304 ‰ TwinOaksBranch BigBendRoadandMeramecStationRoad Ballwin,Missouri63021 TennesseeBranches ‰ CanadaRoadBranch NorthwestCornerof CanadaRoadandHighway64;HardCorner(Outparcelof Small ShoppingStrip) Lakeland,Tennessee38002

LegalDevelopments:ThirdQuarter,2017 435 ‰ NorthshoreBranch NorthwestCornerof SouthNorthshoreDriveandPinnaclePointeWay;HardCorner Knoxville,Tennessee37922 ‰ HarrimanMidtownBranch U.S.Highway70(RoaneStateHighway)andTannerWay Harriman,Tennessee37748 TexasBranches ‰ AlderTrailsBranch SouthwestCornerof BarkerCypressRoadandCypressNorthHoustonBoulevardOne LotSouthof HardCorner Cypress,Texas77433 ‰ CopperwoodVillageBranch NorthwestCornerof Highway6andKingfieldDrive,HardCorner Houston,Texas77084 ‰ KatyStablesideBranch NorthCornerof GastonRoadandFalconLandingBoulevard,HardCorner Katy,Texas77494 ‰ KatyWestparkTollwayBranch NortheastCornerof SpringGreenBoulevardandFM1093,2-3LotsEastof Intersection Katy,Texas77494 ‰ PrestonRoadBranch SouthwestCornerof HickoryStreetandPrestonRoad;HardCorner Frisco,Texas75034 ‰ RayfordCrossingBranch RayfordRoadandRileyFuzzelRoad(FutureGrandParkwayServiceRoad) Spring,Texas77386 AppendixB TheRegionsBankEvaluationincludedafull-scopereviewof thebank’sassessmentareas withinthefollowingMetropolitanStatisticalAreas(“MSAs”):theBirmingham,Alabama, MSA;theMontgomery,Alabama,MSA;theLittleRock,Arkansas,MSA;theMiami, Florida,MSA;theTampa,Florida,MSA;theAtlanta,Georgia,MSA;theCarbondale- Marion,Illinois,MSA;theIndianapolis,Indiana,MSA;theWaterloo,Iowa,MSA;SouthwestKentucky,Kentucky;theBatonRouge,Louisiana,MSA;theNewOrleans,Louisiana, MSA;theJackson,Mississippi,MSA;NorthernMississippi,Mississippi;theSpringfield, Missouri,MSA;theCharlotte,NorthCarolina,MSA;theCharleston,SouthCarolina, MSA;theNashville,Tennessee,MSA;theAustin,Texas,MSA;theHouston,Texas,MSA; andtheAugusta-Chattanooga-Columbus-Kingsport-Memphis-St.Louis-Texarkana,MSA. Alimited-scopereviewwasconductedinthebank’sassessmentareaswithintheAnniston, Alabama,MSA;theAuburn,Alabama,MSA;Coffee-Covington-Escambia,Alabama; theDaphne,Alabama,MSA;theDecatur,Alabama,MSA;theDothan,Alabama,MSA; FayetteCounty,Alabama;theFlorence,Alabama,MSA;theGadsden,Alabama,MSA; theHuntsville,Alabama,MSA;theMobile,Alabama,MSA;NorthernAlabama;Southern Alabama;Tallapoosa-Talladega,Alabama;theTuscaloosa,Alabama,MSA;the Fayetteville,Arkansas,MSA;theFortSmith,Arkansas,MSA;theHotSprings,Arkansas, MSA;theJonesboro,Arkansas,MSA;NortheastArkansas;NorthwestArkansas;

436 FederalReserveBulletin|December2017 SouthernArkansas;UnionCounty,Arkansas;theDaytona,Florida,MSA;theFort Lauderdale,Florida,MSA;theFortMyer,Florida,MSA;theFortWalton,Florida,MSA; theGainesville,Florida,MSA;theHomosassaSprings,Florida,MSA;theJacksonville, Florida,MSA;theLakeland,Florida,MSA;theNaples,Florida,MSA;NorthernFlorida; theOcala,Florida,MSA;Okeechobee,Florida;theOrlando,Florida,MSA;thePalmBay, Florida,MSA;thePanamaCity,Florida,MSA;thePensacola,Florida,MSA;thePunta Gorda,Florida,MSA;theSarasota,Florida,MSA;theTallahassee,Florida,MSA;the TheVillages,Florida,MSA;theWestPalmBeach,Florida,MSA;theAlbany,Georgia, MSA;theAthens,Georgia,MSA;theDalton,Georgia,MSA;ElbertandWilkescounties, Georgia;theGainesville,Georgia,MSA;Jefferson-Jenkins,Georgia;Morgan-Elbert- Wilkes,Georgia;NortheastGeorgia;NorthwestGeorgia;theRome,Georgia,MSA;the Savannah,Georgia,MSA;SouthwestGeorgia;theValdosta,Georgia,MSA;the Bloomington,Illinois,MSA;CentralIllinois;theChampaign,Illinois,MSA;theDecatur, Illinois,MSA;theLivingston,Illinois,MSA;thePeoria,Illinois,MSA;SoutheastIllinois; SouthernIllinois;theSpringfield,Illinois,MSA;theBloomington,Indiana,MSA;Clinton- Grant,Indiana;theEvansville,Indiana,MSA;Knox-Lawrence,Indiana;theKokomo, Indiana,MSA;theLafayette,Indiana,MSA;theLouisville,Indiana,MSA;theTerre Haute,Indiana,MSA;theCedarRapids,Iowa,MSA;theDesMoines,Iowa,MSA; Fayette,Iowa;theIowaCity,Iowa,MSA;Simpson,Kentucky;theAlexandria,Louisiana, MSA;theHammond,Louisiana,MSA;theHouma,Louisiana,MSA;theLafayette,Louisiana,MSA;theMonroe,Louisiana,MSA;Morehouse,Louisiana;NorthwestLouisiana; theShreveport,Louisiana,MSA;SouthernLouisiana;Adams-Wilkinson,Mississippi; CentralMississippi;theGulfport,Mississippi,MSA;theHattiesburg,Mississippi,MSA; NorthwestMississippi;SouthernMississippi;Warren,Mississippi;theCapeGirardeau, Missouri,MSA;CentralMissouri;theColumbia,Missouri,MSA;theJeffersonCity, Missouri,MSA;LawrenceCounty,Missouri;SoutheastMissouri;St.Genevieve-Perry, Missouri;TaneyCounty,Missouri;MaconCounty,NorthCarolina;theRaleigh,North Carolina,MSA;theColumbia,SouthCarolina,MSA;theGreenville,SouthCarolina, MSA;HamptonCounty,SouthCarolina;theHiltonHeadIsland-Bluffton-Beaufort, SouthCarolina,MSA;McCormick-BarnwellSouthCarolina;theSpartanburg,South Carolina,MSA;theClarksville,Tennessee,MSA;theCleveland,Tennessee,MSA;Eastern Tennessee;theJackson,Tennessee,MSA;theJohnsonCity,Tennessee,MSA;theKnoxville,Tennessee,MSA;MiddleTennessee;theMorristown,Tennessee,MSA;Western Tennessee;Cass,Texas;theDallas,Texas,MSA;theFortWorth,Texas,MSA;the Longview,Texas,MSA;Nacogdoches-Angelina-Anderson,Texas;andtheTyler, Texas,MSA.

LegalDevelopments:ThirdQuarter,2017 437 Order Issued Under International Banking Act The Bank of East Asia, Limited Hong Kong SAR, People’s Republic of China OrderApprovingEstablishmentof aBranch FRBOrderNo.2017–25(September28,2017) TheBankof EastAsia,Limited(“BEA”),HongKongSAR(“HongKong”),People’s Republicof China(“China”),aforeignbankwithinthemeaningof theInternational BankingAct(“IBA”),hasappliedundersection7(d)of theIBA1toupgradeitsexisting limitedfederalbranchinLosAngeles,California,toafull-servicebranch.2TheForeign BankSupervisionEnhancementActof 1991,whichamendedtheIBA,providesthata foreignbankmustobtaintheapprovalof theBoardtoestablishabranchintheUnited States.3 Noticeof theapplication,affordinginterestedpersonsanopportunitytocomment,has beenpublishedinanewspaperof generalcirculationinLosAngeles,California(TheLos AngelesDailyNews,July2,2012).Thetimeforfilingcommentshasexpired,andtheBoard hasconsideredallcommentsreceived. BEA,withtotalconsolidatedassetsof approximately$101.0billion,isthesixthlargest bankinHongKong.4SumitomoMitsuiFinancialGroup(“SMFG”),throughitssubsidiary,SumitomoMitsuiBankingCorporation,bothof Tokyo,Japan,ownsapproximately 19percentof thevotingsharesof BEA.5FundaciónBancariaCaixad’EstalvisiPensions deBarcelona,“laCaixa”(“laCaixa”),throughitssubsidiary,CriteriaCaixa,S.A.,bothof Barcelona,Spain,ownsapproximately17.3percentof thevotingsharesof BEA.6Guoco ManagementCompanyLimited(“Guoco”),HongKong,China,ownsapproximately 14.2percentof thevotingsharesof BEA.7Inaddition,ElliotCapitalAdvisors,L.P. 1 12U.S.C.§3105(d). 2 Asalimitedbranch,theLosAngelesbranchisprohibitedfromacceptingdepositsfromsourcesotherthan thosepermittedbysection25AoftheFederalReserveAct.Undersection25AoftheFederalReserveAct,an EdgecorporationmayreceivedepositsoutsidetheUnitedStatesandonlysuchdepositswithintheUnited Statesthatareincidentaltoorforthepurposeofcarryingouttransactionsinforeigncountries.12U.S.C. §615(a).RegulationKdefinestheextentofpermissibledeposit-takingactivitiesofEdgecorporations.12CFR 211.6(a)(1).Upgradingthelimitedbranchtoafull-servicebranchwouldpermitthebranchtoacceptwholesaledomesticdeposits. 3 UndertheBoard’sRegulationK,upgradingalimitedbranchtoafull-servicebranchrequiresBoardapproval. 12CFR211.21(f)and(l)(4);12CFR211.24(a)(1)(A). 4 AssetdataareasofJune30,2017,andrankingdataareasofDecember31,2016,andeachfigureisbasedon theexchangerateasoftherespectivedate.OwnershipdataareasofDecember31,2016. 5 SMFGreceivedBoardapprovaltoacquireupto19.9percentofBEA’sshares.SeeSumitomoMitsuiFinancial Group,FRBOrderNo.2015-07(February20,2015). 6 BothSMFGandlaCaixahaveprovidedpassivitycommitmentstotheBoardtoensurethattheirownershipin, andbusinessrelationshipswith,BEAwouldnotenablethemortheiraffiliatestoexerciseacontrollinginfluenceoverBEAforthepurposesoftheBankHoldingCompanyActof1956,asamended. 7 Guocoisthebeneficialowneroftheshares,andanumberofaffiliatedcompaniesandindividuals(together withGuoco,the“GuocoGroup”)aredeemedtohaveaninterestinthesharesthroughtheirdirectorindirect ownershipinGuoco.TheGuocoGrouphasnodirectororseniormanagementinterlockswithBEAanddoes notengageinmaterialbusinessrelationshipswithBEA.Inconnectionwiththisapplication,BEAhas committedtomonitortheGuocoGroup’sownershipofBEAandwillinformtheFederalReserveBankof NewYorkif(1)theGuocoGroupacquiresmorethan20percentofBEA’svotingshares,(2)theGuocoGroup nominatesadirectortoBEA’sboardofdirectors,(3)anindividualassociatedwiththeGuocoGroupisnominatedtoBEA’sboardofdirectors,or(4)theGuocoGroupproposesanitemforvoteatashareholder meetingofBEA.

438 FederalReserveBulletin|December2017 (“Elliot”),Wilmington,Delaware,ownsapproximately7.0percentof thevotingsharesof BEA.8Noothershareholderowns5percentormoreof BEA’sshares.9 BEAengagesprimarilyinretailandcommercialbanking,wealthmanagement,andinsuranceservices.Outsideof HongKong,BEAoperatesabanksubsidiaryandbranchesin ChinaandbranchesinMacau,Taiwan,theUnitedKingdom,Singapore,andMalaysia.In theUnitedStates,BEAoperatesthreebranches10andcontrolsIndustrialandCommercialBankof China,NationalAssociation(“ICBC-USA”),NewYorkCity.11BEAisa qualifyingforeignbankingorganizationunderRegulationK.12 BEA’shomestateisNewYork.BEAproposestoestablishthisbranchoutsideof itshome statebyupgradingitsLosAngeleslimitedbranchtoafull-servicebranchpursuantto section5(a)(7)(B)of theIBA.13 UndertheIBAandRegulationK,inactingonanapplicationbyaforeignbanktoestablishabranch,theBoardmustconsiderwhether(1)theforeignbankhasfurnishedtothe Boardtheinformationitneedstoassesstheapplicationadequately,(2)theforeignbank andanyforeignbankparentengagedirectlyinthebusinessof bankingoutsideof the UnitedStates,and(3)theforeignbankandanyforeignbankparentaresubjecttocomprehensivesupervisiononaconsolidatedbasisbytheirhomecountrysupervisor.14The BoardalsoconsidersadditionalstandardsassetforthintheIBAandRegulationK.15 8 Elliot’sownershipinBEAisdispersedamonganumberofcompaniesassociatedwithElliot,includingfunds managedbyElliot. 9 HKSCCNomineesLimitedandTheBankofEastAsia(Nominees)Limitedholdapproximately79.7percent and6.3percent,respectively,ofthesharesofBEAastheregisterednomineesofothershareholders. 10 InadditiontothelimitedfederalbranchinLosAngeles,BEAoperatesbothaninsuredandanuninsured federalbranchinNewYorkCity. 11 BEAanditssubsidiary,EastAsiaHoldingCompany,Inc.,NewYork,NewYork,own20percentofthevoting sharesofICBC-USAandarebankholdingcompaniesbyvirtueoftheircontrolofICBC-USA. 12 12CFR211.23(a). 13 12U.S.C.§3103(a)(7)(B).Thatsectionpermitstheupgradeofalimitedbranchtoafull-servicebranchoutside aforeignbank’shomestateiftheestablishmentandoperationofthefull-servicebranchispermittedbythe hoststateandifthelimitedbranchwasinoperationinthehoststatepriortoSeptember29,1994.The proposedupgrademeetstherequirementsofthatsection. 14 12U.S.C.§3105(d)(2);12CFR211.24.RegulationKprovidesthataforeignbankissubjecttoconsolidated homecountrysupervisioniftheforeignbankissupervisedorregulatedinsuchamannerthatitshomecountry supervisorreceivessufficientinformationontheworldwideoperationsoftheforeignbank(includingtherelationshipsofthebanktoanaffiliate)toassesstheforeignbank’soverallfinancialconditionandcompliance withlawandregulation.12CFR211.24(c)(1)(ii).Inassessingthisstandard,theBoardconsiders,amongother indiciaofcomprehensive,consolidatedsupervision,theextenttowhichthehomecountrysupervisors(i)ensure thatthebankhasadequateproceduresformonitoringandcontrollingitsactivitiesworldwide;(ii)obtaininformationontheconditionofthebankanditssubsidiariesandofficesthroughregularexaminationreports,audit reports,orotherwise;(iii)obtaininformationonthedealingswithandrelationshipbetweenthebankandits affiliates,bothforeignanddomestic;(iv)receivefromthebankfinancialreportsthatareconsolidatedona worldwidebasisorcomparableinformationthatpermitsanalysisofthebank’sfinancialconditiononaworldwideconsolidatedbasis;and(v)evaluateprudentialstandards,suchascapitaladequacyandriskassetexposure, onaworldwidebasis.Nosinglefactorisessential,andotherelementsmayinformtheBoard’sdetermination. 15 12U.S.C.§3105(d)(3)-(4);12CFR211.24(c)(2)-(3).Theadditionalstandardssetforthinsection7oftheIBA andRegulationKincludethefollowing:(i)whetherthebank’shomecountrysupervisorhasconsentedtothe establishmentoftheoffice;(ii)thefinancialandmanagerialresourcesofthebank;(iii)whetherthebankhas procedurestocombatmoneylaundering,whetherthereisalegalregimeinplaceinthehomecountryto addressmoneylaundering,andwhetherthehomecountryisparticipatinginmultilateraleffortstocombat moneylaundering;(iv)whethertheappropriatesupervisorsinthehomecountrymayshareinformationonthe bank’soperationswiththeBoard;(v)whetherthebankhasprovidedtheBoardwithadequateassurancesthat itwillmakeavailabletotheBoardsuchinformationonitsoperationsandactivitiesandthoseofitsaffiliates thattheBoarddeemsnecessarytodetermineandenforcecompliancewiththeIBAandotherapplicablefederal bankingstatutes;(vi)whetherthebankanditsU.S.affiliatesareincompliancewithU.S.law;(vii)theneedsof thecommunity;and(viii)thebank’srecordofoperation.TheBoardalsoconsiders,inthecaseofaforeign bankthatpresentsarisktothestabilityoftheUnitedStates,whetherthehomecountryoftheforeignbank hasadopted,orismakingdemonstrableprogresstowardadopting,anappropriatesystemoffinancialregulationforthefinancialsystemofsuchhomecountrytomitigatesuchrisk.12U.S.C.§3105(d)(3)(E).

LegalDevelopments:ThirdQuarter,2017 439 Asnotedabove,BEAengagesdirectlyinthebusinessof bankingoutsidetheUnitedStates. BEAalsohasprovidedtheBoardwithinformationnecessarytoassesstheapplication throughsubmissionsthataddresstherelevantissues. TheBoardpreviouslyhasdetermined,inconnectionwithapplicationsinvolvingBEAand otherbanksinHongKong,thatthosebanksweresubjecttocomprehensivesupervisionon aconsolidatedbasisbytheirhomejurisdictionsupervisor,theHongKongMonetary Authority(“HKMA”).16BEAcontinuestobesupervisedbytheHKMAonsubstantially thesametermsandconditions.Basedonallthefactsof record,BEAcontinuestobe subjecttocomprehensivesupervisiononaconsolidatedbasisbyitshomejurisdiction supervisor. Thefinancialandmanagerialandotherapplicablefactorsinthecasehavealsobeentaken intoaccount.TheHKMAhasnoobjectiontotheestablishmentof theproposedfullservicebranch.HongKong’srisk-basedcapitalstandardsareconsistentwiththoseestablishedbytheBaselCapitalAccord(“Accord”).BEA’scapitalisinexcessof theminimum levelsthatwouldberequiredbytheAccordandisconsideredequivalenttocapitalthat wouldberequiredof aU.S.bankingorganization.BEAappearstohavetheexperienceand capacitytosupporttheproposedbranchandhasestablishedcontrolsandproceduresfor theproposedbranchtoensurecompliancewithU.S.lawandforitsoperationsingeneral. TakingintoconsiderationBEA’soverallfinancialandmanagerialresources,financialand managerialfactorsareconsideredconsistentwithapproval. HongKongisamemberof theFinancialActionTaskForce(“FATF”)andsubscribesto theFATF’srecommendationsonmeasurestocombatmoneylaunderingandterrorist financing.Inaccordancewiththeserecommendations,HongKonghasenactedlawsand developedregulatorystandardstodetermoneylaunderingandterroristfinancing.Money launderingisacriminaloffenseinHongKong,andHongKongfinancialinstitutionsare requiredtoestablishinternalpolicies,procedures,andsystemsforthedetectionandpreventionof moneylaunderingandterroristfinancingthroughouttheirworldwideoperations. BEAhaspoliciesandprocedurestocomplywiththeselawsandregulations,andBEA’s compliancewithapplicablelawsandregulationsismonitoredbygovernmentalentities responsibleforanti-money-launderingcompliance. BEAhascommittedtomakeavailabletotheBoardsuchinformationontheoperationsof BEAandanyof itsaffiliatesthattheBoarddeemsnecessarytodetermineandenforce compliancewiththeIBA,theBankHoldingCompanyAct,andotherapplicablefederal law.Totheextentthattheprovisionof suchinformationtotheBoardmaybeprohibitedby laworotherwise,BEAhascommittedtocooperatewiththeBoardtoobtainanynecessary consentsorwaiversthatmightberequiredfromthirdpartiesfordisclosureof suchinformation.Inaddition,subjecttocertainconditions,theHKMAmayshareinformationon BEA’soperationswithothersupervisors,includingtheBoard.Inlightof thesecommitmentsandotherfactsof record,andsubjecttotheconditiondescribedbelow,ithasbeen determinedthatBEAhasprovidedadequateassurancesof accesstoanynecessaryinformationthattheBoardmayrequest. Section173of theDodd-FrankWallStreetReformandConsumerProtectionAct amendedtheIBAtoprovidethattheBoardmayconsider,foraforeignbankthatpresents 16 SeeLetterdatedMay14,2007,fromtheFederalReserveBankofNewYorktoTheHongkongandShanghai BankingCorporationLimited;CiticKaWahBankLimited,89FederalReserveBulletin435(2003);Letterdated June29,2001,fromtheFederalReserveBankofSanFranciscotoTheBankofEastAsia,Limited;TheBank ofEastAsia,Limited,84FederalReserveBulletin886(1998);LiuChongHingBank,81FederalReserveBulletin 905(1995);HongKongandShanghaiBankingCompany,81FederalReserveBulletin902(1995);DahSingBank, Ltd.,80FederalReserveBulletin182(1994).

440 FederalReserveBulletin|December2017 arisktothestabilityof theUnitedStatesfinancialsystem,whetherthehomecountryof theforeignbankhasadopted,orismakingdemonstrableprogresstowardadopting,an appropriatesystemof financialregulationforthefinancialsystemof suchhomecountryto mitigatesuchrisk.17Informationrelevanttothestandardregardingrisktothestabilityof theUnitedStatesfinancialsystemhasbeenreviewed.Inparticular,considerationhasbeen givento(1)thesizeandscopeof BEA’sactivities,includingthetypeof activitiesit proposestoconductintheUnitedStatesandthepotentialforthoseactivitiestoincreaseor transmitfinancialinstability,and(2)theframeworkinplaceforsupervisingBEAinits homejurisdiction.Basedontheseandotherfactors,financialstabilityconsiderationsin thisproposalareconsistentwithapproval. Onthebasisof allthefactsof record,andsubjecttothecommitmentsmadebyBEAas wellastothetermsandconditionssetforthinthisorder,BEA’sapplicationtoupgradeits limitedbranchinLosAngelestoafull-servicebranchisherebyapprovedbytheDirector of theDivisionof SupervisionandRegulation,withtheconcurrenceof theGeneral Counsel,pursuanttoauthoritydelegatedbytheBoard.18Shouldanyrestrictionsonaccess toinformationontheoperationsoractivitiesof BEAanditsaffiliatessubsequentlyinterferewiththeBoard’sabilitytoobtaininformationtodetermineandenforcecomplianceby BEAoritsaffiliateswithapplicablefederalstatutes,theBoardmayrequireterminationof anyof BEA’sdirectorindirectactivitiesintheUnitedStatesor,inthecaseof anysuch operationlicensedbytheOfficeof theComptrollerof theCurrency(“OCC”),recommend terminationof suchoperation.Approvalof thisapplicationalsoisspecificallyconditionedoncompliancebyBEAwiththecommitmentsmadeinconnectionwiththisapplicationandwiththeconditionsinthisorder.19Thecommitmentsandconditionsreferredto aboveareconditionsimposedinwritingbytheBoardinconnectionwiththisdecisionand maybeenforcedinproceedingsunderapplicablelaw. Byorder,approvedpursuanttoauthoritydelegatedbytheBoard,effectiveSeptember28, 2017. 17 12U.S.C.§3105(d)(3)(E). 18 12CFR265.7(d)(12). 19 TheBoard’sauthoritytoapprovetheupgradeofthelimitedbranchparallelsthecontinuingauthorityofthe OCCtolicenseofficesofaforeignbank.TheBoard’sapprovalofthisapplicationdoesnotsupplantthe authorityoftheOCCtolicensetheproposedofficeofBEAinaccordancewithanytermsorconditionsthat theOCCmayimpose.

441 Federal Reserve BULLETIN Index B Departmentof VeteransAffairs BankHoldingCompanyAct(BHC (VA),5,13,78,194 Act),ordersissuedunder F AnchorBancshares,Inc.,162–167 FannieMae,5,194 BNCBancorp,71–82 FarmServiceAgency(FSA),5 BOKFinancial FederalDepositInsuranceCorporation Corporation,115–128 (FDIC),80,109,209,299,341, CanadianImperialBankof 356 Commerce,291–301 FederalHousingAdministration CathayGeneralBancorp,198–212 (FHA),5,13,78,194 CentralBancompany,Inc.,149–161 FederalReserveAct,ordersissued CommunityBankSystem, under Inc.,254–265 PlainsCapitalBank,229–235 FirstCitizensBancShares, RegionsBank,427–433 Inc.,133–148 VeritexBank,414–425 FirstMidwestBancorp, FederalReserveBankof Chicago,109 Inc.,103–113 FederalReserveBankof Dallas,341 F.N.B.Corporation,169–181 Financial PacWestBancorp,348–359 Literacy,35–37 People’sUnitedFinancial, Products,244 Inc.,182–197 FreddieMac,5 RiverHoldingCompany,83–91 SimmonsFirstNational G Corporation,266–278 Government-sponsoredenterprises SterlingBancorp,360–374 (GSEs),2 SunflowerReincorporationSub, Inc.,279–290 H TheToronto-Dominion HabitatforHumanity,332 Bank,375–387 Herfindahl-HirschmanIndex UnitedBankshares,Inc.,237–253 (HHI),84,94,135–138,150–152 VeritexHoldings,Inc.,335–347 HomeMortgageDisclosureAct WintrustFinancial (HMDA),173,272,328,407 Corporation,92–102 HomeOwnershipandEquity BankMergerAct,ordersissuedunder ProtectionAct(HOEPA),20 FarmersBank&CapitalTrust HomeOwners’LoanAct(HOLA), Company,213,220,221–228 orderissuedunder SynovusBank,401–413 TIAABoardof Overseers Bhutta,Neil,1–27 (“Overseers”),Teachers Bureauof LaborStatistics,59 InsuranceandAnnuity Associationof C America,324–334 CommunityReinvestmentAct (CRA),78,188,191,208,215, I 244,247,272,275–352,364 InternationalBankingAct,orders ConsumerFinancialProtectionBureau issuedunder (CFPB),209,332,356 FédérationdescaissesDesjardins Consumerpriceindex(CPI),59 duQuébec,129–132 CoreLogicHomePriceIndex,29 NordeaBankAB,319–323 TheBankof EastAsia, D Limited,437–440 Departmentof Agriculture (USDA),78,194,261 Departmentof Justice(DOJ),138 Departmentof theTreasury,33

442 FederalReserveBulletin|Index L O Laufer,Steven,1–27 Officeof theComptrollerof the Lending Currency(OCC),122,125,178, Applicationdenials,denial 194,262,332 rates,271,328 Fair,244,250 P Homepurchase,75,187,243,258, PrimaryMortgageMarketSurvey,17 272,364,405 R Smallbusiness,295 RegulationC,26 Low-ormoderate-income(LMI) RegulationH,229,427 Borrowers,censustracts,incomes, RegulationK,129,320,438 neighborhoods,121,203,295, RegulationY,289,373,375,387 365,380,432 RingoDanielR.,1–27 M RuralHousingService(RHS),5 Mortgageinsurancepremiums S (MIPs),5 SmallBusinessAdministration Mortgage(s) (SBA),78,177,188,343 Applicationdenial,denial rates,13–15 Originations,3–6 N NorthCarolinaHousingFinance Agency,78 NorthCarolinaRuralEconomic DevelopmentCenter,177

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