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					November 1994



                                                                                                                                                   999




      Legal Developments
      ORDERS ISSUED UNDER BANK HOLDING                                             The Board previously has determined that the inter-
      COMPANY ACT                                                               state banking statutes of Texas permit out-of-state
                                                                                bank holding companies to acquire established bank-
      Orders Issued Under Section 3 of the Bank                                 ing organizations in Texas.3 Based on all the facts of
      Holding Company Act                                                       record, the Board has determined that its approval of
                                                                                this proposal is not prohibited by the Douglas Amend-
      Boatmen's Bancshares, Inc.                                                ment. Approval of this proposal is conditioned upon
      St. Louis, Missouri                                                       Boatmen's receiving all required state regulatory ap-
                                                                                provals.
      Order Approving Acquisition of a Bank Holding
      Company                                                                   Competitive Consideration
      Boatmen's Bancshares, Inc., St. Louis, Missouri
                                                                                Boatmen's with total deposits of $18.6 billion, controls
      ("Boatmen's"), a bank holding company within the
                                                                                depository institutions in nine states. In Texas, Boat-
      meaning of the Bank Holding Company Act ("BHC
                                                                                men's is the 13th largest commercial banking organi-
      Act"), has applied for the Board's approval under
                                                                                zation, controlling deposits of $1.1 billion, represent-
      section 3 of the BHC Act (12 U.S.C. § 1842) to acquire
                                                                                ing less than 1 percent of total deposits in commercial
      Dalhart Bancshares, Inc., Dalhart, Texas ("Dalhart"),
                                                                                banking organizations in the state.4 Dalhart is the 152d
      and thereby indirectly acquire Citizens State Bank of
                                                                                largest commercial banking organization in Texas,
      Dalhart, Dalhart, Texas ("Bank").1
                                                                                controlling deposits of $119.9 million, representing
         Notice of the application, affording interested per-                   less than 1 percent of total deposits in commercial
      sons an opportunity to submit comments, has been                          banking organizations in the state. Upon consumma-
      published (59 Federal Register 36,765 (1994)). The                        tion of this proposal, Boatmen's would continue to
      time for filing comments has expired, and the Board                       rank as the 13th largest commercial banking organiza-
      has considered the application and all comments re-                       tion in Texas, controlling $1.2 billion in deposits,
      ceived in light of the factors set forth in section 3(c) of               representing less than 1 percent of total deposits in
      the BHC Act.                                                              commercial banking organizations in the state.
                                                                                   Boatmen's and Dalhart compete directly in the
      Douglas Amendment Analysis
                                                                                Amarilio, Texas, banking market.5 Boatmen's is the
                                                                                largest often depository institutions in the market, with
      Section 3(d) of the BHC Act, the Douglas Amend-
                                                                                deposits of $624.1 million, representing 35.5 percent of
      ment, prohibits the Board from approving an applica-
                                                                                total deposits in depository institutions in the market
      tion by a bank holding company to acquire control of
                                                                                ("market deposits").6 Dalhart is the ninth largest
      any bank outside the bank holding company's home
      state unless the acquisition is "specifically authorized
      by the statute laws of the State in which such bank is                       3. Boatmen's Bancshares, Inc., 79 Federal Reserve Bulletin 1179
      located, by language to that effect and not merely by                     (1993). Under Texas law, each bank to be acquired must have been in
      implication."2 For purposes of the Douglas Amend-                         existence for at leastfiveyears, and the proposed transaction must not
      ment, Boatmen's home state is Missouri.                                   result in the acquiring organization controlling more than 25 percent of
                                                                                total deposits held by depository institutions in Texas. Tex. Rev. Civ.
                                                                                Stat. Ann. Art. 342-916 (West 1992). Bank has been in existence for
                                                                                more than five years, and upon consummation of this proposal,
         1. Boatmen's proposes to acquire both Dalhart and Dalhart's wholly     Boatmen's would control less than 1 percent of total deposits in
      owned subsidiary, Dalhart Bancshares of Delaware, Inc., Wilming-          depository institutions in Texas.
      ton, Delaware ("Dalhart Delaware"), which owns approximately                4. State deposit data arc as of March 31, 1994.
      93 percent of the voting shares of Bank. Boatmen's will merge both           5. The Amarilio, Texas, banking market is approximated by the
      Dalhart and Dalhart Delaware into Boatmen's wholly owned subsid-          Amarilio Metropolitan Statistical Area, which consists of Potter and
      iary, Boatmen's Texas, Inc., St. Louis, Missouri.                         Randall Counties, Texas.
         2. 12 U.S.C. § 1842(d). A bank holding company's home state is that       6. In this context, depository institutions include banks, savings
      state in which the operations of the bank holding company's banking       banks, and savings associations. Market deposit data are as of June
      subsidiaries were principally conducted on July 1, 1966, or the date on   30, 1993, and are based on calculations in which deposits of thrift
      which the company became a bank holding company, whichever is later.      institutions are included at 50 percent. The Board previously has
November 1994



      1000 Federal Reserve Bulletin • November 1994


      depository institution in the market, controlling depos-                 Board and, as such, may be enforced in proceedings
      its of $20.1 million, representing 1.1 percent of total                  under applicable law.
      deposits in depository institutions in the market. Upon                     The proposal shall not be consummated before the
      consummation of this proposal, Boatmen's would con-                      thirtieth calendar day following the effective date of
      trol $644.3 million in deposits, representing 36.7 per-                  this order, or later than three months after the effective
      cent of total deposits in depository institutions in the                 date of this order, unless such period is extended for
      market. The Herfindahl-Hirschman Index C'HHI")                           good cause by the Board or by the Federal Reserve
      would increase by 81 points to 2637.7                                    Bank of St. Louis, acting pursuant to delegated au-
         A number of factors in this case indicate that the                    thority.
      increase in the concentration level of the Amarillo                         By order of the Board of Governors, effective
      market tends to overstate the competitive effects of                     September 28, 1994.
      this proposal. For example, nine competitors, includ-
      ing two large multistate bank holding companies would                       Voting for this action: Chairman Greenspan, Vice Chair-
      remain in the market after consummation of this                          man Blinder, and Governors Kelley, LaWare, Lindsey, Phil-
      proposal. In addition, the Amarillo market also has                      lips, and Yellen.
      attracted two de nova entrants in the past five years,
                                                                                                                   JENNIFER J. JOHNSON
      indicating that the market is attractive for entry. After
      considering the number of competitors remaining in                                                  Deputy Secretary of the Board
      the market, the relatively small increase in concentra-
      tion as measured by the HHI, and all other facts of /'FCFT, Inc.,
      record, the Board concludes that consummation of the                     Princeton, West Virginia
      proposal would not result in a significantly adverse
      effect on competition or concentration of banking i | Order Approving Acquisition of Shares of a Bank
      resources in the Amarillo banking market or any other                    Holding Company
      relevant banking market.
                                                                               FCFT, Inc., Princeton, West Virginia ("FCFT"), has
         The Board also concludes that the financial and
                                                                               applied under section 3(a)(3) of the Bank Holding
      managerial resources and future prospects of Boat-
                                                                               Company Act ("BHC Act") (12 U.S.C. § 1842(a)(3))
      men's, Dalhart, and their respective subsidiaries, and
                                                                               to acquire up to 19 percent of the voting shares of
      other supervisory factors the Board must consider
                                                                               Hinton Financial Corporation ("Hinton"), and
      under section 3(c) of the BHC Act, are consistent with
                                                                               thereby indirectly acquire up to 19 percent of the
      approval of this application. Considerations relating to
                                                                               voting shares of Hinton's bank subsidiary, The First
      convenience and needs of the community to be served
                                                                               National Bank of Hinton ("First National"), both of
      also are consistent with approval.
                                                                               Hinton, West Virginia.1
         Based on the foregoing and other facts of record, the
                                                                                  Notice of the application, affording interested per-
      Board has determined that the application should be,
                                                                               sons an opportunity to submit comments, has been
      and hereby is, approved. The Board's approval is
                                                                               published (59 Federal Register 32,962 (1994)). The
      specifically conditioned upon compliance by Boat-
                                                                               time for filing comments has expired, and the Board
      men's with all the commitments made in connection
                                                                               has considered the application and all comments re-
      with this application and with the conditions in this
                                                                               ceived in light of the factors set forth in section 3 of the
      order. For purposes of this action, the commitments
                                                                               BHC Act.
      and conditions relied on in reaching this decision shall
      be deemed to be conditions imposed in writing by the                        FCFT, with total consolidated assets of $690.2 mil-
                                                                               lion, is the seventh largest banking or thrift organiza-
                                                                               tion ("depository institution") in West Virginia,2 con-
      indicated that thrift institutions have become, or have the potential to
                                                                               trolling approximately $572.3 million in deposits,
      become, significant competitors of commercial banks. See Midwest         representing 3.2 percent of the total deposits in depos-
      Financial Group, 75 Federal Reserve Bulletin 386 (1989); National        itory institutions in the state.3 FCFT controls three
      City Corporation, 70 Federal Reserve Bulletin 743 (1984).
        7. Under the revised Department of Justice Merger Guidelines,          bank subsidiaries and one savings association subsid-
      49 Federal Register 26,823 (June 29, 1984), a market in which the
      post-merger HHf is above 1800 is considered concentrated. The
      Justice Department has informed the Board that a bank merger or
      acquisition generally will not be challenged (in the absence of other        1. FCFT currently owns approximately 4.78 percent of the voting
      factors indicating anti-competitive effects) unless the post-merger       shares of Hinton, and intends to purchase up to 19 percent of Hinton's
      HHI is at least 1800 and the merger increases the HHI by 200 points.      voting shares.
      The Justice Department has stated that the higher than normal HHI           2. In this context, depository institutions include commercial banks,
      thresholds for screening bank mergers for anti-competitive effects        savings banks, and savings associations.
      implicitly recognized the competitive effect of limited purpose lenders     3. Asset data are as of March 31, 1994, and state deposit data are as
      and other non-depository financial entities.                              of December 31, 1993.
November 1994



                                                                                                             Legal Developments               1001



      iary located in West Virginia. Hinton, with total con-                    bank holding company."6 The Board also has noted
      solidated assets of $65.8 million, is the 54th largest                    that the requirement in section 3(a)(3) of the BHC Act
      depository institution in West Virginia, controlling                      that the Board's prior approval be obtained before a
      $56.6 million in deposits, representing less than                         bank holding company acquires more than 5 percent of
       1 percent of the total deposits in depository institu-                   the voting shares of a bank suggests that Congress
      tions in the state.                                                       contemplated the acquisition by bank holding compa-
         FCFT and Hinton do not compete directly in any                         nies of between 5 percent and 25 percent of the voting
      banking market. Accordingly, consummation of this                         shares of banks. For these reasons, the Board con-
      proposal would not have a significantly adverse effect                    cludes that the purchase by FCFT of less than a
      on competition or the concentration of banking re-                        controlling interest in Hinton is not a factor that, by
      sources in any relevant banking market.                                   itself, justifies denial of this application.
         The Board has carefully reviewed comments from                            As part of this proposal, FCFT has made a number
      special counsel to Hinton ("Protestant"), objecting to                    of commitments to address concerns relating to the
      FCFT's acquisition of a minority interest in Hinton.                      effect that its acquisition of shares of Hinton would
      Protestant alleges that FCFT's acquisition of 19 per-                     have on the management and operation of Hinton. In
      cent of Hinton's voting stock would adversely affect                      particular, FCFT has committed that it will not, with-
      Hinton's ability to affiliate with another financial insti-               out the Board's prior approval:
      tution and, thus, impair Hinton's ability to raise capital                    1. Exercise or attempt to exercise a controlling
      and improve services to its community.4 Protestant                           influence over the management or policies of Hinton
      alleges that FCFT eventually intends to acquire con-                         or its bank subsidiary;
      trol of Hinton and would discourage potential compet-                        2. Have or seek to have any employees or represen-
      ing acquirers.5 FCFT maintains that its investment in                        tatives serve as an officer, agent, or employee of
      Hinton is completely passive, and that it will not                           Hinton or its bank subsidiary;
      exercise or attempt to exercise a controlling influence                      3. Seek or accept representation on the board of
      over the management or policies of Hinton or First                           directors of Hinton or its bank subsidiary;
      National.                                                                    4. Take any action causing Hinton or its bank
         The Board previously has approved the acquisition                         subsidiary to become a subsidiary of FCFT;
      by a bank holding company of less than a controlling                         5. Acquire or retain shares of Hinton that would
      interest in a bank, noting that "nothing in section 3(c)                     cause the combined interests of FCFT and its af-
      of the [BHC] Act requires denial of an application                           filiates, officers, and directors to equal or exceed
      solely because a bank holding company proposes to                            25 percent of the outstanding voting shares of Hin-
      acquire less than a controlling interest in a bank or                        ton;
                                                                                   6. Propose a director or a slate of directors in
                                                                                   opposition to a nominee or slate of nominees pro-
                                                                                   posed by the management or board of directors of
        4. Protestant also alleges that FCFT improperly filed its application      Hinton or its bank subsidiary;
     before Hinton became a bank holding company. Hinton, however,                 7. Attempt to influence the dividend policies or
     became a bank holding company before the date that FCFT's appli-
     cation was accepted for processing by the Federal Reserve System.             practices of Hinton or its bank subsidiary;
     Accordingly, this comment docs not warrant a denial of the applica-           8. Solicit or participate in soliciting proxies with
     tion.                                                                         respect to any matter presented to the shareholders
        5. Protestant alleges that FCFT's rights as a dissenting shareholder
     under Delaware law could prevent a common and beneficial type of              of Hinton;
     purchase by a potential acquiror. Protestant asserts that the most            9. Attempt to influence the loan and credit decisions
     attractive type of acquisition for Hinton would be a stock-for-stock
     exchange, under which Hinton shareholders would receive stock of              or policies of Hinton or its subsidiary bank, the
     the acquiror in exchange for their shares, and that such transactions         pricing of services, any personnel decision, the
     generally are structured for accounting purposes as a "pooling of             location of any offices, branching, the hours of
     interests." Under Delaware law, FCFT could elect to receive fair
     market value for its Hinton shares in lieu of a stock-for-stock               operation, or similar activities of Hinton or its bank
     exchange proposal by a potential acquiror ("shareholder dissenter's           subsidiary;
     rights"). See Del. Code Ann. tit. 8, S 262 (1974 & Supp. 1992).               10. Dispose or threaten to dispose of shares of
     Protestant alleges that any such election by FCFT, with shareholdings
     in excess of 10 percent, would preclude "pooling of interests"                Hinton in any manner as a condition of specific
     accounting treatment for a stock exchange proposal because this               action or nonaction by Hinton or its bank subsid-
     accounting treatment is not available if more than 10 percent of the
     acquiree's shares are purchased for cash. See Accounting Principles           iary; and
     Board Opinion No. 16, 1l47(b). The Board notes that the "pooling of
     interests" accounting treatment of an acquisition of Hinton also would
     not be available if one or more other Hinton shareholders with               6. See United Counties Bancorpomtion, 75 Federal Reserve Bulle-
     shareholdings aggregating more than 10 percent exercised their share-      tin 714 (1989); Midlantic Banks, Inc., 70 Federal Reserve Bulletin 776,
     holder dissenter's rights.                                                 776-77 (1984).
November 1994



      1002 Federal Reserve Bulletin • November 1994


         11. Enter into any banking or nonbanking transac-                         the appropriate supervisory authority to "assess the
         tions with Hinton or its bank subsidiary, except that                     institution's record of meeting the credit needs of its
         FCFT and/or its subsidiaries may establish and                            entire community, including low- and moderate-
         maintain deposit accounts with Hinton's bank sub-                         income neighborhoods, consistent with the safe and
         sidiary; provided that the aggregate balance of all                       sound operations of such institution," and to take this
         such deposit accounts does not exceed $100,000,                           record into account in its evaluation of bank holding
         and provided that the accounts are maintained on                          company applications.8
         substantially the same terms as those prevailing for                         In connection with this application, Protestant has
         comparable accounts of persons unaffiliated with                          asserted that FCFT's record of performance under the
         Hinton.                                                                   CRA is unsatisfactory, as demonstrated by the "needs
                                                                                   to improve" rating that FCFT's savings association
         Based on the facts of record and FCFT's commit-                           subsidiary, First Federal Savings Bank, Bluefield,
      ments, the Board concludes that FCFT would not                               West Virginia ("First Federal"), received in its eval-
      acquire control or the ability to exercise a controlling                     uation under the CRA as of April 1993 by its primary
      influence over the management or policies of Hinton                          regulator, the Office of Thrift Supervision ("OTS").
      or impair its ability to raise capital upon consumma-                           The Board has carefully reviewed the CRA perfor-
      tion of this proposal.7 On this basis, the Board does                        mance of FCFT and Hinton, and their subsidiary
      not believe that the proposed ownership of up to                             depository institutions, in light of the CRA, the
      19 percent of the shares of Hinton by FCFT would                             Board's regulations, the jointly issued Statement of
      impede Hinton's ability to improve services to its                           the Federal Financial Supervisory Agencies Regarding
      community. The Board notes that numerous other                               the Community Reinvestment Act ("Agency CRA
      bank holding companies with minority investors have                          Statement"), and Protestant's comments. The Agency
      succesfully raised capital to meet business needs, and                       CRA Statement provides that a CRA examination is an
      there is no evidence in the record, other than the                           important and often controlling factor in determining
      assertion of Protestant, that would support afindingin                       whether convenience and needs factors are consistent
      this case that Hinton would be unable as a result of the                     with approval of an expansionary proposal.
      proposed investment to raise capital as needed. Based                           Initially, the Board notes that First Federal im-
      on these and other facts of record, including Protes-                        proved its CRA performance since the 1993 examina-
      tant's comments, the Board concludes that the finan-                         tion. First Federal took steps to address the deficien-
      cial and managerial resources and future prospects of                        cies noted in the 1993 examination, and to improve its
      FCFT and Hinton, and all other supervisory factors                           CRA performance generally. These steps included the
      the Board must consider under section 3 of the BHC                           appointment of a compliance officer and the develop-
      Act, are consistent with approval of this proposal.                          ment of new CRA programs in response to the credit
                                                                                   needs of its community, including a significantly in-
      Convenience and Needs Considerations                                         creased involvement in West Virginia and Virginia
                                                                                   housing development funds and participation in other
      Section 3 of the BHC Act also requires the Board, in                         state-sponsored home ownership programs targeted to
      every case involving the acquisition by a bank holding                       persons of low- or moderate-income. As a result of
      company of a bank or bank holding company, to                                these and other actions, the OTS upgraded First
      consider the effects of the proposal on the convenience                      Federal's rating to "satisfactory" at its most recent
      and needs of the communities to be served. The Board                         examination for CRA performance as of April 11,1994
      has long held that this analysis includes a review of the                    (the "April 1994 examination"). In the April 1994
      performance under the Community Reinvestment Act                             examination, the OTS found that the geographic dis-
      (12 U.S.C. § 2109 et seq.) ("CRA"). The CRA re-                              tribution of First Federal's credit extensions demon-
      quires federal financial supervisory agencies to en-                         strated a reasonable penetration of all segments of its
      courage financial institutions to help meet the credit                       delineated community. The Board notes that the April
      needs of the local communities in which they operate                         1994 examination did not find any evidence of illegal
      consistent with the safe and sound operation of such                         discrimination or illegal credit practices. Examiners
      institutions. To accomplish this end, the CRA requires                       also found no evidence of any practices or procedures
                                                                                   that would discourage applications for credit from any
                                                                                   segment of First Federal's delineated community.
         7. FCFT would not be able to acquire control of Hinton in the future
      or sell its interest in Hinton to another bank holding company without
      prior Board approval, and the Board would at that time re-examine the
      effects of the proposal under the factors set forth in section 3(c) of the
      BHC Act after providing an opportunity for public comment.                    8. 12 U.S.C. § 2903.
November 1994



                                                                                                              Legal Developments              1003



         The record does not show that the issues raised by                      of this order, or later than three months after the
      examiners in the 1993 examination of First Federal                         effective date of this order, unless such period is
      indicate chronic institutional deficiencies or a pattern                   extended for good cause by the Board or the Federal
      of CRA deficiencies at other FCFT depository institu-                      Reserve Bank of Richmond, acting pursuant to dele-
      tions. FCFT's other three depository institutions each                     gated authority.
      received at least a "satisfactory" rating from their                          By order of the Board of Governors, effective
      primary federal supervisors in their most recent CRA                       September 13, 1994.
      performance examinations, including FCFT's lead
      bank, First Community Bank, Inc., Princeton, West                            Voting for this action: Vice Chairman Blinder and Gover-
      Virginia ("First Community").9                                             nors Kelley, Lindsey, Phillips, and Yellen. Absent and not
         For the foregoing reasons, and based on all facts of                    voting: Chairman Greenspan and Governor LaWare.
      record in this case, the Board concludes that the
                                                                                                                        JENNIFER J. JOHNSON
      convenience and needs considerations, including the
                                                                                                             Deputy Secretary of the Board
      CRA performance records of FCFT and its subsidiary
      depository institutions and those of Hinton and its
      bank subsidiary, are consistent with approval of this
                                                                                 Firstar Corporation
      application.                                                               Milwaukee, Wisconsin
                                                                                 Firstar Corporation of Wisconsin
      Conclusion
                                                                                 Milwaukee, Wisconsin
      Based on the foregoing and other facts of record, the
                                                                                 Order Approving the Acquisition of a Bank Holding
      Board has determined that the application should be,
                                                                                 Company
      and hereby is, approved.10 The Board's approval is
      expressly conditioned on compliance with all the com-
                                                                                 Firstar Corporation and Firstar Corporation of Wis-
      mitments made by FCFT in connection with this
                                                                                 consin, both of Milwaukee, Wisconsin (collectively,
      application, including the commitments discussed in
                                                                                 "Firstar"), bank holding companies within the mean-
      this order. The commitments and conditions relied on
                                                                                 ing of the Bank Holding Company Act ("BHC Act"),
      by the Board in reaching this decision arc deemed to
                                                                                 have applied under section 3 of the BHC Act
      be conditions imposed in writing by the Board in
                                                                                 (12 U.S.C. § 1842) to acquire by merger First South-
      connection with itsfindingsand decision, and, as such,
                                                                                 cast Banking Corp., Lake Geneva, Wisconsin ("First
      may be enforced in proceedings under applicable law.
                                                                                 Southeast"), and thereby indirectly acquire First
         This transaction shall not be consummated before
                                                                                 Southeast's banking subsidiaries, First Bank South-
      the thirtieth calendar day following the effective date
                                                                                 east, N.A., Milwaukee, Wisconsin ("First Bank
                                                                                 Southeast"), and First Bank Southeast of Lake
                                                                                 Geneva, N.A., Lake Geneva, Wisconsin ("First Bank
         9. The following bank subsidiaries of FCFT all received a "satis-       Lake Geneva").
      factory" rating at their most recent examinations for CRA perfor-
      mance: First Community (Board—January 24, 1994); The Flat Top                 Notice of the application, affording interested per-
      National Bank of Bluefield, Bluefield, West Virginia (Office of the        sons an opportunity to submit comments, has been
      Comptroller of the Currency ("OCC")—July 11, 1994); and Peoples
      Bank of Blueweli, Bluewell, West Virginia (Federal Deposit Insurance       published (59 Federal Register 23,717 (1994)). The
      Corporation—January 19, 1994). The Board also notes that First             time for filing comments has expired, and the Board
      National received a "satisfactory" rating by the OCC at its most           has considered the application and all comments re-
      recent examination for CRA performance as of April 19, 1993.
         10. Protestant has requested that the Board hold a public hearing on    ceived in light of the factors set forth in section 3(c) of
      this application. The Board is not required under section 3(b) of the      the BHC Act.
      BHC Act to hold a hearing on an application unless the appropriate
      banking authority for the bank to be acquired makes a timely                  Firstar, with total consolidated assets of $13.9 bil-
      recommendation of denial of the application. In this case, the OCC has     lion, controls 34 subsidiary banks in Wisconsin, Iowa,
      not recommended denial of the proposal.                                    Illinois, Minnesota, and Arizona. Upon consummation
         Generally, under the Board's rules, the Board may, in its discretion,
      hold a public hearing or meeting on an application to clarify factual      of the proposal, Firstar would remain the second
      issues related to the application and to provide an opportunity for        largest commercial banking organization in Wiscon-
      testimony, if appropriate. 12 C.F.R. 262.3(e) and 262.25(d). The           sin, controlling $7 billion in deposits, representing
      Board has carefully considered this request. In the Board's view,
      Protestant has had sufficient opportunity to present written submis-       16.7 percent of the total deposits in commercial bank-
      sions, and has, in fact, submitted written comments that have been         ing organizations in the state.1
      considered by the Board. On the basis of all the facts of record, the
      Board has determined that a public hearing is not necessary to clarify
      the factual record in this application, or otherwise warranted in this
      case. Accordingly, the request for a public hearing on this application      1. Asset data are as of March 31, 1994. All deposit data are as of
      is hereby denied.                                                          June 30, 1993.
November 1994



      1004 Federal Reserve Bulletin • November 1994


      Competitive Considerations                                                 Convenience and Needs Considerations

      Firstar and First Southeast compete directly in the                       In acting upon an application to acquire a depository
      Milwaukee, Kenosha-Racine, and Walworth banking                           institution under the BHC Act, the Board must con-
      markets, all in Wisconsin.2 Upon consummation of                          sider the convenience and needs of the communities to
      this proposal, all these markets would remain moder-                      be served, and take into account the records of the
      ately concentrated as measured by the Herfindahl-                         relevant depository institutions under the Community
      Hirschman Index ("HHI") 3 based on market deposit                         Reinvestment Act (12 U.S.C. § 2901 et seq.) ("CRA").
      calculations in which the deposits of thrift institutions                 The CRA requires the federal financial supervisory
      are included at 50 percent.4 In light of all the facts of                 agencies to encouragefinancialinstitutions to help meet
      record, including the number of depository institutions                   the credit needs of the local communities in which they
      (commercial banks, savings banks and savings associ-                      operate, consistent with the safe and sound operation of
      ations) that would remain in these markets, and the                       such institutions. To accomplish this end, the CRA
      relatively small increases in market share and market                     requires the appropriate federal supervisory authority
      concentration as measured by the HHI,5 the Board                          to "assess the institution's record of meeting the credit
      believes that consummation of this proposal would not                     needs of its entire community, including low- and
      have a significantly adverse effect on competition or                     moderate-income neighborhoods, consistent with the
      the concentration of banking resources in any relevant                    safe and sound operation of such institution," and to
      banking market.6                                                          take that record into account in its evaluation of bank
                                                                                holding company applications.7
                                                                                   The Board has received comments opposing the
         2. The Milwaukee banking market consists of Milwaukee, Ozaukee,
      and Waukesha Counties; Polk, Jackson, Richfield, and Germantown           proposal from the United Paperworkers International
      townships in Washington County; Waterford, Norway, and Raymond            Union ("Protestant"). Protestant alleges that data
      townships in Racine County; East Troy township in Walworth                submitted by Firstar under the Home Mortgage Dis-
      County; and Ixonia township in Jefferson County. The Kenosha-
      Racine banking market consists of Kenosha County, except Wheat-           closure Act ("HMDA") (12 U.S.C. § 2801 et seq.)
      land and Randall townships; and Caledonia, Mount Pleasant,                show that Firstar discriminates in its housing-related
      Yorkville, Dover, and Rochester townships in Racine County. The           lending against minority applicants in the City of
      Walworth banking market consists of Walworth County, except East
      Troy township; Wheatland and Randall townships in Kenosha                 Milwaukee, particularly African-American and
      County; and Burl township in Racine County.                               Hispanic borrowers residing in low-income and dete-
         3. Under the revised Department of Justice Merger Guidelines,          riorating areas in the central city that have been
      49 Federal Register 26,824 (June 29, 1984), a market in which the
      post-merger HHI is between 1000 and 1800 is considered moderately         designated as "target areas" by the Milwaukee Comp-
      concentrated. The Justice Department has informed the Board that a        troller's office.8
      bank merger or acquisition generally will not be challenged (in the
      absence of other factors indicating anti-competitive effects) unless the
      post-merger HHI is at least 1800 and the merger increases the HHI by     Record of Performance Under the CRA
      200 points. The Justice Department has stated that the higher than
      normal HHI thresholds for screening bank mergers for anti-competi-
      tive effects implicitly recognize the competitive effect of limited-     In its consideration of the convenience and needs
      purpose lenders and other non-depository financial entities.             factor under the BHC Act, the Board has carefully
         4. The Board previously has indicated that thrift institutions have
      become, or have the potential to become, major competitors of
      commercial banks. See WM Bancorp, 76 Federal Reserve Bulletin 788
      (1990); National City Corporation, 70 Federal Reserve Bulletin (1984). would remain in the Kenosha-Racine banking market, including one
         5. In the Milwaukee banking market, Firstar would remain the          independent community bank with 21.2 percent of market deposits.
      largest depository institution, controlling 23 percent of the total      Based on the presence of these competitors and for the reasons
      deposits in depository institutions in the market ("market deposits"),   discussed above, the Board believes that the competitive consider-
      and the HHI would increase by five points to 1212. In the Kenosha-       ations in this proposal are consistent with approval and that these
      Racine banking market, Firstar would become the third largest            comments do not warrant denial of the application.
      depository institution, controlling 17 percent of market deposits, and      7. 12 U.S.C. § 2903.
      the HHI would increase by 112 points to 1637. In the Walworth               8. Specifically, Protestant maintains that Firstar affiliates: have
      banking market, Firstar would become the largest depository institu-     higher residential loan denial rates for neighborhoods in the central
      tion, controlling 23 percent of market deposits, and the HHI would       city of Milwaukee than for all other neighborhoods in metropolitan
      increase by 252 points to 1101.                                          Milwaukee; reject applications from minority loan applicants more
         6. The Board has carefully reviewed several comments maintaining      frequently than they reject applications from white applicants; and
      that this proposal would have an anticompetitive effect by eliminating   reject mortgage applications for properties in predominantly minority
      the last major independent bank in the Walworth and Kenosha-Racine       neighborhoods at significantly higher rates than for properties in
      banking markets. The Board notes that a significant number of            predominantly white neighborhoods. Protestant also alleges that
      competitors, including several independent institutions, would remain    Firstar affiliates discriminate against residents of low- and moderate-
      in the two relevant banking markets following consummation of this       income neighborhoods in Racine, and that First Southeast has a
      proposal. In the Walworth banking market, seventeen depository           superior record of housing-related lending in Racine.
      institutions would remain, including two independent community              The Board also has received comments from several individuals
      banks with 11.3 percent and 9.9 percent, respectively, of market         opposing this proposal on the basis of Firstar's record of making
      deposits and six other independent depository institutions with          housing-related loans to minorities in Milwaukee and in the central
      5 percent or more of market deposits. Sixteen depository institutions    city of Milwaukee.
November 1994



                                                                                                 Legal Developments                 1005


      reviewed the CRA performance record of Firstar and         and Firstar's mortgage lending subsidiary, Firstar
      its respective subsidiary banks, as well as all com-       Home Mortgage Corporation, Milwaukee, Wisconsin
      ments received regarding these applications, Firstar's     ("Firstar Mortgage"), in lending to minorities, partic-
      responses to these comments, and all other relevant        ularly African Americans and Hispanics in the central
      facts of record in light of the CRA, the Board's           city of Milwaukee, in light of 1992 and 1993 HMDA
      regulations, and the Statement of the Federal Finan-       data. These data show some disparities in denial rates
      cial Supervisory Agencies Regarding the Community          for African American and Hispanic applicants com-
      Reinvestment Act ("Agency CRA Statement").9                pared to white applicants, and in the denial rates for
         The Board also has carefully considered the com-        applicants from the target area compared to applicants
      ments and information provided by the Oifice of the        from the rest of the Milwaukee MSA. However, the
      Comptroller of the Currency ("OCC"), the primary           HMDA data also indicate that Firstar's housing-
      regulator of Firstar Bank Milwaukee, N.A., Milwau-         related lending to African American and Hispanic
      kee, Wisconsin ("Firstar Milwaukee"), Firstar's lead       borrowers and in low- and moderate-income neighbor-
      subsidiary bank and the primary focus of Protestant's      hoods is comparable to or exceeds the performance of
      comments. The OCC has reviewed this proposal in            lenders in the aggregate in the Milwaukee area. For
      light of Protestant's comments and all its examination     example, Firstar approved a higher percentage of loan
      and other supervisory information relating to the CRA      applications from African Americans and Hispanics
      performance of Firstar Milwaukee and the other na-         than did lenders in the aggregate both in the target area
      tional bank subsidiaries of Firstar. Based on this         and in the Milwaukee MSA as a whole, and its denial
      review, the OCC has concluded that there is no reason      rates for these groups were generally lower than the
      to oppose this transaction.                                denial rates of lenders in the aggregate."
                                                                    The Board is concerned when an institution's record
      A. Evaluations of CRA Performance                          indicates disparities in lending to minority applicants
                                                                 and in low- and moderate-income neighborhoods and
      The Agency CRA Statement provides that a CRA               believes that all banks are obligated to ensure that
      examination is an important and often controlling          their lending practices are based on criteria that assure
      factor in the consideration of an institution's CRA        not only safe and sound lending, but also assure equal
      record and that these reports will be given great weight   access to credit by creditworthy applicants regardless
      in the applications process.10 In this case, the Board     of race or residential area. The Board recognizes,
      notes that Firstar Milwaukee received a "satisfacto-       however, that HMDA data alone provide an incom-
      ry" rating from the OCC at its most recent examina-        plete measure of an institution's lending in its com-
      tion for CRA performance as of July 5, 1993, and that      munity and have limitations that make the data an
      Firstar Bank Racine, Racine, Wisconsin ("Firstar Ra-       inadequate basis, absent other information, for con-
      cine"), received an "outstanding" rating from its pri-     clusively determining whether an institution has
      mary regulator, the Federal Deposit Insurance Corpo-       engaged in illegal discrimination in making lending
      ration ("FDIC"), at its most recent examination for        decisions.
      CRA performance as of May 27, 1992. In addition, all         The most recent OCC examination of Firstar Mil-
      remaining 32 subsidiary banks of Firstar have received     waukee found no evidence of illegal discrimination
      either "outstanding" or "satisfactory" ratings from        against minorities or low- and moderate-income bor-
      their primary regulators in their most recent examina-     rowers. Examiners also found no evidence of any
      tions for CRA performance. First Bank Southeast re-        practices or procedures that would discourage appli-
      ceived a "satisfactory" rating from the OCC at its most    cations for available credit from any geographical
      recent examination for CRA performance as of Novem-        segment of its delineated community. Moreover, these
      ber 15, 1993, and First Bank Lake Geneva received a
      "satisfactory" rating from the OCC at its most recent
      examination for CRA performance as of May 21, 1991.
                                                                    11. Protestant also criticizes Firstar's performance in the target area
                                                                 by comparing the percentage of housing-related loans originated in
      B. HMDA Data                                               1992 by Firstar Milwaukee (14 percent) with the percentage of such
                                                                 loans originated by First Bank Southeast (21 percent). The record
                                                                 indicates, however, that Firstar Milwaukee and Firstar Mortgage
      The Board has carefully reviewed Protestant's alle-        originated 128 housing-related loans in the target area during 1992,
                                                                 while First Southeast originated 16 such loans. The relative percent-
      gations regarding the record of Firstar Milwaukee          ages of loans made by Firstar and First Southeast in the target area are
                                                                 not directly comparable because of a significant difference in the size
                                                                 of the institutions and the communities they serve. First Bank
                                                                 Southeast has a single branch in the Milwaukee banking market, with
       9. 54 Federal Register 13,742 (1989).                     $11 million in deposits, located in the target area, while Firstar
       10. Id. at 13,745 (1989).                                 Milwaukee serves nearly the entire Milwaukee MSA.
November 1994



      1006 Federal Reserve Bulletin • November 1994


      examinations indicate generally that the geographic                       which was more than 50 percent higher than the
      distribution of Firstar Milwaukee's credit extensions,                    percentage during each period for any other large
      applications, and denials reflect reasonable penetra-                     lender as determined by the Milwaukee Comptroller.
      tion in all segments of its delineated community,                         In 1992, Firstar made 452 conventional home mortgage
      including low- and moderate-income neighborhoods.12                       loans in the Milwaukee MSA, including 76 loans
         The OCC also conducted a fair lending examination                      totalling $3.1 million in low- and moderate-income
      of Firstar Mortgage as of June 30, 1993, and found no                     census tracts and 19 loans totalling $523,000 in pre-
      evidence of racial discrimination. In the examination,                    dominantly minority census tracts. In 1993, Firstar
      the OCC reviewed the loan files for all minority                          made 580 conventional home mortgage loans in the
      applicants denied loans and compared them to the files                    Milwaukee MSA, including 84 loans totalling $3.8
      of white applicants provided loans. The OCC con-                          million in low- and moderate-income census tracts and
      cluded that all these loans denials were appropriate                      16 loans totalling $456,000 in predominantly minority
      and that minority and non-minority applicants re-                         census tracts. Firstar also made 145 home improve-
      ceived equivalent levels of assistance during the loan                    ment loans totalling $1.3 million in low- and moderate-
      application process.13                                                    income census tracts in 1992 and 170 such loans
                                                                                totalling $1.6 million in 1993, and made 67 home
      C. Other Aspects of CRA Performance                                       improvement loans totalling $450,000 in predomi-
                                                                                nantly minority census tracts in 1992 and 69 such loans
      The record in this case indicates that Firstar provides                   totalling $656 thousand in 1993. In addition, Firstar
      a substantial amount of housing-related loans through-                    Milwaukee participates in several governmentally guar-
      out the Milwaukee MSA, including the target area.                         anteed housing loan programs, including programs of
      The Board notes that the Milwaukee Comptroller's                          the Wisconsin Housing and Economic Development
      1993 review of lending practices ranked Firstar Mil-                      Authority ("WHEDA"), the Wisconsin Department of
      waukee first among large lenders in the percentage of                     Veterans Affairs, and the Farmers Home Loan Admin-
      residential lending in the target area.M The Milwaukee                    istration. In 1991, Firstar Milwaukee made 80 loans
      Comptroller found that Firstar Milwaukee made                             through these programs, totalling $4.2 million.
      13.2 percent of its housing-related loans (excluding                         Firstar also has participated in every program of-
      home refinancing loans) in the target area in 1991, and                   fered by the City of Milwaukee to encourage home
      14.3 percent of such loans in the target area in 1992,                    ownership in the target area. During 1990 and 1991,
                                                                                Firstar Milwaukee originated $5.3 million in loans
                                                                                under the city's Making Ownership a Reality program,
         12. The OCC has identified several loan transactions in which          including $700,000 in loans in lower-income neighbor-
      Firstar Milwaukee and two other Firstar subsidiary banks, Firstar
      Bank Des Moines, N.A., Des Moines, Iowa, and Firstar Bank Cedar           hoods, to finance the purchase and rehabilitation of
      Rapids, N.A., Cedar Rapids, Iowa ("Firstar Cedar Rapids"), have           housing by lower-income families. The bank also has
      failed to comply with the Equal Credit Opportunity Act (15 U.S.C.         participated in the city's Buy in Your Neighborhood
      § 1601 etxeq.) ;ind the Board's Regulation B(12 C.F.R. 202.1 et seq,).
      These transactions involved the treatment of the income of certain        program to help homeowners buy second homes as
      unmarried joint applicants for consumer loans. In addition, the OCC       rental properties in their immediate neighborhoods
      determined that Firstar Cedar Rapids improperly discounted the            and the Duplex as a Starter Home program to provide
      income of certain other applicants for consumer loans. No real estate
      related loans were affected. Firstar has implemented a number of steps    loans for the purchase of duplexes. In addition, Firstar
      to ensure that these violations do not occur in the future, including a   Milwaukee served as joint managing underwriter in
      revised consumer lending policy developed in consultation with the
      OCC, and extensive training sessions for all its lenders.                 1991 for $169 million of bonds issued by WHEDA to
         13. Protestant also alleges that Firstar Mortgage discriminates        finance low-income housing in Milwaukee and else-
      against residents of low- and moderate-income neighborhoods in            where in Wisconsin, and has underwritten bond issues
      Racine. The OCC included all denials of applications from minorities
      in Racine in its fair lending examination of Firstar Mortgage, and        by the Milwaukee Housing Authority. Firstar Milwau-
      found no evidence of racial discrimination. In addition, the most         kee also has developed supplemental products and
      recent CRA performance examination of Firstar Racine by its primary       programs. The bank offers a Your Way to a Home
      regulator, the FDIC, found no evidence of practices intended to
      discourage credit applications or violations of the substantive provi-    Loan, which features reduced down payment and
      sions of fair lending and fair housing laws. In this regard, the          debt-to-income requirements, reduced closing costs,
      examination noted that all credit denials are reviewed by a senior        alternative credit documentation, no private mortgage
      officer to verify the appropriateness of the denial. In addition, exam-
      iners found that the bank's delineated community did not exclude any      insurance requirement, and no application fee, a Rapid
      low- and moderate-income neighborhoods, and that its loans and            Equity Loan, which provides a standard first mortgage
      financial services were distributed throughout the community.
         14. The Milwaukee Comptroller separates lenders that originate
                                                                                loan together with a short-term second mortgage loan,
      more than $25 million in residential loans (excluding home refinancing    and a home purchase and rehabilitation loan that
      loans) in one year from lenders that make a smaller dollar volume of      requires no repayment of principal during the first six
      such loans for purposes of comparing the concentration of their
      lending in the target area.                                               months. Firstar Milwaukee also has committed to
November 1994



                                                                                                             Legal Developments                1007



      purchase $200,000 of home improvement and second                         hospital in a low- to moderate-income area to provide
      mortgage loans from Neighborhood Housing Services,                       business and medical office space to accommodate
      a non-profit agency promoting neighborhood revital-                      over 300 new jobs.
      ization.15
         Firstar Milwaukee also has taken steps to improve                     Conclusions Regarding Convenience and Needs
      the marketing of its special lending programs and to                     Factors
      encourage more home ownership among low-income
      residents. In July 1993, Firstar Milwaukee integrated                    In considering the overall CRA performance records
      these programs into the Community Home Works                             of Firstar, its subsidiary banks, Firstar Mortgage, and
      Program, which it promotes through its network of                        First Southeast, the Board has carefully considered
      45 branches (including eight branches in low- and                        the entire record, including the public comments. The
      moderate-income census tracts, two branches contig-                      Board is concerned by the disparities in the HMDA
      uous to such census tracts, and five branches located                    data concerning the percentage of minority and target
      in adjacent census tracts), a weekly radio call-in pro-                  area applicants that Firstar denies as compared to
      gram on home ownership issues, bilingual loan coun-                      non-minority and higher-income applicants. The
      seling, and sponsorship of inner-city "Parade of                         Board notes, however, that the record, including CRA
      Homes" events. From July 1993 through May 1994,                          performance examinations, indicates that Firstar's
      Firstar Milwaukee received 91 applications under the                     housing-related lending to minority and low- and
      program, closed 61 loans, and denied only four appli-                    moderate-income borrowers is generally satisfactory.
      cations.                                                                 These examinations and the fair lending examination
         Firstar Milwaukee's community development cor-                        of Firstar Mortgage by the OCC found no evidence of
      poration subsidiary, Firstar Community Investment                        illegal discrimination by Firstar in housing-related
      Corporation, Milwaukee, Wisconsin ("FCIC"), also                         lending. The Board further notes the relatively large
      assists in meeting the housing needs of low- and                         volume of lending by Firstar, as compared to its peers,
      moderate-income members of the community, partic-                        in the target area and the programs Firstar Milwaukee
      ularly in the central city of Milwaukee. FCIC arranged                   has adopted to address the specific housing-related
      financing, invested as a limited partner, planned and                    credit needs of low- and moderate-income borrowers
      coordinated, and served as guarantor for the                             and of residents of the central city of Milwaukee. The
      $9.2 million Johnson Square housing rehabilitation                       Board expects Firstar to continue to implement its
      project, the largest such project in Wisconsin. Com-                     CRA initiatives and to address the issues raised by the
      pleted in 1992, this project renovated six dilapidated                   OCC in its most recent CRA performance examination
      apartment buildings in order to create 179 low- and                      of Firstar Milwaukee and other national banks. The
      moderate-income apartments and to provide on-site                        Board will continue to monitor implementation by
      day-care and Head Start facilities.16 FCIC also served                   Firstar of the steps taken to address the matters
      as developer for the $4.2 million renovation of a                        discussed in this order, and will take this review into
      deteriorating former bank building to create 100 apart-                  account in future applications by Firstar. Based on a
      ments for low-income residents, and is serving as                        review of the entire record of performance in this case,
      developer and an equity investor in a $8.7 million                       including Protestant's comments, Firstar's response to
      project nearing completion to rehabilitate five apart-                   these comments, the relevant reports of examination,
      ment buildings in order to provide 50 units of low-                      and the steps taken by Firstar to address the issues
      income housing and social services on Milwaukee's                        raised by the OCC, the Board has concluded that the
      Near West Side. In addition, FCIC has invested                           efforts of Firstar to help meet the credit needs of all
      $400,000 in the Housing Equity Fund to develop new                       segments of the communities served by its subsidiary
      housing initiatives in Milwaukee and planned and                         banks are consistent with approval of this applica-
      coordinated the $16 million renovation of a vacant                       tion.17


         15. Firstar Racine addresses the credit needs of low- and moderate-      17. Protestant and the individual commenters have requested thai
      income borrowers in the Racine MSA by participating in the GE            the Board hold a public meeting or hearing on these applications. The
      Capital Home Buyer's Program, which provides credit counseling and       Board is not required under section 3(b) of the BHC Act to hold a
      employs modified employment, debt-to-income, and credit history          hearing on an application unless the appropriate banking authority for
      requirements, and in FHA, VA, and Wisconsin Housing and Eco-             the bank to be acquired makes a timely written recommendation of
      nomic Development Authority loan programs.                               denial of the application. As previously noted, the OCC has not
         16. Firstar Milwaukee provided construction financing for the         recommended denial of this proposal.
      project. More than 50 percent of the construction contracts for the         Under the Board's rules, the Board may, at its discretion, hold a
      project were awarded to minority-owned firms, and nearly 10 percent      public hearing or meeting on an application to clarify factual issues
      of the construction contracts for the project were awarded to firms      related to the application, and to provide an opportunity for testi-
      owned by women.                                                          mony, if appropriate. 12 C.F.R. 262.3(c) and 262.25(d). The Board has
November 1994



      1008 Federal Reserve Bulletin • November 1994


      Other Considerations                                                         Notice of the application, affording interested per-
                                                                                sons an opportunity to submit comments, has been
      The financial and managerial resources and future                         published (59 Federal Register 31,996 (1994)). The
      prospects of Firstar, First Southeast, and their respec-                  time for filing comments has expired, and the Board
      tive banking subsidiaries, and other supervisory fac-                     has considered the application and all comments re-
      tors the Board must consider under section 3 of the                       ceived in light of the factors set forth in section 3 of the
      BHC Act, also are consistent with approval.                               BHC Act.
                                                                                   Keweenaw, with total consolidated assets of ap-
      Conclusion                                                                proximately $112 million, controls one bank, Superior
                                                                                National Bank and Trust Company, Hancock, Michi-
      Based on the foregoing and other facts of record, the                     gan ("Superior National").1 Keweenaw is the 54th
      Board has determined that this application should be,                     largest commercial banking organization in Michigan,
      and hereby is, approved. The Board's approval is                          controlling $101.8 million in deposits, representing less
      expressly conditioned upon compliance with all the                        than 1 percent of total deposits in commercial banks in
      commitments made by Firstar in connection with this                       the state.2 Bank controls $41.1 million in deposits,
      application and with the conditions referred to in this                   representing less than 1 percent of total deposits in
      order. The commitments and conditions relied on by                        commercial banks in the state. Upon consummation of
      the Board in reaching this decision are both deemed to                    this proposal, Keweenaw would become the 36th
      be conditions imposed in writing by the Board in                          largest commercial banking organization in Michigan,
      connection with itsfindingsand decision, and, as such,                    controlling $142.9 million in deposits, representing less
      may be enforced in proceedings under applicable law.                      than 1 percent of total deposits in commercial banks in
         This transaction shall not be consummated before                       the state.
      the thirtieth calendar day following the effective date                      Keweenaw and Bank compete directly in the Calu-
      of this order, or later than three months after the                       met, Michigan banking market ("Calumet banking
      effective date of this order, unless such period is                       market").3 Keweenaw's subsidiary bank, Superior
      extended by the Board or by the Federal Reserve Bank                      National, is the largest of seven depository institu-
      of Chicago, acting pursuant to delegated authority.                       tions4 that operate in the market, controlling deposits
         By order of the Board of Governors, effective                          of $101.8 million, representing 25.8 percent of total
      September 6, 1994.                                                        deposits in depository institutions in the market
                                                                                ("market deposits").5 Bank is the fifth largest depos-
       Voting for this action: Chairman Greenspan, Vice Chair-                  itory institution in the Calumet banking market,
      man Blinder, and Governors Kelley, Lindsey, Phillips, and                 controlling deposits of $40.4 million, representing
      Yellen. Absent and not voting: Governor LaWare.                           10.2 percent of market deposits. Upon consummation
                                                                                of this proposal, Superior National would remain the
                                                  WILLIAM W. WILES
                                                                                largest depository institution in the Calumet banking
                                              Secretary of the Board            market, controlling deposits of $142.2 million, repre-
                                                                                senting 36.1 percent of market deposits. The Herfind-
      Keweenaw Financial Corporation                                            ahl-Hirschman Index ("HHI") would increase by 371
      Hancock, Michigan                                                         points to 2220.6
      Order Approving the Acquisition of a Bank
                                                                                   1. Asset data are as of June 30, 1994.
      Keweenaw Financial Corporation, Hancock, Michi-                              2. State deposit data are as of March 31, 1994.
      gan ("Keweenaw"), a bank holding company within                              3. The Calumet banking market is approximated by Keweenaw,
      the meaning of the Bank Holding Company Act                               Houghton, and Baraga counties, all in Michigan.
                                                                                   4. When used in this context, the term "depository institution"
      ("BHC Act"), has applied under section 3 of the BHC                       includes commercial banks, savings banks, and savings associations.
      Act (12 U.S.C. 8 1842) to acquire Commercial Na-                          Market share data are based on calculations in which the deposits of
      tional Bank of L'Anse, L'Anse, Michigan ("Bank").                         thrift institutions are included at 50 percent. The Board previously has
                                                                                indicated that thrift institutions have become, or have the potential to
                                                                                become, major competitors of commercial banks. See Midwest Finan-
                                                                                cial Group, 75 Federal Reserve Bulletin 386 (1989); National City
      carefully considered this request. In the Board's view, interested        Corporation, 70 Federal Reserve Bulletin 743 (1984).
      parties have had A sufficient opportunity to present written submis-         5. Market deposit data are as of June 30, 1994.
      sions, and Protestant has submitted substantial written comments that        6. Under the revised Department of Justice Merger Guidelines (49
      have been considered by the Board. On the basis of all the facts of       Federal Register 26,823 (June 29, 1984)), a market in which the
      record, the Board has determined that a public meeting or hearing is      post-merger HHI exceeds 1800 is considered to be highly concen-
      not necessary to clarify the factual record in these applications, or     trated. In such markets, the Justice Department is likely to challenge
      otherwise warranted in this case. Accordingly, the request for a public   a merger that increases the HHI by more than 50 points. The Justice
      meeting or hearing on these applications is hereby denied.                Department has informed the Board that a bank merger or acquisition
November 1994



                                                                                                        Legal Developments          1009


         A number of factors in this case indicate that the                      Based on the foregoing and all the other facts of
      increase in the concentration level of the Calumet                      record, the Board has determined that this application
      banking market, as measured by the HHI, tends to                        should be, and hereby is, approved. The Board's
      overstate the competitive effects of this proposal. For                 approval of this proposal is expressly conditioned
      example, upon consummation of this proposal, six                        upon compliance with all the commitments made by
      competitors would remain in the market, including a                     Keweenaw in connection with this application, and
      large multistate bank holding company and the largest                   with the conditions in this order. For purposes of this
      banking organization headquartered in Michigan's Up-                    action, these commitments and conditions are deemed
      per Peninsula. Four of these competitors would have                     to be conditions imposed in writing by the Board in
      market shares of at least 14 percent, and all the                       connection with itsfindingsand decision, and, as such,
      institutions that compete in the market would have                      may be enforced in proceedings under applicable law.
      market shares of at least 7 percent. One of these                          This transaction shall not be consummated before
      organizations entered the Calumet banking market in                     the thirtieth calendar day following the effective date
       1994 through an acquisition, indicating that the market                of this order, or later than three months after the
      may be attractive to entry. In addition, the Calumet                    effective date of this order, unless such period is
      banking market has become less concentrated in re-                      extended for good cause by the Board or by the
      cent years; the HHI has decreased more than 300                         Federal Reserve Bank of Minneapolis, acting pursuant
      points since 1989. Moreover, there are numerous                         to delegated authority.
      potential entrants to the Calumet banking market,                          By order of the Board of Governors, effective
      since Michigan permits statewide branching and acqui-                   September 12, 1994.
      sitions by out-of-state bank holding companies on a
      nationwide reciprocal basis.7 Finally, consummation                       Voting for this action: Vice Chairman Blinder and Gover-
      of this proposal would not result in the loss of an                     nors Kelley, Lindsey, Phillips, and Yellen. Absent and not
      independent competitor in the Calumet banking mar-                      voting: Chairman Greenspan and Governor LaWare.
      ket since Bank is part of a two-bank chain banking
      organization that includes First National Bank of                                                         JENNIFER J. JOHNSON
      Calumet-Lake Linden, Calumet, Michigan, another                                                 Deputy Secretary of the Board
      depository institution that competes in the Calumet
      banking market. The Board also notes that the Depart-
      ment of Justice and Office of the Comptroller of the                    Midwest Bancshares, Inc.
      Currency have considered the potential anticompeti-                     Poplar Bluff, Missouri
      tive impact of the proposal, and have not objected to
      the proposal. Based on the foregoing considerations,                    Order Approving Acquisition of a Bank Holding
      and all the other facts of record, the Board has con-                   Company
      cluded that consummation of this proposal would not
      result in a significantly adverse effect on competition or
      the concentration of banking resources in the Calumet                   Midwest Bancshares, Inc., Poplar Bluff, Missouri
      banking market or any other relevant banking market.                    ("Midwest"), a bank holding company within the
                                                                              meaning of the Bank Holding Company Act ("BHC
         The Board also has concluded that the financial                      Act"), has applied under section 3 of the BHC Act
      and managerial resources and future prospects of                        (12 U.S.C. § 1842) to acquire all the voting shares of
      Keweenaw and its subsidiaries and Bank, and all other                   First Southern Missouri Bancshares, Inc., Poplar
      supervisory factors the Board must consider under                       Bluff, Missouri ("First Southern"), and thereby indi-
      section 3 of the BHC Act, are consistent with approval                  rectly acquire Carter County State Bank, Van Buren,
      of this application. Considerations relating to the con-                Missouri ("Bank").
      venience and needs of the communities to be served                         Notice of the application, affording interested per-
      also are consistent with approval.                                      sons an opportunity to submit comments, has been
                                                                              published (59 Federal Register 30,003 (1994)). The
                                                                              time for filing comments has expired, and the Board
      generally will not be challenged (in the absence of other factors       has considered the application and all comments re-
      indicating anti-competitive effects) unless the post-merger HHI is at   ceived in light of the factors set forth in section 3(c) of
      least 1800 and the merger increases the HHI by more than 200 points.    the BHC Act.
      The Justice Department has stated that the higher than normal
      threshold for an increase in the HHI when screening bank mergers and       Midwest is the 51st largest commercial banking
      acquisitions for anti-competitive effects implicitly recognizes the     organization in Missouri, controlling three subsidiary
      competitive effects of limited-purpose lenders and other non-deposi-
      tory financial entities.                                                banks with total deposits of $97.2 million, representing
         7. MICH. STAT. ANN. §8 23.710(130b) and 23.710(171).                 less than 1 percent of total deposits in commercial
November 1994



      1010 Federal Reserve Bulletin • November 1994


      banking organizations in the state.1 First Southern, a                     by the Federal Reserve Bank of St. Louis, acting
      one-bank holding company, is the 277th largest com-                        pursuant to delegated authority.
      mercial banking organization in the state, controlling                       By order of the Board of Governors, effective
      total deposits of $16.9 million, representing less than                    September 6, 1994.
       1 percent of total deposits in commercial banking
      organizations in the state. Upon consummation of this                       Voting for this action: Chairman Greenspan, Vice Chair-
      proposal, Midwest would become the 45th largest                            man Blinder, and Governors Kelley, Lindsey, Phillips, and
      commercial banking organization in the state, control-                     Yellen. Absent and not voting: Governor LaWare.
      ling total deposits of $114.1 million, representing less
                                                                                                                          WILLIAM W. W I L E S
      than 1 percent of total deposits in commercial banking
      organizations in the state. Midwest and First Southern                                                          Secretary of the Board
      do not compete directly in any banking market. Ac-
      cordingly, consummation of this proposal would not                         ! Omnibanc Corporation
      have a significantly adverse effect on competition or                       River Rouge, Michigan
      the concentration of banking resources in any relevant
      banking market.                                                            Order Approving Acquisition of a Bank Holding
                                                                                 Company
         The Board also concludes that financial and mana-
      gerial resources and future prospects of Midwest, First
                                                                                 Omnibanc Corporation, River Rouge, Michigan
      Southern, and their respective subsidiary banks, and
                                                                                 ("Omnibanc"), a bank holding company within the
      the other supervisory factors that the Board must
                                                                                 meaning of the Bank Holding Company Act ("BHC
      consider under section 3 of the BHC Act, are consis-
                                                                                 Act"), has applied under section 3 of the BHC Act
      tent with approval of this proposal.2 Considerations
                                                                                 (12 U.S.C. 8 1842) to acquire Indecorp, Inc., Chicago,
      relating to the convenience and needs of the commu-
                                                                                 Illinois ("Indecorp"), and thereby indirectly acquire
      nities to be served also are consistent with approval.
                                                                                 Indecorp's subsidiary banks, Independence Bank of
         Based on the foregoing and other facts of record, the                   Chicago ("Independence Bank"), and Drexel Na-
      Board has determined that the application should be,                       tional Bank, both of Chicago, Illinois.1
      and hereby is, approved. The Board's approval is
                                                                                    Notice of the application, affording interested per-
      expressly conditioned on compliance with all the com-
                                                                                 sons an opportunity to submit comments has been
      mitments made by Midwest in connection with this
                                                                                 published (58 Federal Register 67,411 (1993)). The
      application. The commitments and conditions relied on
                                                                                 time for filing comments has expired, and the Board
      by the Board in reaching this decision are both deemed
                                                                                 has considered the application and all comments re-
      to be conditions imposed in writing by the Board in
                                                                                 ceived in light of the factors set forth in section 3 of the
      connection with itsfindingsand decision, and, as such,
                                                                                 BHC Act.
      may be enforced in proceedings under applicable law.
                                                                                    Omnibanc is the 144th largest commercial banking
         The acquisition of First Southern shall not be con-
                                                                                 organization in Michigan, controlling one banking
      summated before the thirtieth calendar day following
                                                                                 subsidiary with $15.9 million in deposits, representing
      the effective date of this order, or later than three
                                                                                 less than 1 percent of the total deposits in commercial
      months after the effective date of this order, unless
                                                                                 banking organizations in the state.2 Indecorp is the
      such period is extended for good cause by the Board or
                                                                                 79th largest commercial banking organization in
                                                                                 Illinois, controlling two subsidiary banks with
                                                                                 $227.4 million in deposits, representing less than 1
         1. All banking data arc as of June 30, 1993.
         2. The Board has carefully considered comments received from a          percent of the total deposits in commercial banking
      minority shareholder of Bank ("Protestant") who maintains that the         organizations in Illinois. Upon consummation of this
      principal shareholder is paid excessive compensation as president and      proposal, Omnibanc would become the 79th largest
      chairman of the bank holding companies and Bank. Protestant also
      believes that the provision of data processing and consulting services     commercial banking organization in Illinois.
      to Bank and Midwest by two companies ownetl by the principal                  Section 3(d) of the BHC Act, the Douglas Amend-
      shareholder, and the acquisition of all the shares of a bank holding
      company by a bank holding company controlled by the target's owner,        ment, prohibits the Board from approving an applica-
      raise supervisory concerns. The Board notes that the principal share-
      holder's compensation was reduced in 1993 as a result of a consult-
      ant's study. In addition, federal law requires that the purchase of          1. Omnibanc proposes to merge its wholly owned subsidiary,
      services from an affiliate must be on a fair market basis. These           Omnibanc Illinois, Inc., into Indecorp. Upon consummation of this
      comments have been reviewed in light of information contained in           proposal, the surviving entity would operate as a second tier bank
      reports of examinations conducted by the primary federal regulators of     holding company under the name, Indecorp, Inc. Drexel National
      Bank and the bank holding companies. As part of the examination            Bank is owned by Drexel Holding Company, Chicago, Illinois, a
      process, the examiners consider the fees paid to affiliated providers of   wholly owned subsidiary of Indecorp. Drexel Holding Company
      services and compensation. Based on all the facts of record, the Board     would be liquidated upon consummation of this proposal.
      concludes that these comments do not warrant denial of the application.      2. Banking data are as of June 30, 1992.
November 1994



                                                                                                           Legal Developments              1011


      tion by a bank holding company to acquire control of                    Omnibanc are inadequate to acquire a substantially
      any bank located outside its home state, unless such                    larger banking organization like Indecorp. Protestants
      acquisition is "specifically authorized by the statute                  also assert that managerial considerations relating to
      laws of the State in which such bank is located, by                     the chief executive officer and principal shareholder of
      language to that effect and not merely by implica-                      Omnibanc ("Principal") are inconsistent with ap-
      tion."3 For purposes of the Douglas Amendment, the                      proval. The Board has carefully reviewed these com-
      home state of Omnibanc is Michigan and the home                         ments in light of all the facts of record in assessing the
      state of Indecorp is Illinois.                                          statutory factors in this case.
          The interstate banking statutes of Illinois permit                     Omnibanc has provided detailed financial projec-
      out-of-state bank holding companies to acquire Illinois                 tions and strategic plans for addressing potential issues
      banking organizations if the laws of the state where the                associated with acquiring a larger organization. The
      acquiring company is located permit acquisitions by an                  Board notes that the acquisition is substantially fi-
      Illinois bank holding company under conditions sub-                     nanced with equity and that, upon consummation of the
      stantially similar to those imposed by Illinois.4 Mich-                 proposal, Omnibanc's consolidated capital ratios would
      igan's interstate banking statute authorizes the acqui-                 exceed the thresholds for well-capitalized institutions.
      sition of Michigan banking organizations by out-of-                     In addition, Omnibanc's strategic plan contains detailed
      state bank holding companies located within a defined                   operational and managerial steps that would be taken to
      region, which includes Illinois, on a reciprocal basis if               integrate and manage the combined entity.
      the laws of the state where the acquiring bank holding                     The Board also has carefully considered comments
      company is located would not impose unduly restric-                     on the competence, experience and integrity of Prin-
      tive conditions on an acquisition by a Michigan bank                    cipal that allege improper actions by Principal, primar-
      holding company.5 The Illinois and Michigan banking                     ily during the early 198()'s, when he was involved in
      supervisors have indicated that their reciprocity re-                   two cable television ventures. The Board notes that
      quirements have been met/' In light of the foregoing,                   proceedings by the Disciplinary Commission of the
      the Board has determined that its approval of this                      Ohio state bar ("Disciplinary Commission") against
      proposal is not prohibited by the Douglas Amendment.                    Principal, who is licensed to practice law in Ohio, are
      Approval of this proposal is conditioned on Omnibanc                    pending.7
      obtaining all required state approvals.                                    The Board has considered the information provided
         Omnibanc and Indecorp do not compete directly in                     by Protestants regarding these matters, and the expla-
      any relevant banking market. Therefore, based on all                    nations and information provided by Principal, as well
      the facts of record, the Board concludes that Omni-                     as the record of financial and managerial performance
      banc's acquisition of Indecorp and its subsidiary banks                 of Omnibanc's management as disclosed in reports of
      would not result in any significantly adverse effects on                examination by federal and state regulators. The
      the concentration of banking resources or on compe-                     Board has reviewed this information in light of a
      tition in any relevant banking market.                                  number of additional factors, including Principal's
         The Board received a number of comments support-                     record of involvement with Omnibanc's bank subsid-
      ing this proposal from individuals, community-based                     iary, OmniBank, since 1989 and the fact that the
      groups and public officials, who believe that Omni-                     allegations raised by Protestants are currently the
      banc's plan to strengthen investment and economic                       subject of review by the Disciplinary Commission.
      development would benefit the community, particu-                       The Board notes that Principal has had a satisfactory
      larly in view of Omnibanc's record of performance in                    record of managerial performance in banking since
      the banking industry. The Board also has received                       1989 when he acquired OmniBank, and has provided
      comments from individuals ("Protestants") contend-                      substantial equity capital to improve the financial
      ing that the financial and managerial resources of                      condition of Omnibanc's subsidiary bank. Principal
                                                                              maintains that none of the actions under review by the
                                                                              Disciplinary Commission or raised by Protestants in-
         3. 12 U.S.C. § lK42(d). A bank holding company's home state is       volve wrongdoing on his part. Nevertheless, Principal
      that state in which the operations of the bank holding company's        has committed that he will not serve as an officer or
      banking subsidiaries were principally conducted on July 1, 1966, or     director of Indecorp's subsidiary banks while the
      the date on which the company became a bank holding company,
      whichever is later.                                                     Disciplinary Commission proceedings are pending,
        4. S.H.A. 205 ILCS KM.071 (West 1994).
        5. MSA § 23.710 (1606) (1994 Supp.).
        (i. The Board also has considered this transaction as if [ndecorp,
      with a home state of Illinois, were acquiring Omnibanc. As noted          7. The Disciplinary Commission publicly reprimanded Principal in
      above, the relevant banking statutes of Illinois would permit the       1982 for altering the date on an auditor's opinion Setter filed in
      acquisition of an Illinois bank holding company by a Michigan banking   connection with the payment of a franchise tax by his cable company
      organization.                                                           to the city of Columbus, Ohio.
November 1994



      1012 Federal Reserve Bulletin • November 1994


      and that he will resign his positions with Omnibanc                         be, and hereby is, approved. The Board's approval of
      upon the request of the Board if the proceedings result                     this proposal is expressly conditioned on compliance
      in a significantly adverse finding against him.                             with the commitments made by Omnibanc and Princi-
         Based on all the facts of record, including informa-                     pal in connection with this application and the condi-
      tion provided by the commenters, Omnibanc, and the                          tions discussed in this order. The commitments and
      Disciplinary Commission, relevant reports of exami-                         conditions relied on by the Board in reaching this
      nation, and Principal's commitments in this case, the                       decision are deemed to be conditions imposed in
      Board believes that considerations relating to the                          writing by the Board in connection with its findings
      managerial resources are consistent with approval.8 In                      and decision and, as such, may be enforced in pro-
      addition, based on the facts of record, including the                       ceedings under applicable law.
      matters discussed above, and commitments made by                               This transaction shall not be consummated before
      Omnibanc and Principal, the Board believes that con-                        the thirtieth calendar day following the effective date
      siderations relating to the financial resources, future                     of this order, or later than three months after the
      prospects of the institutions involved, the convenience                     effective date of this order, unless such period is
      and needs of the community9 and other supervisory                           extended for good cause by the Board or by the
      considerations are also consistent with approval.10                         Federal Reserve Bank of Chicago, acting pursuant to
      Thus, the Board does not believe that Protestants'                          delegated authority.
      comments warrant a denial of this application.                                 By order of the Board of Governors, effective
         Based on the foregoing and all the facts of record,                      September 14, 1994.
      the Board has determined that the application should
                                                                                   Voting for this action: Chairman Greenspan, Vice Chair-
                                                                                  man Blinder, and Governors Kelley, Lindsey, Phillips, and
         8. Another commcnter contends (hat Omnibanc is required tofilea          Yellen. Absent and not voting: Governor LaWare.
      tender offer with the U.S. Securities and Exchange Commission
      ("SEC") under section 14(d) of the Securities Exchange Act of 1934                                                  JENNIFER J. JOHNSON
      (the "1934 Act"). Section 14(d) regulates tender offers, which are                                       Deputy Secretary of the Board
      offers made directly to the shareholders of the target company, for any
      class of security registered under section 12 of the 1934 Act. No filing
      is required in this case because Omnibanc is not making an offer to the     Orders Issued Under Section 4 of the Bank
      shareholders of Indccorp and neither company has securities regis-
      tered under the 1934 Act. SEC stuff has informally concurred in this        Holding Company Act
      conclusion.
         9. Indccorp's subsidiary bank, Independence Bank, received a             Barnett Banks, Inc.
      "needs to improve" rating for performance under the Community
      Reinvestment Act (12 U.S.C. §2901 el seq.) ("CRA") at its most              Jacksonville, Florida
      recent examination by the Federal Deposit Insurance Corporation, its
      primary federal regulator. The Board notes that Omnibanc's subsidiary       Order Approving an Application to Acquire a
      bank received "satisfactory" CRA performance ratings at its most
      recent examination and that Omnibanc has committed to implement a           Mortgage Company
      number of programs designed to increase the lending and marketing
      activities at Independence Bank after consummation of the proposal.
         Protestants maintain that Omnibanc would not fulfill CRA-related         Barnett Banks, Inc. ("Barnett"), and its subsidiary
      commitments because they believe that Principal failed to fulfill           Barnett Mortgage Company, both of Jacksonville,
      commitments made to community groups about the operation of his             Florida, have applied for the Board's approval under
      Seattle cable company. As discussed later in this order, fulfillment of
      Omnibanc's commitments is a condition imposed by this order, and as         section 4(c)(8) of the Bank Holding Company Act
      such may be enforced under applicable law.                                  ("BHC Act") (12 U.S.C. § 1843(c)(8)) and section
         10. The Hoard also has considered a request by Protestants chal-         225.23 of the Board's Regulation Y (12 C.F.R. 225.23)
      lenging the integrity of Omnibanc's Principal, for a public hearing or
      meeting in connection with this application. Section 3(b) of the BHC        to acquire Loan America Financial Corporation,
      Act does not require the Board to hold a public hearing or meeting on       Miami Lakes, Florida ("Loan America"), and its
      an application unless the appropriate supervisory authority for the
      bank to be acquired makes a timely written recommendation of denial
                                                                                  wholly owned subsidiaries.1 Loan America engages in
      of the application. In this case, neither the Michigan Financial            making, acquiring, and servicing loans.2
      Institutions Bureau, nor the Illinois Commissioner of Banks and Trust
      Companies, has recommended denial of the proposal.
         Generally, under its rules, the Board may, in its discretion hold a
      public healing or meeting on an application to clarify factual issues          1. Loan America operates four wholly owned subsidiaries. Citizens
      related to the application and to provide an opportunity for testimony,     Management Corporation, CMC Mortgage Corporation (USA), and
      if appropriate. 12 C.F.R. 262.3(e) and 262.25(d). In the Board's view,      CMC Mortgage Corporation (USA), Inc. (collectively, "Compa-
      all interested parties have had ample opportunity to submit their           nies"), are California, Georgia, and Texas corporations, respectively,
      views, and substantive written submissions have been received.              formed for the exclusive purpose of serving as nominal holders of
      Based on all the facts of record, including the commitments made by         deeds of trust, as required by the laws of their incorporating states.
      Omnibanc and Principal in this case, the Board has determined that a        CMC Mortgage Corporation (USA) is the California parent company
      public meeting or hearing is not necessary to clarify the factual record    of Citizens Management Corporation.
      in this application, or otherwise warranted in this case, and the request      2. Loan America is a mortgage banking firm that originates residen-
      for a public hearing or meeting on this application is denied.              tial mortgage loans through independent mortgage brokers and other
November 1994



                                                                                                         Legal Developments          1013


         Notice of this proposal, affording interested persons                  advantage of economies of scale, provide Barnett
      an opportunity to submit comments, has been pub-                          with access to Loan America's enhanced loan pro-
      lished (59 Federal Registry 25,659 (1994)). The time for                  duction and servicing technology, and provide added
      filing comments has expired, and the Board has con-                       convenience to Barnett's mortgage customers. The
      sidered the application and all the facts of record in                    Board also notes that the acquisition of Loan Amer-
      light of the factors set forth in section 4(c)(8) of the                  ica by Barnett is not likely to have a significantly
      BHC Act. No public comments were received on this                         adverse effect on the provision or availability of
      proposal.                                                                 mortgage lending or other services in any relevant
         Barnett, with consolidated assets of $38.3 billion, is                 market because there are numerous providers of
      the 21st largest banking organization in the United                       these services and Loan America and Barnett focus
      States.1 Barnett operates 31 banking subsidiaries in                      their activities on different parts of the country.
      Florida and Georgia, and engages through other sub-                       There is no evidence in the record to indicate that
      sidiaries in various permissible nonbanking activities.                   consummation of this proposal is likely to result in
      Barnett is the largest retail mortgage originator in                      any significantly adverse effects, such as undue con-
      Florida, originating $3.5 billion in residential mortgage                 centration of resources, decreased or unfair compe-
      loans in 1993, representing approximately 7.5 percent                     tition, conflicts of interests, or unfair banking prac-
      of total residential mortgages originated in Florida.                     tices that are not outweighed by the public benefits of
      Barnett also services a mortgage loan portfolio of                        the proposal.
      $13.1 billion. Loan America, with total assets of                             In reviewing this proposal, the Board notes that the
      $299 million, originated $3.4 billion in residential mort-                Department of Justice ("DOJ") has initiated an in-
      gage loans in 1993, and services a mortgage loan                          quiry into the mortgage lending practices of several
      portfolio of $4.1 billion.4 Loan America is the 61st                      subsidiary banks of Barnett under the federal fair
      largest residential mortgage banking firm in the coun-                    lending statutes. There has been no finding or adjudi-
      try, with mortgages originated in Florida representing                    cation of any violation of law by Barnett or any of its
      less than 3 percent of total mortgages it purchased in                    subsidiaries. Barnett has indicated that it believes that
       1993.5 Upon consummation of this proposal, Barnett                       the lending activities of all of its subsidiary banks fully
      would become the 29th largest mortgage scrvicer in                        comply with all federal fair lending laws, and has
      the United States, servicing a residential mortgage                       submitted to the Board extensive information about
      portfolio of approximately $17.2 billion.                                 the lending efforts and programs at its banks and a
         The Board previously has determined that making,                       statistical analysis of the lending efforts of two of its
      acquiring, and servicing loans, including mortgage                        banks. The DOJ has indicated that it is not able at this
      loans, are activities that are closely related to banking                 time to provide the Board with the information it has
      within the meaning of section 4 of the BHC Act/1                          compiled in its inquiry.
      Barnett has committed to conduct these activities in                         The Board has an obligation under the BHC Act to
      accordance with the Board's regulations.                                  act on applications submitted under that Act in light of
         In order to approve Barnett's acquisition of Loan                      specified statutory factors. The Board must consider
      America under section 4(c)(8) of the BHC Act, the                         each application on the basis of the record before it
      Board also must find that the performance of the                          and its findings must be supported by substantial
      proposed activities by Barnett "can reasonably be                         evidence. In addition, the BHC Act and the Board's
      expected to produce benefits to the public . . . that                     regulations require the Board to act on applications
      outweigh possible adverse effects, such as undue                          submitted under section 4(c)(8) of the BHC Act within
      concentration of resources, decreased or unfair com-                      specified time periods.
      petition, conflicts of interests, or unsound banking                         The Board has considered the information available
      practices." 12 U.S.C. § 1843(c)(8). The proposed ac-                      to it about this application, including submissions by
      quisition of Loan America will allow Barnett to take                      Barnett, examination reports and findings, and other
                                                                                information. On the basis of that record, the Board
                                                                                concludes that this proposal satisfies the criteria spec-
      originators in major housing markets across the country. Upon             ified by statute to be applied by the Board in reviewing
      consummation of this proposal, Loan America would operate as a
      separate subsidiary of Burnett Mortgage Company.                          proposed acquisitions of this type and that the record
         3. Asset data for Barnett and mortgage data for both Barnett and       does not provide a basis to deny this application under
      Loan America arc as of December 31, 1993.                                 the statutory factors. The Board notes that this pro-
         4. Asset data for Loan America are as of March 31, 1994.
         5. Loan America conducts its home mortgage business in 36 states,      posal represents the acquisition of a nonbanking com-
      with 70 percent of its 1993 business located in California, New Jersey,   pany and that Board action on this proposal will not
      Illinois, and New York. In contrast, Barnett originates mortgage loans    hinder the DOJ in its inquiry, The Board will monitor
      only in Florida and Georgia.
         6. See 12 C.F.R. 225.25(b)(l).                                         the DOJ inquiry and retains broad authority to take
November 1994



      1014 Federal Reserve Bulletin • November 1994


      appropriate supervisory action, including action on          Board's Regulation Y (12 C.F.R. 225.23) to engage
      future applications, if warranted.                           through its indirect subsidiary, Cosmo Securities
         Based on the record available to the Board at this        (America) Inc., New York, New York ("Company"),
      time, including commitments made by Barnett in con-          in securities brokerage activities pursuant to sec-
      nection with this application, and for the reasons           tion 225.25(b)(15) of Regulation Y (12 C.F.R.
      discussed in this order, the Board has determined that       225.25(b)(15)), and in buying and selling securities on
      the balance of public interest factors that it is required   the order of investors as "riskless principal."
      to consider under section 4(c)(8) of the BHC Act is             Notice of the application, affording interested per-
      favorable and consistent with approval of this applica-      sons an opportunity to submit comments, has been
      tion. Accordingly, the application is hereby approved.       published (59 Federal Register 15,730 (1994)). The
      The Board's approval is specifically conditioned on          time for filing comments has expired, and the Board
      compliance by Barnett with all the commitments made          has considered the application and all comments re-
      in connection with this application. The Board's de-         ceived in light of the factors set forth in section 4(c)(8)
      termination also is subject to all the conditions set        of the BHC Act.
      forth in Regulation Y, including those in sections 225.7        Applicant, with total consolidated assets equivalent
      and 225.23(b)(3) of Regulation Y (12 C.F.R. 225.7 and        to approximately $178.2 billion, is the 20th largest
      225.23(b)), and to the Board's authority to require          banking organization in the world.1 Applicant operates
      modification or termination of the activities of a bank      branches, agencies, representative offices and loan
      holding company or any of its subsidiaries as the            production offices in several cities in the United
      Board finds necessary to assure compliance with, and         States, and owns Daiwa Bank Trust Company, a
      to prevent evasion of, the provisions and purposes of        state-chartered trust company in New York. The
      the BHC Act and the Board's regulations and orders           Company is registered as a broker-dealer with the
      issued thereunder. For the purpose of this action, the       Securities and Exchange Commission ("SEC") and is
      commitments and conditions relied on by the Board in         a member of the National Association of Securities
      reaching this decision are deemed to be conditions           Dealers, Inc. ("NASD"). 2 Accordingly, Company is
      imposed in writing by the Board in connection with its       subject to the record-keeping, reporting, fiduciary
      findings and decision, and, as such, may be enforced in      standards, and other requirements of the Securities
      proceedings under applicable law.                            Exchange Act of 1934 (15 U.S.C. § 78a et seq.), the
        This transaction shall not be consummated later            SEC, and the NASD.
      than three months after the effective date of this order,       The Board previously has determined by regulation
      unless such period is extended for good cause by the         that engaging in securities brokerage services is
      Board or by the Federal Reserve Bank of Atlanta,             closely related to banking and permissible for bank
      acting pursuant to delegated authority.                      holding companies under section 4(c)(8) of the BHC
        By order of the Board of Governors, effective              Act.1 Applicant has committed that Company will
      September 21, 1994.                                          conduct these activities in accordance with the limi-
                                                                   tations imposed by section 225.25(b)(15) of Regula-
       Voting for this action: Chairman Greenspan, Vice Chair-     tion Y.
      man Blinder, and Governors Kelley, Lindsey, Phillips, and       "Riskless principal" is the term used in the securi-
      Yellen. Absent and not voting: Governor LaWare.              ties business to refer to a transaction in which a
                                       JENNIFER J. JOHNSON
                                                                   broker-dealer, after receiving an order to buy (or sell)
                                                                   a security from a customer, purchases (or sells) the
                              Deputy Secretary of the Board
                                                                   security for its own account to offset a contemporane-
                                                                   ous sale to (or purchase from) the customer.4 "Risk-
      The Daiwa Bank, Limited                                      less principal" transactions are understood in the
      Osaka, Japan                                                 industry to include only transactions in the secondary
                                                                   market. Thus, Applicant proposes that Company
      Order Approving an Application to Engage in                  would not act as a "riskless principal" in selling
      Securities Brokerage Activities and to Act as                securities at the order of a customer that is the issuer
      ' 'Riskless Principal''

      The Daiwa Bank, Limited, Osaka, Japan ("Appli-                  1. Asset data are as of March 31, 1994.
                                                                     2. Company currently engages in securities brokerage activities.
      cant"), a bank holding company within the meaning of         Applicant received temporary authority to acquire a controlling inter-
      the Bank Holding Company Act ("BHC Act"), has                est in Company under section 4(c)(9) of the BHC Act.
                                                                     3. See 12 C.F.R. 225.25(b)(l5).
      applied pursuant to section 4(c)(8) of the BHC Act             4. See Securities and Exchange Commission Rule 10b-10. 17 C.F.R.
      (12 U.S.C. § 1843(c)(8)) and section 225.23 of the           240.10b-10(a)(8)(i).
November 1994



                                                                                                                 Legal Developments               1015


      of the securities to be sold, or in any transaction where                     outweigh possible adverse effects under the proper
      Company has a contractual agreement to place the                              incident to banking standard of section 4(c)(8) of the
      securities as agent of the issuer. Company also would                          BHC Act.8
      not act as a "riskless principal" in any transaction                              Under the framework established in this and prior
      involving a security for which it makes a market.                              Board decisions, consummation of this proposal is not
         The Board previously has determined by order that,                          likely to result in any significantly adverse effects,
      subject to prudential limitations that address the po-                         such as an undue concentration of resources, de-
      tential for conflicts of interests, unsound banking                           creased or unfair competition, conflicts of interests, or
      practices, and other adverse effects, the proposed                            unsound banking practices. Moreover, the Board has
      riskless principal activities are so closely related to                       determined that performance of the proposed activi-
      banking as to be a proper incident thereto within the                         ties by Applicant can reasonably be expected to pro-
      meaning of section 4(c)(8) of the BHC Act.5 The Board                         duce public benefits, such as added convenience to
      also previously has determined that purchasing and                            Applicant's customers, that would outweigh any ad-
      selling securities on the order of investors as a "risk-                      verse effects under the proper incident to banking
      less principal" does not constitute underwriting and                          standard of section 4(c)(8) of the BHC Act.
      dealing in securities for purposes of section 20 of the                           In every case involving a nonbanking acquisition by
      Glass-Steagall Act (12 U.S.C. § 377), and that reve-                          a bank holding company under section 4 of the BHC
      nue derived from this activity is not subject to the                          Act, the Board considers the financial condition and
      10 percent revenue limitation on underwriting and                             resources of Applicant and its subsidiaries and the
      dealing in bank-ineligible securities.6 In order to ad-                       effect of the transaction on these resources.9 In this
      dress the potential for conflicts of interests, unsound                       case, the Board notes that Applicant meets the rele-
      banking practices, or other adverse effects, Applicant                        vant risk-based capital standards consistent with the
      has committed that Company will conduct its "riskless                         Basle Accord, and has capital equivalent to that which
      principal" activities using the same methods and pro-                         would be required of a United States banking organi-
      cedures, and subject to the same prudential limita-                           zation. In view of these and other facts of record, the
      tions, as those established by the Board in the Bankers                       Board has determined that the financial factors are
      Trust Order and the J.P. Morgan Order, as modified to                         consistent with approval of this application. The man-
      reflect Applicant's status as a foreign bank.7                                agerial resources of Applicant and its subsidiaries also
         In order to approve this application, the Board also                       are consistent with approval.
      is required to determine that the performance of the                              Based on the foregoing and all the facts of record,
      proposed activities by Applicant can reasonably be                            the Board has determined to, and hereby does, ap-
      expected to produce benefits to the public that would                         prove this application subject to all the terms and
                                                                                    conditions set forth in this order, and in the Board
                                                                                    regulations and orders noted above. The Board's
         5. See J.P. Morgan & Company Incorporated, 76 Federal Reserve              determination also is subject to all the terms and
      Bulletin 26 (1990) ["J.P. Morgan Order"); Hankers Trust New York
      Corporation, 75 Federal Reserve Bulletin K29 (1989) ("Bunkers Trust           conditions set forth in its Regulation Y, including
      Order").                                                                      those in sections 225.7 and 225.23(b), and to the
         6. Id.                                                                     Board's authority to require modification or termina-
         7. See The Suntitomo liaixk. Limited, 11 Federal Reserve Bulletin
      339 (1991); Creditanstalt-llankverein, 11 Federal Reserve Bulletin 183        tion of the activities of a bank holding company or any
      (1991); The Royal Bank of Scotland Group Pl.C. 76 Federal Reserve             of its subsidiaries as the Board finds necessary to
      Bulletin 866 (1990). As detailed more fully in these orders, in addition
      to the commitments imposed by the Board in connection with under-
                                                                                    assure compliance with, and to prevent evasion of, the
      writing and dealing in securities, Applicant has made a number of             provisions of the BHC Act, and the Board's regula-
      commitments regarding the conduct of the "riskless principal" activ-          tions and orders issued thereunder. The Board's deci-
      ities. In particular, Applicant has committed that Company will
      maintain specific records that will clearly identify all "riskless princi-    sion is specifically conditioned on compliance with all
      pal" transactions, and that Company will not engage in "riskless              the commitments made in this application, including
      principal" transactions for any securities carried in its inventory.          the commitments discussed in this order and the
      When acting as a "riskless principal," Company will engage only in
      transactions in the secondary market, and will not act at the order of        conditions set forth in the Board orders noted above.
      a customer that is the issuer of the securities to be sold; will not act as   These commitments and conditions shall be deemed to
      "riskless principal" in any transaction involving a security for which        be conditions imposed in writing by the Board in
      it makes a market; nor hold itself out as making a market in the
      securities that it buys and sells as a "riskless principal." Moreover,        connection with its findings and decisions and, as
      Company will not engage in "riskless principal" transactions on
      behalf of any foreign affiliates that engage in securities dealing
      activities outside the United States, and will not act as "riskless
      principal" for registered investment company securities, (n addition,           8. 12 U.S.C. S 1843(c)(8).
      Company will not act as a "riskless principal" with respect to any              9. See 12 C.F.R. 225.24; Fuji Bank, Limited, 75 Federal    Reserve
      securities of investment companies that are advised by Applicant or           Bulletin 94 (1989); Bayerisehe Vereinsbank Ail, 73 Federal   Reserve
      any of its affiliates.                                                        Bulletin 155 (1987).
November 1994



      1016 Federal Reserve Bulletin • November 1994


      such, may be enforced in proceedings under applicable                     section 9 of the Federal Reserve Act (12 U.S.C. § 321
      law.                                                                      et seq.)1-
        This transaction shall not be consummated later                            Section 5(d)(3) of the FDI Act requires the Board to
      than three months after the effective date of this order,                 review any proposed merger between a Savings Asso-
      unless such period is extended for good cause by the                      ciation Insurance Fund member and any Bank Insur-
      Board or by the Federal Reserve Bank of New York,                         ance Fund ("BIF") member, if the acquiring or result-
      pursuant to delegated authority.                                          ing institution is a BIF-insured subsidiary of a bank
        By order of the Board of Governors, effective                           holding company. In reviewing these proposals, the
      September 27, 1994.                                                       Board is required to follow the procedures and con-
                                                                                sider the factors set forth in section 18(c) of the FDI
        Voting for this action: Chairman Greenspan, Vice Chair-                 Act, the Bank Merger Act (12 U.S.C. 8 1828(c)).3
      man Blinder, and Governors Kelley, Lindsey, Phillips, and                    Notice of the applications, affording interested per-
      Yellen. Absent and not voting: Governor LaWare.                           sons an opportunity to submit comments, has been
                                                                                published (59 Federal Register 32,432 (1994)). As
                                                JENNIFER J. JOHNSON
                                                                                required by the Bank Merger Act and the Board's
                                    Deputy Secretary of the Board
                                                                                Rules of Procedure (12 C.F.R. 262.3(b)), reports on
                                                                                the competitive effects of the mergers were requested
      First Interstate Bancorp                                                  from the United States Attorney General, the Office of
      Los Angeles, California                                                   the Comptroller of the Currency ("OCC"), and the
                                                                                Federal Deposit Insurance Corporation. The time for
      First Interstate Bank of California                                       filing comments has expired, and the Board has con-
      Los Angeles, California                                                   sidered the applications and all comments received in
                                                                                light of the factors set forth in section 4(c)(8) of the
      Order Approving Applications to Acquire and Merge                         BHC Act, the Bank Merger Act, section 5(d)(3) of the
      a Savings Association Into a Subsidiary Bank                              FDI Act, and section 9 of the Federal Reserve Act.
                                                                                   The Board has determined by regulation that the
      First Interstate Bancorp, Los Angeles, California
                                                                                operation of a savings association by a bank holding
      ("First Interstate"), a bank holding company within
                                                                                company is closely related to banking for purposes of
      the meaning of the Bank Holding Company Act
                                                                                section 4(c)(8) of the BHC Act, if the savings associ-
      ("BHC Act"), has applied under section 4(c)(8) of the
                                                                                ations acquired by bank holding companies conform
      BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.23
                                                                                their direct and indirect activities to those permissible
      of the Board's Regulation Y (12 C.F.R. 225.23) to
                                                                                for bank holding companies under section 4(c)(8) of
      acquire Sacramento Savings Bank, Sacramento, Cali-
                                                                                the BHC Act.4 First Interstate has committed to
      fornia ("Savings Bank"), and Central Valley Security
                                                                                conform all activities of Savings Bank to the require-
      Company, both wholly owned subsidiaries of Allegh-
                                                                                ments of section 4(c)(8) of the BHC Act and Regula-
      eny Financial, Inc., New York, New York. First
                                                                                tion Y.
      Interstate's subsidiary bank, First Interstate Bank of
      California, Los Angeles, California ("FICAL"), a                             First Interstate, with total consolidated assets of
      state member bank, has applied under section 18(c) of                     $53.5 billion, controls 14 banks in Alaska, Arizona,
      the Federal Deposit Insurance Act (the "FDI Act")                         California, Colorado, Idaho, Montana, Nevada, New
      (12 U.S.C. § 1828(c) ("Bank Merger Act") to acquire                       Mexico, Oregon, Texas, Washington, Wyoming, and
      Savings Bank.                                                             Utah.5 First Interstate is the fifth largest depository
                                                                                institution in California, with FICAL controlling
         First Interstate also has applied under section
                                                                                $19.9 billion in deposits, representing approximately
      5(d)(3) of the FDI Act (12 U.S.C. § 1815(d)(3)), as
                                                                                5.1 percent of the total deposits in depository insti-
      amended by the Federal Deposit Insurance Corpora-
                                                                                tutions in the state.6 Savings Bank is the 22d largest
      tion Improvement Act of 1991, Pub. L. No. 102-242,
      S 501, 105 Stat. 2236, 2388 (1991), to acquire Savings
      Bank,1 and FICAL has applied to establish branches                           2. A list of these branches is set forth in the Appendix.
      at the present locations of Savings Bank pursuant to                         3. 12 U.S.C. S 1815(d)(3)(E). These factors include considerations
                                                                                relating to competition, the financial and managerial resources and
                                                                                future prospects of the existing and proposed institutions, and the
                                                                                convenience and needs of the communities to be served. 12 U.S.C.
         1. Section 5{d)(3) of the FDI Act requires the Board to review any     § 1828(c).
      proposed merger between a bank owned by a bank holding company              4. See 12 C.F.R. 225.25(b)(9).
      and a savings association, or branch of a savings association, in which      5. Asset data are as of March 31, 1994.
      the resulting institution is insured by the Bank insurance Fund, and in      6. State and market deposit data are as of June 30, 1993. In this
      reviewing these proposals, to follow the procedures and consider the      context, depository institutions include commercial banks, savings
      factors set forth in section lS(c) of the Bank Merger Act.                banks, and savings associations. Market share data before consum-
November 1994



                                                                                                               Legal Developments                1017


      depository institution in California, controlling                          needs of the local communities in which they operate,
      $2.8 billion in deposits, representing less than 1 per-                    consistent with the safe and sound operation of such
      cent of the total deposits in depository institutions in                   institutions. To accomplish this end, the CRA requires
      the state. Upon consummation of this proposal, First                       the appropriate federal supervisory authority to "as-
      Interstate would remain the fifth largest depository                       sess the institution's record of meeting the credit
      organization in the state, controlling deposits of $22.7                   needs of its entire community, including low- and
      billion, representing approximately 5.8 percent of the                     moderate-income neighborhoods, consistent with the
      total deposits in depository institutions in California.                   safe and sound operation of such institutions," and to
         First Interstate and Savings Bank compete directly                      take that record into account in its evaluation of these
      in ten banking markets in California.7 After consum-                       applications.9
      mation of this proposal, numerous competitors would                           The Board has reviewed comments submitted by
      remain in each market and the increase in market                           several organizations and individuals ("Protestants")
      concentration, as measured by the Herfindahl-                              alleging that First Interstate's lead bank, FICAL, has
      Hirschman Index ("HHI"), would not exceed the                              failed to meet the credit needs of minority and low- to
      Department of Justice merger guidelines.8 Based on all                     moderate-income persons in the Sacramento metro-
      the facts of record, the Board concludes that consum-                      politan statistical area ("Sacramento MSA").10 In
      mation of this proposal would not result in significantly                  particular, Protestants contend that data filed by the
      adverse effects on competition or the concentration of                     bank under the Home Mortgage Disclosure Act
      banking resources in these or any other relevant                           (12 U.S.C. § 2801 et seq.) ("HMDA") indicate dispar-
      banking markets.                                                           ities in the rates of housing-related loan approvals and
                                                                                 denials between minority and nonminority applicants
      Convenience and Needs Considerations                                       and in the geographic distribution of credit-related
                                                                                 products. In addition, Protestants indicate that the
      In acting on applications to acquire a depository                          Sacramento community has not benefitted from
      institution, the Board must consider the convenience                       FICAL's lending initiative to provide $2 billion in
      and needs of the communities to be served, and take                        special funding over a ten-year period to low- to
      into account the records of the relevant depository                        moderate-income communities. Protestants assert that
      institutions under the Community Reinvestment Act                          FICAL has an inadequate branch location/closure pol-
      (12 U.S.C. S 2901 et seq.) ("CRA"). The CRA re-                            icy and insufficient community and economic develop-
      quires the federal financial supervisory agencies to                       ment and outreach and marketing programs to serve the
      encourage financial institutions to help meet the credit                   minority community in the Sacramento MSA. More-
                                                                                 over, Protestants express concern that the proposed
                                                                                 transaction may result in the elimination of branches
      mation are based on calculations in which the deposits of thrift           and lending programs established by Savings Bank and
      institutions arc included at 50 percent. The Board previously has          loss of employment opportunities in Sacramento."
      indicated that thrift institutions have become, or have the potential to
      become, significant competitors of commercial banks. See WM Ban-             In its consideration of the convenience and needs
      corp, 76 Federal Reserve Bulletin 788 (1990); National City Corpora-       factor, the Board has carefully reviewed the entire
      tion, 70 Federal Reserve Bulletin 743 (1984). Because the deposits of
      Savings Bank would be transferred to a commercial bank under this          CRA performance record of FICAL and Savings
      proposal, those deposits are included at 100 percent in the calculation    Bank, all comments received on these applications,
      of First Union's pro forma market share. See Not-west Corporation,         including First Interstate's and Savings Bank's re-
      78 Federal Reserve Bulletin 452 (1992); First Hank, Inc., 76 Federal
      Reserve Bulletin 669, 670 n. 9 (1990).
         7. These markets are the Auburn, Chico, Grass Valley, Lodi,
      Placerville, Redding, Santa Rosa, Sacramento, Stockton, and Yuba
      City banking markets.                                                         9. 12 U.S.C. § 2903.
         8. Under the revised Department of Justice Merger Guidelines, 49           10. The Protestants include the Mayor of Sacramento, Project
      Federal Register 26,823 (June 29, 1984), a market in which the             FAITHE, Sacramento Black Chamber of Commerce, Sacramento
      post-merger HHI is above 1800 is considered to be highly concen-           Housing Alliance, and Sacramento Housing and Redevelopment
      trated. In such markets, the Justice Department is likely to challenge     Agency. An individual commenter has joined in these comments, and
      a merger that increases the HHI by more than 50 points. The Justice        also alleges that FICAL does not make sufficient ascertainment and
      Department has informed the Board that a bank merger or acquisition        outreach efforts to the gay and lesbian community, and has engaged in
      generally will not be challenged (in the absence of other factors          deliberate, discriminatory actions against the gay and lesbian commu-
      indicating anticompetitive effects) unless the post-merger HHI is at       nity in its credit practices and against downtown Sacramento residents
      least 1800 and the merger increases the HHI by more than 200 points.       through its administration of an automated teller machine ("ATM")
      The Justice Department has stated that the higher than normal HHI          site. The Board notes that FICAL closed the ATM at night and locked
      thresholds for screening bank mergers for anticompetitive effects          the parking lot in response to security concerns raised by the
      implicitly recognize the competitive effect of limited-purpose lenders     Sacramento Police Department. FICAL subsequently installed a new
      and other non-depository financial entities. Consummation of this          24-hour ATM in a more secure location on the branch's premises.
      proposal would not cause the HHI to increase more than 200 points or          1!. FICAL expects that any staff reductions would be accomplished
      result in a post-merger HHI above 1800 points in any of the relevant       largely through attrition, and has in place programs to assist employ-
      banking markets.                                                           ees who are displaced as a result of this proposal.
November 1994



      1018 Federal Reserve Bulletin • November 1994


      sponse to these comments, and all other relevant facts                   moderate-income and minority communities. The
      of record, in light of the CRA, the Board's regulations                  Board also recognizes that HMDA data have limita-
      and the Statement of the Federal Financial Supervi-                      tions that make the data an inadequate basis, absent
      sory Agencies Regarding the Community Reinvest-                          other information, for conclusively determining
      ment Act ("Agency CRA Statement").12                                     whether an institution has engaged in illegal discrimi-
                                                                               nation in making lending decisions.
      A. Record of CRA Performance                                                The Board has carefully considered the results of
                                                                               FICAL's 1994 examination, which found that credit
      The Agency CRA Statement provides that a CRA                             applications are generally solicited from all segments
      examination is an important and often controlling                        of the bank's delineated community, are in compliance
      factor in the consideration of an institution's CRA                      with regulatory requirements, and do not contain
      record, and that these reports will be given great                       language that would discourage applicants. The bank
      weight in the applications process.13 The Board notes                    has developed a number of policies, procedures and
      that FICAL received a "satisfactory" rating from the                     training programs to prevent discrimination in its
      Federal Reserve Bank of San Francisco at the most                        lending and credit activities. Examiners also noted
      recent examination of FICAL's CRA performance as                         that FICAL's record of generating applications and
      of April 11, 1994 (" 1994 examination") and that all of                  extending credit in low-income and minority commu-
      First Interstate's other subsidiary banks received                       nities continues to improve. The 1994 examination
      "satisfactory" or "outstanding" CRA ratings at the                       indicates that FICAL has taken extensive steps to
      most recent examinations of their CRA performance.l4                     identify discriminatory practices at the branch, resi-
      In addition, Savings Bank received a "satisfactory"                      dential, and consumer lending levels. These efforts
      rating from its primary regulator, the Office of Thrift                  include the use of consultants who were hired to
      Supervision, at its most recent examination as of                        conduct two separate "matched pair" tests at the
      March 10, 1993.                                                          branch level to evaluate mortgage-lending and other
                                                                               officers involved in home improvement financing; and
      B. FICAL's HMD A Data                                                    a comprehensive fair lending review conducted by the
                                                                               bank's internal audit department to evaluate under-
      The Board has carefully reviewed the 1992 and 1993                       writing procedures and ensure that credit standards
      data filed under the HMDA in light of Protestants'                       are applied consistently to all applicants. Moreover,
      allegations of disparities in lending to low- to moderate-               FICAL has implemented a "second review" program
      income and minority residents in the Sacramento                          for consumer, mortgage, and small business lending.
      MSA, which show some disparities in denial and                           Under the program, senior bank underwriters review
      origination rates in the Sacramento MSA.                                 all declined loan applications to ensure that the appli-
         Because all banks are obligated to adopt and imple-                   cants were treated fairly and in accordance with law,
      ment lending practices that ensure not only safe and                     and to determine if an alternative credit structure to
      sound lending, but also equal access to credit by                        the one requested can be offered to the applicant.15
      creditworthy applicants regardless of race, the Board
      is concerned when the record of an institution indi-                     C. FICAL's Lending Practices
      cates disparities in lending to applicants in low- to
                                                                               /. Statewide

         12. 54 Fcileml Register 13.742 (1989).                                FICAL offers numerous loan products to assist in
         13. Id. at 13,745.
         14. FICAL's subsidiary bank. First Interstate Bank of Englewood,      meeting the ascertained credit needs of the bank's
      Englewood, Colorado, received an "outstanding" rating for its CRA        community, including low- and moderate-income
      performance from the OCC as of January 1991, and twelve subsidiary
      banks of FICAL each received "satisfactory" ratings for CRA
      performance from the OCC: First Interstate Bank of Alaska, Anchor-
      age, Alaska (October 1992); First Interstate Bank of Arizona, l'hoe-        15. Examiners also found violations of the Equal Credit Opportu-
      nix, Arizona (May 1992); First Interstate Bank of Denver, Denver,        nity Act at the bank, mostly related to the bank's failure to provide
      Colorado (January 1991); First Interstate Bank of Idaho, Boise, Idaho    notification of adverse actions to telephone loan applicants, or involv-
      (August 1993); First Interstate Bank of Montana, Kalispell, Montana      ing non-applicant signature requirements for otherwise creditworthy
      (October 1992); First Interstate Bank of Nevada, Las Vegas, Nevada       applicants at various bank departments. Management commenced
      (November 1992); First Interstate Bank of New Mexico, Santa Fe,          corrective action during the examination and immediately thereafter
      New Mexico (November 1993); First Interstate Bunk of Oregon,             to remedy these violations. Examiners also found a few apparent
      Portland, Oregon (April 1992); First Interstate Bank of Texas, Hous-     violations of law in other areas of the bank. FICAL and the Federal
      ton, Texas (June 1993); First Interstate Bank of Utah, Salt Lake City,   Reserve Bank of San Francisco are evaluating these apparent viola-
      Utah (October 1993); First Interstate Bank of Washington. Seattle,       tions to determine what, if any, corrective action is appropriate. The
      Washington (August 1992); and First Interstate Bank of Wyoming,          bank's progress in addressing these matters will be closely monitored
      Casper, Wyoming (October 1993).                                          by the Reserve Bank.
November 1994



                                                                                          Legal Developments         1019


      neighborhoods. In 1992, the bank introduced the Com-        and that its lending activities in low- to moderate-
      munity Investment Home Loan Program, which con-             income areas in Sacramento represent a somewhat
      sists of three new mortgage products to make home           greater proportion of its lending activities in the city.
      ownership more affordable for low- and moderate-            FICAL's assets in the Sacramento MSA represent
      income borrowers who may not otherwise meet the             approximately 3 percent of the bank's total assets. In
      bank's credit standards. The Community Investment            1993, however, the bank's lending activity in the
      Home Loan Program includes the Down Payment                 Sacramento MSA represented approximately 7 per-
      Assistance program which reduces the homebuyer's            cent of total assets in mortgage loans to low-income
      out-of-pocket down payment cost to 3 percent of the         applicants or in low- and moderate-income areas, and
      purchase price. FICAL lends the remaining 2 percent          12 percent of total assets in construction loans for
      in the form of a second mortgage with below-market          affordable housing to low-income individuals.
      rates and interest-only payments for the life of the           In 1993, FICAL originated approximately $7.1 mil-
      loan. In addition, the Home Buyers Assistance Pro-          lion in mortgage loans to low-income applicants or
      gram has a down payment requirement of 5 percent,           low-to-moderate-income census tracts in the Sacra-
      with an option permitting the down payment to come          mento MSA. Moreover, the bank originated 776 con-
      from a gift or grant to the borrower. FICAL also has        sumer loans to individuals in low- to moderate-income
      established a Community Advancement Program tar-            census tracts totalling $7.6 million in 1993. During the
      geted at low-income or minority census tracts that has      first half of 1994, 332 consumer loans were made in
      reduced down payment requirements of 5 percent for          these census tracts totalling $7 million.
      any qualified borrower purchasing a home in a low-             In 1993, FICAL extended five loans totalling
      income or predominantly minority area. In 1993, 84          $485,000 under the bank's three-pronged Community
      loans, totalling $10.3 million, were made under these       Investment Home Loan Program. This year, the bank
      programs. In 1994, the bank has made 212 such loans,        has made four loans totalling $397,750 under this
      totalling $23.7 million.                                    program. The Affordable Housing Unit made a loan of
         The 1994 examination also indicates that FICAL's         $10.5 million to construct a 241-unit low-income hous-
      community development activities are outstanding.           ing project for senior citizens in Sacramento. During
      The bank's community development activities are             the first half of 1994, FICAL also originated $697,500
      conducted primarily through its Community Lending           in government-guaranteed business loans and
      Department ("CLD"), which contains two separate             $3.7 million in non-government guaranteed small bus-
      units, Affordable Housing and Economic Develop-             iness loans in the Sacramento MSA.
      ment. FICAL's Affordable Housing Unit provides                 In connection with this proposal, FICAL has com-
      affordable housing construction loans primarily for the     mitted to take a variety of steps to increase the number
      construction of residences targeted for low- and            of loans made to minority and low- to moderate-
      moderate-income households. The unit extended               income areas in the Sacramento MSA. For example,
      $56 million in 1992 and $82 million in 1993 in affordable   First Interstate will hire a CRA loan officer for the
      housing loans. The Economic Development Unit ad-            Sacramento area. In addition, First Interstate will
      ministers FICAL's commercial loan pools and pro-            establish a Sacramento loan production office at a site
      grams, and extends loans under the bank's Community         accessible to low- and moderate-income applicants for
      Assistance Program ("CAP"), a loan program devel-           home loans. The loan production office will have a
      oped in 1993 to provide financial assistance for commu-     bilingual loan officer solely responsible for originating
      nity social services, increased job opportunities, and      CRA loans and will co-sponsor homebuyer workshop
      housing in low-income and economically deprived             sessions with local community groups.
      neighborhoods. As of April 1994, loans totalling $2.3          In response to Protestants' concerns, First Inter-
      million have been extended under the CAP program.           state will allocate a portion of its $2-billion/I0-year
         FICAL also participates in government-insured and        statewide loan commitment to low- and moderate-
      publicly sponsored programs, including Federal Hous-        income communities to the Sacramento MSA. To
      ing Administration mortgage loans, California guaran-       ensure that the Sacramento MSA is adequately repre-
      teed business loans, Small Business Administration          sented in future allocations, FICAL plans to add a
      ("SBA") loans, and federally insured and state guar-        person from the Sacramento area to the Community
      anteed student loans.                                       Advisory Board, which was established to make com-
                                                                  munity development loans from the $2-billion fund. In
      2. Sacramento                                               addition, FICAL will continue Savings Bank's role in
                                                                  the Northern California Reinvestment Consortium
      In evaluating this proposal, the Board notes that           ("NCRC") and has committed to joining NCRC as a
      FICAL's presence in Sacramento is relatively small,         loan pool participant. First Interstate will pursue mem-
November 1994



      1020 Federal Reserve Bulletin D November 1994


      bership in the Federal Home Loan Bank's Affordable                           credit history barriers. In addition, after FICAL deter-
      Housing Program, a program in which Savings Bank                             mined that many low-income applicants were being
      previously served as a lender.                                               denied credit because FICAL was unable to acquire
                                                                                   mortgage insurance for the loans, FICAL approved a
      D. FICAL's Ascertainment of Community                                        $50 million portfolio allocation for loans that met
      Credit Needs                                                                 underwriting standards but for which mortgage insur-
                                                                                   ance was not available. Moreover, a Community Ad-
      /. Statewide                                                                 visory Board consisting of a six-member group of
                                                                                   minority leaders was formed in 1993, as part of
      The 1994 examination indicates that FICAL's ascer-                           FICAL's $2-billion/10-year statewide CRA commit-
      tainment efforts are outstanding. The bank's employ-                         ment.
      ees have direct contacts with local government and
      community groups, as well as a "telephone call"                              2. Sacramento
      program to identify the credit needs of the entire
      community, including low- and moderate-income                                FICAL has implemented these statewide outreach
      neighborhoods. Information gathered through these                            efforts in the Sacramento MSA. For instance,
      contacts is documented in a "Community Reinvest-                             FICAL's branch managers and staff are required to
      ment Act Questionnaire" completed periodically for                           ascertain the credit needs of their communities
      each branch and used in devising techniques to target                        through customer and prospective customer contacts;
      outreach efforts. These questionnaires are forwarded                         calling efforts; involvement in community-based orga-
      to the Community Development Department for com-                             nizations; contacts with government officials, agencies
      pilation and distribution to the bank's CRA Task                             or departments; and discussions with community lead-
      Force, which develops a comprehensive annual CRA                             ers. In 1993, the Sacramento area averaged over 200
      Plan.lh Branches also receive information from                               such calls per month. In addition, a representative
      FICAL's California Marketing Department on the                               from the Sacramento area will be added to the Com-
      demographics of the branch's targeted market, recom-                         munity Advisory Board.
      mended product usage, potential credit needs and
      market share information.                                                    E. FICAL's Marketing Efforts
         As a result of the most recent CRA Questionnaire,
      conducted in April 1993, F1CAL now offers unsecured                          /. Statewide
      small business lines of credit, small business accounts
      receivable lines of credit, and a commercial real estate                     The 1994 examination indicates that FICAL's overall
      product with lower minimum loan sizes and newly                              marketing efforts are satisfactory. FICAL markets its
      acceptable forms of collateral; has hired additional                         products and services through the California Market-
      Small Business Administration loan officers; has imple-                      ing Department ("CMD"), which is the primary mar-
      mented a flexible Mobile Home Loan Policy to allow                           keting and advertising vehicle for statewide promo-
      for older, wider homes to serve as collateral to pur-                        tions; the Central Marketing Department; individual
      chase single-wide homes; offers secured consumer                             departments of the bank (First Interstate Residential
      credit cards with credit lines as low as $500; and has                       Mortgage, Government Guaranteed Lending Unit, and
      created a flexible basic checking account with a low                         the Community Development Department), which are
      opening balance and no minimum balance requirement.                          responsible for product specific marketing relative to
         FICAL's Residential Mortgage Division identified                          the credit products offered; and the branch network
      the following characteristics of credit as obstacles to                      which acts as a support mechanism to the CMD for all
      meeting the mortgage credit needs of the community:                          product promotions.
      down payment requirements, underwriting criteria,                               Marketing efforts at the CMD consist primarily of
      lack of credit history, and rigid mortgage insurance                         direct mail campaigns. The CMD also uses various
      guidelines. The bank's three-pronged Community In-                           media sources, including radio stations such as Spanish
      vestment Home Loan Program was established to                                language stations, that reach a diverse section of the
      alleviate the down payment, underwriting and lack of                         community in all counties served by the bank. Exam-
                                                                                   iners noted that FICAL's use of outdoor and transit
                                                                                   media had increased since the previous examination
         16. The 1994 examination indicates that FtCAL's board of directors        period, and advertisements are generally included in
      and senior management have supported efforts to improve the bank's           African-American, Chinese, and Hispanic publications.
      CRA program and routinely attend CRA Task Force meetings. Exam-
      iners also noted that the board of directors are generally active in their      The CMD also compiles the branch Sales Resource
      respective communities in ways that enhance the bank's CRA program.          Manual, which contains advertisements and solicita-
November 1994



                                                                                               Legal Developments                1021



      tions for most products and services offered by the       ability of FICAL's special affordable mortgage pro-
      bank. Approximately 25 to 35 new flyers are produced      grams and products.
      each year in both English and Spanish. Branches use
      these flyers in conjunction with mailing lists provided   F. Branches
      by the CMD.
         All marketing activities for FICAL's mortgage loan     The 1994 examination indicates that branch offices are
      products are conducted through the Residential Mort-      reasonably accessible to all segments of the bank's
      gage Division ("FIRM"). The major marketing device        local community and provide a full range of deposit
      at FIRM is the Home Buyer Workshop. These work-           and credit services. Each branch has ATM facilities,
      shops are held in conjunction with branches, commu-       and additional stand-alone ATMs are available at
      nity based organizations, and local churches to pro-      various locations throughout the state. The 1994
      vide prospective applicants with information on the       examination also indicates that FICAL has a com-
      bank's mortgage loan products, especially those de-       prehensive, written branch-closure policy. The pol-
      signed for low- and moderate-income consumers. Ra-        icy states that the decision to close a branch office
      dio and community based newspapers as well as local       shall be made only after the bank has thoroughly
      realtors promote the workshops.                           evaluated the potential impact of such an action and
         The bank's Community Development Department            consulted with the local community, including cus-
      also is engaged in marketing activities, and has re-      tomers and employees.
      tained an advertising agency to promote FICAL's              In Sacramento, FICAL and Savings Bank have
      F.I.R.S.T. Program, a program designed to provide         seven branch offices located in census tracts either
      access to consumer credit for low- and moderate-          designated as low- to moderate-income or having a
      income individuals who are unable to obtain credit        minority population greater than 50 percent. Two of
      because of down payment and closing-cost require-         these offices would be consolidated into nearby
      ments.                                                    FICAL offices in accordance with FICAL's branch-
         Marketing for the bank's Small Business Adminis-       closure policy.
      tration ("SBA") loan programs is conducted through
      the Government Guaranteed Lending Unit. Activities        G. Conclusion Regarding Convenience and
      of the unit include developing product specific adver-    Needs Factor
      tisements for local business journals throughout the
      state, participation in SBA seminars, hosting seminars    On the basis of all the facts of record, including the
      targeted at small business owners, and producing          information provided by the commenters and First
      marketing materials for use at these seminars.            Interstate, and relevant reports of examination, the
                                                                Board concludes that the convenience and needs con-
      2. Sacramento                                             siderations, including the CRA records of performance
                                                                of FICAL and Savings Bank, are consistent with
      Currently, FICAL uses the Home Buyer Education            approval of these applications.17 The Board expects
      Workshops to reach low-income and minority commu-         First Interstate to implement fully all commitments
      nities in the Sacramento MSA. FICAL conducted 14          made in connection with this proposal, including its
      homebuyer workshops in 1993, and 17 such work-            proposed CRA initiatives for the Sacramento area. The
      shops through the first half of 1994. After the merger,   Board also expects FICAL to continue to strengthen its
      FICAL will maintain the same number of workshops          performance in the areas discussed in this order, and to
      as the combined number of workshops that Savings
      Bank and FICAL currently conduct.
         FICAL also plans to implement a four-part Sacra-          17. Protestants have requested that the Board hold a public hearing
      mento Affordable Mortgage Loan Marketing Plan.            or meeting on this proposal. The Board's rules provide that a hearing
                                                                is required under section 4 of the BHC Act only if there are disputed
      First, FICAL will develop a direct mail campaign,         issues of material fact that cannot be resolved in some other manner.
      consisting of a series of letters or postcards announc-   In addition, the Board may, in its discretion, hold a public hearing or
      ing the availability of FHA, FmHA, VA, and Commu-         meeting on an application to clarify factual issues related to the
                                                                application and to provide an opportunity for testimony, if appropri-
      nity Investment Home loans to all segments of the         ate. 12 C.F.R. 262.3(e) and 262.25(d). The Board has carefully
      Sacramento MSA. Second, advertisements will be            considered this request. In the Board's view, Protestants have had
      placed in community-oriented publications. Third, ad-     sufficient opportunity to present written submissions, and has submit-
                                                                ted substantial written comments that have been considered by the
      vertisements will be placed with radio stations tar-      Board. On the basis of all the facts of record, the Board has
      geted to minority audiences. Fourth, a community          determined that a public meeting or hearing is not necessary to clarify
                                                                the factual record in these applications, or otherwise warranted in this
      reinvestment officer has been hired to work with          case. Accordingly, the request for a public meeting or hearing on these
      community organizations to communicate the avail-         applications is hereby denied.
November 1994



      1022 Federal Reserve Bulletin • November 1994


      submit semiannual reports on its programs to the Fed-                   this proposal is specifically conditioned on compliance
      eral Reserve Bank of San Francisco for the next two                     by First Interstate with the commitments made in
      years. The Board will assess the success of FICAL's                     connection with these applications and upon First In-
      continued efforts in connection with future applications                terstate and FICAL receiving all necessary federal and
      for expansion by First Interstate.                                      state approvals. The commitments and conditions re-
                                                                              lied on by the Board in reaching this decision are
      Other Considerations                                                    deemed to be conditions imposed in writing by the
                                                                              Board in connection with itsfindingsand decision and,
      The financial and managerial resources and future                       as such, may be enforced in proceedings under appli-
      prospects of First Interstate, Savings Bank, and their                  cable law.
      respective subsidiaries, and the other supervisory fac-                    The Board's determination is subject to all of the
      tors the Board must consider under the Bank Merger                      conditions set forth in Regulation Y, including those in
      Act and the Federal Reserve Act, are consistent with                    sections 225.4(d) and 225.23(b)(3), and to the Board's
      approval of this proposal.                                              authority to require modification or termination of the
         In addition, the record does not indicate that consum-               activities of a bank holding company or any of its
      mation of this proposal is likely to result in any signif-              subsidiaries as the Board finds necessary to assure
      icantly adverse effects, such as undue concentration of                 compliance with, and to prevent evasion of, the pro-
      resources, decreased or unfair competition, conflicts of                visions and purposes of the BHC Act and the Board's
      interests, or unsound banking practices that are not                    regulations and orders issued thereunder.
      likely to be outweighed by the public benefits of this                     The merger of FICAL and Savings Bank shall not be
      proposal. The Board expects that FICAL's acquisition                    consummated before the thirtieth calendar day follow-
      of Savings Bank would provide added convenience and                     ing the effective date of this order, and neither trans-
      services to Savings Bank customers because they                         action shall be consummated later than three months
      would have access to an array of services and programs                  after the effective date of this order, unless such period
      not currently provided by Savings Bank in the Sacra-                    is extended for good cause by the Board or by the
      mento community. Accordingly, the Board has deter-                      Federal Reserve Bank of San Francisco, acting pursu-
      mined that the balance of public interest factors it must               ant to delegated authority.
      consider under section 4(c)(8) of the BHC Act is                           By order of the Board of Governors, effective
      favorable and consistent with approval of First Inter-                  September 22, 1994.
      state's applications to acquire Savings Bank.
         The Board also has considered the additional factors                  Voting for this action: Chairman Greenspan, Vice Chair-
      it must review under section 5(d)(3) of the FDI Act,                    man Blinder, and Governors Kelley, Lindsey, Phillips, and
      and the record in this case reflects that:                              Yellen. Absent and not voting: Governor LaWare.
         (1) The transaction will not result in the transfer of
                                                                                                                        JENNIFER J. JOHNSON
         any federally insured depository institution's federal
                                                                                                            Deputy Secretary of the Board
         deposit insurance from one federal deposit insur-
         ance fund to the other;
                                                                              Appendix
         (2) First Interstate and FICAL currently meet, and
         upon consummation of the proposed transaction will
                                                                              Branches of Sacramento Savings Bank to be
         continue to meet, all applicable capital standards;
         and                                                                  Acquired by First Interstate Bancorp
         (3) Because FICAL is located in California and is
                                                                              330 E Street, Davis, California
         merging with a California savings association, the
                                                                              5499 Sunrise Blvd., Davis, California
         proposed transaction would comply with the Dou-
                                                                              5000 Laguna Blvd., Elk Grove, California
         glas Amendment if Savings Bank were a state bank
         that First Interstate was applying to acquire di-
         rectly. See 12 U.S.C. § 1815(d)(3).                                  staffs. The Board notes that because FICAL employs more than 50
                                                                              people, serves as a depository of government funds, and acts as agent
                                                                              in selling or redeeming U.S. savings bonds and notes, it is required by
      Based on the foregoing and all the facts of record, the                 Department of Labor regulations to:
      Board has determined that the applications should be,                      (1) File annual reports with the Equal Employment Opportunity
      and hereby are, approved.18 The Board's approval of                     Commission; and
                                                                                 (2) Have in place a written affirmative action compliance program
                                                                              that states its efforts and plans to achieve equal opportunity in the
                                                                              employment, hiring, promotion, and separation of personnel.
         18. In addition, one Protestant criticized FICAL's record on the        See 41 C.F.R. 60-1.7(a), 60-1.40. First Interstate and its other
      representation of African Americans among its vendor contractors; on    subsidiaries also are subject to these equal opportunity and affirmative
      its board of directors; and on its executive, officer, and management   action requirements.
November 1994



                                                                                          Legal Developments               1023


      954 East Avenue, Chico, California                     of the Bank Holding Company Act ("BHC Act"), has
      6585 Oakmont Drive, Santa Rosa, California              applied under section 4(c)(8) of the BHC Act
       190 E. Monte Vista Avenue, Vacaville, California      (12 U.S.C. § 1843(c)(8)), and section 225.23 of the
      5697 Hillsdale Blvd., Sacramento, California            Board's Regulation Y (12 C.F.R. 225.23), to acquire
      6363 Riverside Blvd., Sacramento, California            through its wholly owned subsidiary, Pinnacle Invest-
      90 Belle Mille Road, Red Bluff, California              ment Company, Windsor, Colorado, a partial interest
      1224 E. Gibson Road, Woodland, California              in a de novo joint venture partnership ("Joint Ven-
      1380 Hilltop Drive, Redding, California                ture") that would provide full-service securities bro-
      9165 Kiefer Blvd., Sacramento, California              kerage services pursuant to section 225.25(b)(15) of
      8859 Madison Avenue, Fair Oaks, California             Regulation Y (12 C.F.R. 225.25(b)(I5)). The remaining
      6653 Clark Road, Paradise, California                  interest in Joint Venture would be acquired by Gilbert
      5107 Fair Oaks Blvd., Carmichael, California           Marshall & Company, Greeley, Colorado ("Gilbert
      3103 Travis Blvd., Fail-field, California              Marshall").
      3205 West Hammer Lane, Stockton, California               Notice of the application, affording interested per-
      2485 Notre Dame Blvd., Suite 750, Chico, California    sons an opportunity to submit comments, has been
      1326 Broadway, Sacramento, California                  published (58 Federal Register 61,913 (1993)). The
      1300 W. Kettleman Lane, Lodi, California               time for filing comments has expired, and the Board
      3450 Palmer Drive, Cameron Park, California            has considered the application and all comments re-
      2440 N. Texas Street, Fairfield, California            ceived in light of the factors set forth in section 4(c)(8)
      3101 Travis Blvd., Fairfield, California               of the BHC Act.
      8395 Folsom Blvd., Sacramento, California                 Applicant, with $1.1 billion in total consolidated
      9165 Kiefer Blvd., Sacramento, California              assets, operates subsidiary banks in Colorado, Kan-
      850 Colusa Avenue, Yuba, California                    sas, Nebraska and Wyoming,1 and engages in permis-
      995 Tharp Road, Yuba City, California                  sible nonbanking activities. Gilbert Marshall is a reg-
      7895 Lichen Drive, Citrus Heights, California          istered broker-dealer and derives a significant portion
      6031 Greenback Lane, Citrus Heights, California        of its revenues from underwriting and dealing in bank-
      2805 Childress Drive, Anderson, California             ineligible securities.
      13422 East Lincoln Way, Auburn, California                The Board previously has determined by regulation
      1801 Douglas Blvd., Roseville, California              that providing full-service securities brokerage ser-
      9 South El Dorado Street, Stockton, California         vices is an activity that is closely related to banking
      1100 Pitt School Road, Dixon, California               and permissible for bank holding companies under
      736 Taylorville Road, Grass Valley, California         section 4(c)(8) of the BHC Act.2 Applicant has com-
      7201 Southland Park Drive, Sacramento, California      mitted that Joint Venture will conduct these activities
      424 L Street, Sacramento, California                   in accordance with the limitations imposed by section
      1651 Response Road, Sacramento, California             225.25(b)(15) of Regulation Y.
      6945 Stockton Blvd., Sacramento, California               Applicant proposes that two officers of Gilbert Mar-
      2150 Watt Avenue, Sacramento, California               shall who are involved in marketing and selling bank-
      8799 Elk Grove Blvd., Elk Grove, California            ineligible securities underwritten and dealt in by Gil-
      11875 Sutton Way, Grass Valley, California             bert Marshall serve as officers of Joint Venture. In
      701 East Bidwell Street, Folsom, California            addition, Applicant proposes that at least half of the 35
      11200 Gold Express Drive, California                   registered broker-dealers employed by Gilbert Mar-
      4875 Granite Drive, Rocklin, California                shall serve simultaneously as employees of Joint Ven-
      3980 Missouri Flat Road, Placervilte, California       ture and provide full-service brokerage services to
      700 E Street, Marysville, California                   customers of Applicant's bank affiliates.' Applicant
      1320 Yuba Street, Redding, California                  maintains that reliance on officers and broker-dealers
                                                             who are dual employees is necessary to the success of
      Pinnacle Bancorp, Inc.                                 Joint Venture.
      Central City, Nebraska                                    In prior decisions, the Board has expressed concern
                                                             that joint ventures potentially could lead to a matrix of
      Order Approving Application to Engage in
      Full-Service Securities Brokerage Activities Through
      a Joint Venture                                          1. Asset data are as of December 31, 1993.
                                                               2. See 12 C.F.R. 225.25(b)(15).
                                                               3. Initially, Joint Venture's offices would be established at six
      Pinnacle Bancorp, Inc., Central City, Nebraska ("Ap-   Pinnacle bank locations. Gilbert Marshall would provide one or more
      plicant"), a bank holding company within the meaning   brokers to each location during regular business hours or as needed.
November 1994



      1024 Federal Reserve Bulletin • November 1994


      relationships between co-venturers that could breach                          In order to approve this application, the Board also
      the legally mandated separation of banking and com-                        must determine that the performance of the proposed
      merce, create the possibility of conflicts of interests                    activities by Applicant' 'can reasonably be expected to
      and other adverse effects that the BHC Act was                             produce benefits to the public, such as greater conve-
      designed to prevent, or impair, or give the appearance                     nience, increased competition, or gains in efficiency,
      of impairing, the ability of the banking organization to                   that outweigh possible adverse effects, such as undue
      function effectively as an independent and impartial                       concentration of resources, decreased or unfair com-
      provider of credit.4 The Board has restricted dual                         petition, conflicts of interests, or unsound banking
      employees between a joint venture and a securities                         practices."7 Applicant and Joint Venture have com-
      firm co-venturer in previous cases, to separate the                        mitted that the securities advisory and brokerage
      permissible activities of the joint venture from the                       services offered by Joint Venture will be provided in
      impermissible activities of the co-venturer securities                     accordance with the guidelines established by the
      firm.5                                                                     Board and the other agencies for the sale of uninsured
         In this case, Applicant has made several commit-                        products on bank premises.8
      ments to address concerns that the proposed common                            Under these guidelines, the securities and advisory
      officers and employees may cause Joint Venture to be                       services provided by Joint Venture on bank premises
      engaged in impermissible securities activities or may                      will be provided by trained personnel at a clearly
      cause conflicts of interests or other adverse effects.                     identified location separate from the bank's deposit-
      Applicant has committed that Joint Venture will not                        taking area. Customers also will receive written dis-
      recommend, market, or act as broker for any securi-                        closures that specific products recommended by Joint
      ties underwritten or dealt in by Gilbert Marshall, and                     Venture are uninsured and will be required to sign a
      will not solicit customers on Gilbert Marshall's behalf.                   written acknowledgement of the disclosures. Appli-
      None of the broker-dealers employed by Joint Venture                       cant has established procedures for supervising Joint
      will have any involvement in Gilbert Marshall's under-                     Venture's compliance with these and the other policies
      writing, market making or dealing activities, either at                    set forth in the guidelines and Applicant may terminate
      Gilbert Marshall or at Joint Venture, even while                           the joint venture if the policies are not followed. The
      serving as employees of Gilbert Marshall.6 In addition,                    Board believes that this framework for conducting the
      Joint Venture's activities will be conducted at a loca-                    proposed activities reduces the potential for conflicts
      tion separate from the Gilbert Marshall offices, and                       of interests and customer confusion that otherwise
      Joint Venture will not include any reference to Gilbert                    might be associated with conducting the proposed
      Marshall in its name. While two of the officers of                         activities on bank premises.
      Gilbert Marshall who are engaged in underwriting and                          In every case involving a nonbanking acquisition by
      dealing activities would be officers of the joint venture,                 a bank holding company under section 4 of the BHC
      neither these officers nor any other officers of Gilbert                   Act, the Board considers the financial condition and
      Marshall will have access to the Pinnacle customer                         resources of the applicant and its subsidiaries and the
      lists or be permitted to provide services directly to                      effect of the transaction on these resources.9 Based on
      Joint Venture's customers. Moreover, the dual em-                          the facts of this case, the Board concludes that finan-
      ployees will not distribute prospectuses or sales liter-                   cial considerations are consistent with approval of this
      ature regarding securities underwritten or dealt in by                     application. The managerial resources of Applicant
      Gilbert Marshall, and will not refer customers to                          also are consistent with approval.
      Gilbert Marshall.                                                             The Board expects that the de novo entry of Appli-
         Based on these and all of Applicant's other commit-                     cant into the market for the proposed services would
      ments, it appears that the proposed dual officers and                      provide added convenience to Applicant's customers,
      employees would not cause Applicant or Joint Venture                       and would increase the level of competition among
      to become involved in impermissible securities activ-                      existing providers of these services. Accordingly, the
      ities.                                                                     Board has determined that performance of the pro-
                                                                                 posed activities by Joint Venture can reasonably be
                                                                                 expected to produce benefits to the public.
                                                                                    In addition, the record does not indicate that con-
        4. See The Chuo Trust and Banking Company, Limited, 78 Federal           summation of the proposal is likely to result in any
      Reserve Bulletin 446 (1992) (Chuo Trust); Amsterdam-Rotterdam
      Bank. N.V.. 70 Federal Reserve Bulletin 835 (1984) (Amro).
        5. See Amro; Chuo Trust; Banque Nationale de Paris, 80 Federal
      Reserve Bulletin 638 (1994).                                                7. 12 U.S.C. § 1843(c)(8).
        6. The underwriting and dealing activities of Gilbert Marshall will be    8. See Interagency Statement on Retail Sales of Nondeposit Invest-
      handled exclusively by the officers of Gilbert Marshall, none of whom      ment Products, February 15, 1994.
      will have contact with customers of Joint Venture.                          9. 12C.F.R. 225.24.
November 1994



                                                                                               Legal Developments               1025


      significantly adverse effects, such as concentration of     the Bank Holding Company Act ("BHC Act"), 1 has
      resources, decreased or unfair competition, conflicts       applied under section 4(c)(8) of the BHC Act
      of interests, or unsound banking practices that are not     (12 U.S.C. 8 1843(c)(8)) and section 225.23(a) of the
      likely to be outweighed by the public benefits of the       Board's Regulation Y (12 C.F.R. 225.23(a)) to engage
      proposal. Accordingly, the Board has determined that        de novo through its wholly owned subsidiary, Toronto
      the public interest factors it must consider under          Dominion Securities (USA) Inc., New York, New
      section 4 of the BHC Act are favorable and consistent       York ("Company"), in the following nonbanking ac-
      with approval of the application.                           tivities:
         Based on the foregoing and all the facts of record,         (1) Underwriting and dealing in, to a limited extent,
      the Board has determined to, and hereby does, ap-              all types of debt and equity securities (other than
      prove the application, subject to the terms and condi-         securities issued by open-end investment compa-
      tions set forth in this order, and in the Board regula-        nies), including sovereign debt securities, corporate
      tions and orders noted above. The Board's                      debt securities, convertible debt securities, debt
      determination also is subject to all the terms and             securities issued by a trust or other vehicle secured
      conditions set forth in Regulation Y, including those in       by or representing interests in debt obligations,
      sections 225.7 and 225.23(b), and to the Board's au-           preferred stock, common stock, American Deposi-
      thority to require modification or termination of the          tary Receipts, and other direct and indirect owner-
      activities of a bank holding company or any of its             ship interests in corporations and other entities
      subsidiaries as the Board finds necessary to assure            ("bank-ineligible securities");
      compliance with, and prevent evasion of, the provi-            (2) Purchasing and selling all types of securities as a
      sions of the BHC Act, and the Board's regulations and          "riskless principal" on the order of customers; and
      orders issued thereunder. The Board's decision is              (3) Making, acquiring, and servicing loans or other
      specifically conditioned on compliance with all the            extensions of credit (including issuing letters of
      commitments made in this application, including the            credit and accepting drafts) for Company's account
      commitments discussed in this order and the condi-             and for the account of others, pursuant to section
      tions set forth in the Board orders noted above. These         225.25(b)(l) of Regulation Y.
      commitments and conditions shall be deemed to be
      conditions imposed in writing by the Board in connec-       Applicant seeks approval for Company to conduct the
      tion with its findings and decisions, and, as such, may     proposed activities throughout the United States.
      be enforced in proceedings under applicable law.               Notice of the application, affording interested per-
         This transaction shall not be consummated later          sons an opportunity to submit comments on the pro-
      than three months after the effective date of this order,   posal, has been published (59 federal Register 11,607
      unless such period is extended for good cause by the        (1994)). The time for filing comments has expired, and
      Board or by the Federal Reserve Bank of Kansas City,        the Board has considered the application and all
      pursuant to delegated authority.                            comments received in light of the factors set forth in
         By order of the Board of Governors, effective            section 4(c)(8) of the BHC Act.
      September 19, 1994.                                            Applicant, with total consolidated assets of
                                                                  $56.6 billion, is the fifth largest commercial banking
       Voting for this action: Chairman Greenspan, Vice Chair-    organization in Canada and the 98th largest bank in the
      man Blinder, and Governors Kelley, Phillips, and Yellen.    world.2 In the United States, Applicant operates a
      Absent and not voting: Governors LaWare and Lindsey.        branch and a limited purpose trust company in New
                                                                  York, New York, an agency in Houston, Texas, and a
                                       JENNIFER J. JOHNSON
                                                                  representative office in Chicago, Illinois. In addition,
                              Deputy Secretary of the Board       Applicant engages through Company and other sub-
                                                                  sidiaries in a broad range of permissible nonbanking
      The Toronto-Dominion Bank                                   activities in the United States. Company currently is
      Toronto, Canada                                             engaged in limited bank-ineligible securities underwrit-
                                                                  ing and dealing activities that are permissible under
      Order Approving Application to Engage De Novo in            section 20 of the Glass-Steagall Act (12 U.S.C.
      Various Securities-Related Activities, Including
      Underwriting and Dealing in All Types of Debt and
      Equity Securities on a Limited Basis                           1. Applicant, a foreign bank with a branch in New York, New York,
                                                                  is subject to the BHC Act by operation of section K(a) of the
                                                                  International Banking Act of 1978 (12 U.S.C. § 3106(a)).
      The Toronto-Dominion Bank, Toronto, Canada ("Ap-               2. Asset data arc as of December 3!, 1992, and employ exchange
      plicant"), a foreign bank subject to the provisions of      rates then in effect.
November 1994



      1026 Federal Reserve Bulletin • November 1994


      § 377).3 Company is, and will continue to be, a broker-                       that Company will conduct its underwriting and deal-
      dealer registered with the Securities and Exchange                            ing activities with respect to bank-ineligible securities
      Commission ("SEC") and a member of the National                               subject to this 10 percent revenue test.5
      Association of Securities Dealers, Inc. ("NASD").                                The Board has determined that, subject to the
      Accordingly, Company is subject to the record-keep-                           prudential framework of limitations established in pre-
      ing and reporting obligations, fiduciary standards, and                       vious decisions to address the potential for conflicts of
      other requirements of the Securities Exchange Act of                          interests, unsound banking practices, or other adverse
      1934 (15 U.S.C. § 78a et seq.), the SEC, and the                              effects, the proposed underwriting and dealing activi-
      NASD.                                                                         ties involving bank-ineligible securities are so closely
         As indicated above, the Board has previously deter-                        related to banking as to be proper incidents thereto
      mined by regulation that the proposed activities re-                          within the meaning of section 4(c)(8) of the BHC Act.6
      lated to the making, acquiring, and servicing of loans                        Applicant has committed that Company will conduct
      and other extensions of credit are closely related to                         the proposed underwriting and dealing activities using
      banking within the meaning of the BHC Act. See                                the same methods and procedures, and subject to the
      12 C.F.R. 225.25(b)(l). In order to approve this appli-                       same prudential limitations as were established by the
      cation, the Board also must determine that the perfor-                        Board in the Section 20 Orders and other previous
      mance of the proposed activities by Company "can                              cases.
      reasonably be expected to produce benefits to the                                The Board notes that, in connection with this pro-
      public . . . that outweigh possible adverse effects, such                     posal, an issue has been raised as to whether the
      as undue concentration of resources, decreased or                             Section 20 Orders would prevent affiliates of Company
      unfair competition, conflicts of interests, or unsound                        from participating in letter of credit or similar facilities
      banking practices." 12 U.S.C. § 1843(c)(8).                                   that would enhance the marketability or creditworthi-
                                                                                    ness of bank-ineligible securities underwritten by
      Underwriting and Dealing Activities                                           Company. The Board's Section 20 Orders contain a
                                                                                    limitation on credit enhancements which prohibits an
      The Board has previously determined that the conduct                          affiliate of a section 20 subsidiary from extending
      of the proposed underwriting and dealing activities is                        credit that might be viewed as enhancing the credit-
      consistent with section 20 of the Glass-Steagall Act                          worthiness or marketability of securities underwritten
      (12 U.S.C. § 377), provided that the company engaged                          by the section 20 subsidiary. Unlike other limitations
      in the underwriting and dealing activities derives no                         contained in the Section 20 Orders, this limitation on
      more than 10 percent of its total gross revenue from                          credit enhancements contains no exception for credit
      underwriting and dealing in bank-ineligible securities                        facilities in which there is substantial participation by
      over any two-year period.4 Applicant has committed                            other lenders. Accordingly, this limitation would pro-


         3. In particular, Company has authority to underwrite and deal in,         Cir. 1988), cert, den., 486 U.S. 1059 (1988) (collectively, "Section 20
      to a limited extent, certain municipal revenue bonds, 1-4 family              Orders"). Compliance with the 10 percent revenue limitation shall be
      mortgage-related securities, commercial paper, and consumer receiv-           calculated in accordance with the method stated in the Section 20
      able-related securities. In addition, Company is authorized to:               Orders, as modified by the Order Approving Modifications to the
         (1) Underwrite and deal in securities that state member banks are          Section 20 Orders, 75 Federal Reserve Bulletin 751 (1989), the Order
         permitted to underwrite and deal in under sections 5(c) and 16 of the      Approving Modifications to the Section 20 Orders, 79 Federal Reserve
         Glass-Steagall Act (12 U.S.C. §8 335 and 24(7));                           Bulletin 226 (1993), and the Supplement to Order Approving Modifi-
         (2) Act as agent in the private placement of all types of securities;      cations to Section 20 Orders, 79 Federal Reserve Bulletin 360 (1993)
         (3) Provide investment advisory and securities brokerage services          (collectively, "Modification Orders"). In this regard, the Board notes
         on a combined basis;                                                       that Applicant has not adopted the Board's alternative indexed
         (4) Provide certain financial and transaction advice to institutions;      revenue test to measure compliance with the 10 percent limitation on
         (5) Broker various interest rate and currency swaps, and similar           bank-ineligible securities activities, and, absent such election, will
         transactions;                                                              continue to employ the Board's original 10 percent revenue standard.
         (6) Arrange for the sale of loans and other extensions of credit              5. Applicant also has proposed that Company engage in certain
         originated by affiliated and unaffiliated lenders; and                     activities, including repurchase and reverse repurchase transactions,
         (7) Provide financial advice to Canadian governmental authorities          in connection with and as an incident to the proposed underwriting
         and their agents with respect to the issuance of their securities in the   and dealing activities. In this regard, the Board notes that Company
         United States.                                                             may engage in activities that are necessary incidents to the proposed
         See The Toronto-Dominion Bank, 76 Federal Reserve Bulletin 573             underwriting and dealing activities, provided that any such activities
      (1990).                                                                       are treated as part of the bank-ineligible securities activities unless
         4. See Canadian Imperial Bank of Commerce, et «/., 76 Federal              Company has received specific approval under section 4(c)(8) of the
      Reserve Bulletin 158 (1990); J.P. Morgan < Co. incorporated, et a/.,
                                                     £                              BHC Act to conduct the activities independently. Until such approval
      75 Federal Reserve Bulletin 192 (1989), affd sub nom. Securities              is obtained, any revenues from the incidental activities must be
      Industries Ass'n v. Board of Governors of the Federal Reserve                 counted as ineligible revenues subject to the 10 percent revenue
      System, 900 F.2d 360 (D.C. Cir. 1990); Citicorp, et at., 73 Federal           limitation set forth in the Section 20 Orders, as modified by the
      Reserve Bulletin 473 (1987), affd sub nom. Securities Industry Ass'n          Modification Orders.
      v. Board of Governors of the Federal Reserve System, 839 F.2d 47 (2d             6. See Section 20 Orders.
November 1994



                                                                                                                  Legal Developments 1027


      hibit affiliates of Company from participating in a                        tus as a foreign bank." These methods, procedures,
      credit facility that would support bank-ineligible secu-                   and prudential limitations include the comprehensive
      rities underwritten by Company, even when other                            framework of restrictions designed to avoid potential
      lenders participate in the facility to a substantial ex-                   conflicts of interests, unsound banking practices, and
      tent.                                                                      other adverse effects imposed by the Board in connec-
                                                                                 tion with underwriting and dealing in securities.
      Riskless Principal Activities
                                                                                 Other Considerations
      "Riskless principal" is the term used in the securities
      business to refer to a transaction in which a broker-                      In every case under section 4(c)(8) of the BHC Act,
      dealer, after receiving an order to buy (or sell) a                        the Board considers the financial and managerial re-
      security from a customer, purchases (or sells) the                         sources of the applicant and its subsidiaries and the
      security for its own account to offset a contemporane-                     effect of the transaction upon such resources.12 In
      ous sale to (or purchase from) the customer.7 Riskless                     considering these factors, the Board has noted that
      principal transactions are understood in the industry to                   Applicant's capital ratios satisfy applicable risk-based
      include only transactions in the secondary market.                         standards established under the Basle Accord, and are
      Thus, Company would not act as a riskless principal in                     considered equivalent to the capital levels that would
      selling securities at the order of a customer that is the                  be required of a U.S. banking organization. The Board
      issuer of the securities to be sold or in any transaction                  has also reviewed the capitalization of Applicant and
      in which Company has a contractual agreement to                            Company in accordance with the standards set forth in
      place the securities as agent of the issuer. Company                       the Section 20 Orders, and finds the capitalization of
      also would not act as a riskless principal in any                          each to be consistent with approval of this proposal.
      transaction involving a security for which it makes a                      With respect to the capitalization of Company, this
      market.                                                                    determination is based upon all the facts of record,
         The Board has previously determined that, subject                       including Applicant's projections with respect to the
      to prudential limitations that address the potential for                   volume of Company's underwriting and dealing activ-
      conflicts of interests, unsound banking practices, or                      ities in bank-ineligible securities. On the basis of all the
      other adverse effects, the proposed riskless principal                     facts of record, including the foregoing, and subject to
      activities are so closely related to banking as to be                      the completion of a satisfactory infrastructure review,
      proper incidents thereto within the meaning of section                     the Board has concluded that financial and managerial
      4(c)(8) of the BHC Act.8 The Board has also previ-                         considerations are consistent with approval of this
      ously determined that purchasing and selling securities                    application.
      on the order of investors as a riskless principal does                        Under the framework and conditions established in
      not constitute underwriting or dealing in securities for                   this and prior decisions, consummation of this pro-
      purposes of section 20 of the Glass-Steagall Act, and,
      accordingly, that revenue derived from these activities
      is not subject to the 10 percent revenue limitation on                     tory. When acting as a riskless principal, Company will engage only in
      bank-ineligible securities underwriting and dealing.9                      transactions in the secondary market, and not at the order of a
                                                                                 customer that is the issuer of the securities to be sold, will not act as
      Applicant has committed that Company will conduct                          riskless principal in any transaction involving a security for which it
      its riskless principal activities using the same methods                   makes a market, and will not hold itself out as making a market in the
      and procedures, and subject to the same prudential                         securities that it buys and sells as a riskless principal. Moreover,
                                                                                 Company will not engage in riskless principal transactions on behalf of
      limitations, as were established by the Board in the                       any foreign affiliates that engage in securities dealing activities outside
      Bankers Trust Order, the J.P. Morgan Order, and                            the United States, and will not act as riskless principal for registered
                                                                                 investment company securities. In addition, Company will not act as
      other orders approving the conduct of riskless princi-                     a riskless principal with respect to any securities of investment
      pal activities,10 as modified to reflect Applicant's sta-                  companies that are advised by Applicant or any of its affiliates.
                                                                                    With respect to these riskless principal activities, Applicant has
                                                                                 proposed that Company he permitted to enter bid or ask quotations, or
                                                                                 publish "offering wanted" or "bid wanted" notices, on trading
         7. See 17 C.F.K. 249.10b-10(a)(8)(i).                                   systems other than an exchange or the NASDAQ, provided that
         8. See J.P. Morgan & Company Incorporated, 76 Federal Reserve           Company not enter price quotations on different sides of the market
      Bulletin 26 (1990) {"J.P. Morgan Order"); Hankers Trust New York           for a particular security without a separation of at least two business
      Corporation, 75 Federal Reserve Bulletin 829 (1989) ("Hankers Trust        days between such quotations, The Board has previously permitted
      Order").                                                                   this practice in connection with riskless principal activities. See
         9. See Bankers Trust Order.                                             Dauphin Deposit Corporation, 77 Federal Reserve Bulletin 672 (1991).
         10. See J.P. Morgan Order; Bunkers Trust Order. Included among             11. See, e.g., The Bank of Nova Scotia, 76 Federal Reserve Bulletin
      the limitations applicable to the proponed activities arc that Company     545 (1990).
      will maintain specific records that will clearly identify all riskless        12. See 12 C.F.R. 225.24. See also The Fuji Bank, Limited, 75
      principal transactions, and that Company will not engage in any            Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73
      riskless principal transactions for any securities carried in its inven-   Federal Reserve Bulletin 155 (1987).
November 1994



      1028 Federal Reserve Bulletin • November 1994


      posal is not likely to result in any significant adverse     subject to the other conditions of this order and the
      effects, such as undue concentration of resources,           Section 20 Orders.
      decreased or unfair competition, conflicts of interests,        The Board's determination also is subject to all the
      or unsound banking practices. Moreover, the Board            terms and conditions set forth in Regulation Y, includ-
      expects that the de novo entry of Company into the           ing those in sections 225.7 and 225.23(b) of Regulation
      market for the proposed services in the United States        Y, and to the Board's authority to require such mod-
      would provide added convenience to Applicant's cus-          ification or termination of the activities of a bank
      tomers, and would increase the level of competition          holding company or any of its subsidiaries as the
      among existing providers of these services. For these        Board finds necessary to ensure compliance with, and
      reasons, the Board has determined that the perfor-           to prevent evasion of, the provisions of the BHC Act
      mance of the proposed activities by Applicant can            and the Board's regulations and orders issued there-
      reasonably be expected to produce public benefits that       under. The Board's decision is specifically conditioned
      outweigh possible adverse effects under the proper           on compliance with all the commitments made in
      incident to banking standard of section 4(c)(8) of the       connection with this application, including the com-
      BHC Act.                                                     mitments discussed in this order, and the conditions
         Accordingly, and for the reasons set forth in this        set forth in this order and the above-noted Board
      order and in the Section 20 Orders, the Board has            regulations and orders. These commitments and con-
      concluded that Applicant's proposal to engage through        ditions are deemed to be conditions imposed in writing
      Company in the proposed activities is consistent with        by the Board in connection with its findings and
      the Glass-Steagall Act, and that the proposed activi-        decision, and, as such, may be enforced in proceed-
      ties are so closely related to banking as to be proper       ings under applicable law.
      incidents thereto within the meaning of section 4(c)(8)         This transaction shall not be consummated later
      of the BHC Act, provided that Applicant limits Com-          than three months after the effective date of this order,
      pany's activities as specified in this order and the         unless such period is extended for good cause by the
      Section 20 Orders, as modified by the Modification           Board or by the Federal Reserve Bank of New York,
      Orders.                                                      acting pursuant to delegated authority.
         On the basis of the foregoing and all the facts of           By order of the Board of Governors, effective
      record, including the commitments furnished by Ap-           September 14, 1994.
      plicant, the Board has determined that the application
      should be, and hereby is, approved, subject to all the        Voting for this action: Chairman Greenspan, Vice Chair-
      terms and conditions of this order and the Section 20        man Blinder, and Governors Kelley, Lindsey, Phillips, and
      Orders, as modified by the Modification Orders. The          Yellen. Absent and not voting: Governor La Ware.
      Board's approval of this proposal extends only to
                                                                                                    JENNIFER J. JOHNSON
      activities conducted within the limitations of those
      orders and this order, including the Board's reserva-                                Deputy Secretary of the Board
      tion of authority to establish additional limitations to
      ensure that Company's activities are consistent with
      safety and soundness, conflicts of interests, and other (l   ORDERS ISSUED UNDER BANK MERGER                 ACT
      relevant considerations under the BHC Act. Under-
      writing and dealing in any manner other than as ('4          Bank of Lancaster
      approved in this order and the Section 20 Orders is not      Kilmarnock, Virginia
      within the scope of the Board's approval and is not
      authorized for Company.                                      Order Approving Merger of Savings Association
         The Board's approval of this proposal is conditioned      with a Commercial Bank
      upon a future determination by the Board that Appli-
      cant and Company have established policies and pro-          Bank of Lancaster, Kilmarnock, Virginia ("Bank"), a
      cedures to ensure compliance with the Section 20             state member bank, has applied under section 18(c) of
      Firewalls and the other requirements of this order and       the Federal Deposit Insurance Act ("FDI Act")
      the Section 20 Orders, including computer, audit, and        (12 U.S.C. § 1828(c)) (the "Bank Merger Act") to
      accounting systems, internal risk management con-            acquire the Kilmarnock, Virginia, branch of TideMark
      trols, and the necessary operational and managerial          Bank ("TideMark Branch"), a federally chartered
      infrastructure. Upon notification by the Board that this     stock savings bank headquartered in Newport News,
      condition has been satisfied, Company may immedi-            Virginia. Bank also has applied under section 5(d)(3) of
      ately commence the proposed underwriting and deal-           the FDI Act (12 U.S.C. § 1815(d)(3)), as amended by
      ing activities with respect to bank-ineligible securities,   the Federal Deposit Insurance Corporation Improve-
November 1994



                                                                                                               Legal Developments               1029


      ment Act of 1991 (Pub. L. No. 102-242, § 501, 105                          Branch is the fifth largest depository institution in the
      Stat. 2236, 2388 (1991)), to acquire Tidemark Branch"                      market, controlling $5.2 million in deposits, represent-
      and to establish a branch at this location, pursuant to                    ing 1.1 percent of market deposits. Upon consum-
      section 9 of the Federal Reserve Act (12 U.S.C. § 321                      mation of this proposal, Lancaster would control
      et seq.).                                                                  $140.3 million in deposits, representing 59.8 percent of
         Notice of the applications, affording interested per-                   total market deposits. The Herfindahl-Hirschman In-
      sons an opportunity to submit comments, has been                           dex ("HHI") would increase by 167 points to 4331.5
      given in accordance with the Bank Merger Act and the                          The Board notes that a number of factors indicate
      Board's Rules of Procedure (12 C.F.R. 262.3(b)). As                        that the competitive effects of the proposal may be
      required by the Bank Merger Act, reports on the                            overstated by the increase in concentration as mea-
      competitive effects of the merger were requested from                      sured by the HHI. Because of its financial condition,
      the United States Attorney General, the Office of the                      TideMark Bank has operated under formal supervi-
      Comptroller of the Currency ("OCC"), the Federal                           sory action by the OTS since 1990, and it has not been
      Deposit Insurance Corporation ("FDIC"), and the                            a viable competitor in the market. In addition, three
      Office of Thrift Supervision ("OTS"). The time for                         other commercial banks, including two branches of the
      filing comments has expired, and the Board has con-                        state's largest commercial banks, would remain in the
      sidered the applications and all comments received in                      market after consummation of this proposal. More-
      light of the factors set forth in the Bank Merger Act                      over, TideMark Bank undertook substantial efforts to
      and in section 9 of the Federal Reserve Act.                               find a buyer both in and out of the market, and Bank
         Bank is the 35th largest commercial banking organi-                     emerged as the only purchaser for TideMark Branch's
      zation in Virginia, controlling $135.1 million in depos-                   relatively small amount of deposits.
      its, representing less than I percent of total deposits in                    As noted above, the Board sought comments from
      commercial banking organizations in the state.2 Tide-                      the United States Attorney General, the OCC, the
      Mark Branch controls deposits of $5.2 million, repre-                      FDIC, and the OTS on the competitive effects of this
      senting less than 1 percent of total deposits in thrift                    proposal. The Attorney General indicated that the
      institutions in the state. Upon consummation of the                        proposal is not likely to have a significantly adverse
      proposed transaction, Bank would remain the 35th                           effect on competition in any relevant banking market,
      largest commercial bank in Virginia, controlling                           and the OCC, the FDIC, and the OTS did not object to
      $140.3 million, representing less than 1 percent of total                  the acquisition. Based on all the facts of record,
      deposits in commercial banks in the state.                                 including the financial condition of TideMark Branch,
                                                                                 the Board concludes that consummation of this pro-
      Competitive Considerations                                                 posal would not have significantly adverse effects on
                                                                                 competition or on the concentration of resources in
      Bank and TideMark Branch compete directly in the                           any relevant banking market.
      Lancaster County banking market.1 Bank is the largest                         The Board also concludes that the financial and
      of the five depository institutions in the market,                         managerial resources and future prospects of Bank
      controlling deposits of $135.1 million, representing                       and TideMark Branch are consistent with approval of
      58.2 percent of the total deposits in depository institu-                  this application. Considerations relating to the conve-
      tions in the market ("market deposits").4 TideMark                         nience and needs of the communities to be served and
                                                                                 the other supervisory factors the Board is required to
                                                                                 consider under the Bank Merger Act are all consistent
         1. Section 5(d)(3) of the FDI Act requires the Board to follow the      with approval.
      procedures and consider the factors set forth in section I8(c) of the
      Bank Merger Act.
         2. Market deposit data are as of June 30, (994.
         3. The Lancaster County banking market is approximated by
      Lancaster County, Virginia.
         4. In this context, depository institutions include commercial banks,      5. Under the revised Department of Justice Merger Guidelines, 49
      savings banks, and savings associations. Market share data before          Federal Register 26,823 (June 29, 1984), a market in which the
      consummation are based on calculations in which the deposits of thrift     post-merger HHI is above 1800 is considered to be highly concen-
      institutions are included at 50 percent. The Board previously has          trated. In such markets, the Justice Department is likely to challenge
      indicated that thrift institutions have become, or have the potential to   a merger that increases the HHI by more than 50 points. The Justice
      become significant competitors of commercial banks. See WM Ban-            Department has informed the Board that a bank merger or acquisition
      rorp, 76 Federal Reserve Bulletin 788 (1990); National City Corpora-       generally will not be challenged (in the absence of other factors
      tion, 70 Federal Reserve Bulletin 743 (1984). Because the deposits of      indicating anticompetitive effects) unless the post-merger HHI is at
      TideMark Branch would be transferred to a commercial bank under            least IS00 and the merger increases the HHI by more than 200 points.
      this proposal, those deposits are included at 100 percent in the           The Justice Department has stated that the higher than normal HHI
      calculation of pro forma market share. See Norwest Corporation, 78         thresholds for screening bank mergers for anticompetitive effects
      Federal Reserve Bulletin 452 (1992); First Hanks, Inc., 76 Federal         implicitly recognize the competitive effect of limited-purpose lenders
      Reserve Bulletin 669 (1990).                                               and other non-depository financial entities.
November 1994



      1030 Federal Reserve Bulletin • November 1994


        In addition, the Board has also considered the                  Bank"); Rocky Mountain Bank of Plains, Plains; First
      specific factors it must review under section 5(d)(3) of          State Bank of Stevensville, Stevensville; and The
      the FDI Act, and the record in this case shows that:              Whitehall State Bank, Whitehall; all in Montana (col-
        (1) The transaction will not result in the transfer of          lectively, "merging banks"), with Billings Bank to be
        any federally insured depository institution's federal          the surviving institution. Billings Bank and the merg-
        deposit insurance from one federal deposit insur-               ing banks are subsidiaries of Rocky Mountain Bancor-
        ance fund to the other; and                                     poration, Inc., Billings, Montana ("Rocky Moun-
        (2) Bank currently meets, and upon consummation                 tain"), a bank holding company within the meaning of
        of the proposed transaction will continue to meet, all          the Bank Holding Company Act (12 U.S.C. § 1841
        applicable capital standards.                                   et seq.). In connection with this proposal, Billings
                                                                        Bank also has applied for the Board's approval under
      The Board also has reviewed the factors it is required            section 9 of the Federal Reserve Act (12 U.S.C. § 321
      to consider in applications for the establishment and             et seq.) to establish branches at the sites of the
      operation of branches under the Federal Reserve Act               merging banks' existing offices.
      and finds them to be consistent with approval.                       Notice of the applications, affording interested per-
         Based on the foregoing and all the facts of record,            sons an opportunity to submit comments, has been
      the Board has determined that these applications                  given in accordance with the Bank Merger Act and the
      should be, and hereby are, approved. The Board's                  Board's Rules of Procedure (12 C.F.R. 262.3). As
      approval of these applications is conditioned on com-             required by the Bank Merger Act, reports on the
      pliance by Bank with the commitments made in con-                 competitive effects of the proposal were requested
      nection with these applications. For purposes of this             from the United States Attorney General ("Attorney
      action, the commitments and conditions relied on in               General"), the Office of the Comptroller of the Cur-
      reaching this decision are both conditions imposed in             rency ("OCC"), and the Federal Deposit Insurance
      writing by the Board and, as such, may be enforced in             Corporation ("FDIC"). The time for filing comments
      proceedings under applicable law.                                 has expired, and the Board has considered the appli-
         The acquisition by Bank may not be consummated                 cations and all comments received in light of the
      before the thirtieth calendar day following the effective         factors set forth in the Bank Merger Act and the
      date of this order, and this proposal may not be                  Federal Reserve Act.
      consummated later than three months after the effec-                 Billings Bank controls deposits of $22.1 million,
      tive date of this order, unless such period is extended           representing less than 1 percent of the total deposits in
      by the Board or by the Federal Reserve Bank of                    commercial banks in Montana.2 The merging banks
      Richmond, acting pursuant to delegated authority.                 collectively control deposits of $99.3 million, repre-
         By order of the Board of Governors, effective                  senting approximately 1.5 percent of total deposits in
      September 12, 1994.                                               commercial banks in the state. Upon consummation of
                                                                        this proposal, Rocky Mountain would remain the ninth
        Voting for this action: Vice Chairman Blinder and Gover-        largest commercial banking organization in Montana,
      nors Kelley, Lindsey, Phillips, and Yellen. Absent and not        controlling deposits of $121.4 million, representing
      voting: Chairman Greenspan and Governor LaWare.
                                                                        approximately 1.8 percent of total deposits in commer-
                                           JENNIFER J. JOHNSON          cial banks in the state.
                                     Deputy Secretary of Board             As previously noted, Rocky Mountain currently
                                                                        controls Billings Bank and the merging banks. Hence,
      Rocky Mountain Bank of Billings                                   this transaction represents a merger of banks that are
      Billings, Montana                                                 already affiliated. The Attorney General has indicated
                                                                        that this proposal is not likely to result in a signifi-
      Order Approving the Merger of Banks                               cantly adverse effect on competition in any relevant
                                                                        banking market, and neither the OCC nor the FDIC
      Rocky Mountain Bank of Billings, Billings, Montana                has objected to consummation of this transaction.
      ("Billings Bank"), a state member bank,1 has applied              Based on all the facts of record, including the forego-
      under section 18(c) of the Federal Deposit Insurance              ing, the Board has concluded that consummation of
      Act (12 U.S.C. § 1828(c)) ("Bank Merger Act") to                  this proposal would not have a significantly adverse
      merge with Powder River Bank of Broadus, Broadus;                 effect on competition or the concentration of banking
      Security State Bank of Harlem, Harlem ("Harlem                    resources in any relevant banking market.

        1. Billings Bank, formerly Western Bank of Billings, became a
      member of the Federal Reserve System on June 24, 1994.             2. Deposit data are as of March 31, 1994.
November 1994



                                                                                                           Legal Developments                1031



      Convenience and Needs Considerations                                  Record of CRA Performance

      In acting on an application under the Bank Merger                     A. Evaluation of CRA Performance
      Act, the Board is required to consider the convenience
      and needs of the communities to be served, and to take                The Agency CRA Statement provides that a CRA
      into account the records of the relevant depository                   examination is an important and often controlling
      institutions under the Community Reinvestment Act                     factor in the consideration of an institution's CRA
      (12 U.S.C. § 2901 et seq.) ("CRA"). The CRA re-                       record, and that these reports will be given great
      quires the federal financial supervisory agencies to                  weight in the applications process.6 The Board notes
      encourage financial institutions to help meet the credit              that all of Rocky Mountain's subsidiary banks that
      needs of the local communities in which they operate,                 have been examined for CRA performance received
      consistent with the safe and sound operation of such                  "satisfactory" ratings from their primary regulators
      institutions. To accomplish this end, the CRA requires                during their most recent examinations for CRA perfor-
      the appropriate federal supervisory authority to "as-                 mance. In particular, Billings Bank, the surviving
      sess the institution's record of meeting the credit needs             institution under this proposal, received a "satisfacto-
      of its entire community, including low- and moderate-                 ry" rating from the FDIC, at its most recent examina-
      income neighborhoods, consistent with the safe and                    tion for CRA performance as of January 18, 1994.7 In
      sound operation of such institution," and to take that                addition, Harlem Bank received a "satisfactory" rat-
      record into account in its evaluation of applications                 ing from the FDIC at its most recent CRA examination
      under the Bank Merger Act or section 9 the Federal                    as of September 27, 1993 ("1993 Exam").
      Reserve Act to establish domestic branches.3
         The Board has received comments from the Fort                      B. Lending Record
      Belknap Community Council4 ("Protestant") that crit-
      icize the efforts of Harlem Bank to meet the credit and               The Board has carefully reviewed Harlem Bank's
      banking needs of the communities it serves. Protestant                lending data in light of Protestant's allegations. The
      alleges generally that Harlem Bank historically has                   Board notes that the FDIC concluded in the 1993
      denied credit to Native American borrowers, even                      Exam that Harlem Bank's geographic distribution of
      when those loans would be guaranteed by the Bureau                    credit applications and denials demonstrated reason-
      of Indian Affairs ("BIA"), and that, in some cases, the               able penetration of all segments of the bank's local
      bank denied credit to applicants who had maintained                   community. The examination results also indicated
      deposit accounts at Harlem Bank for several years.                    that the bank had advanced credit throughout its local
      Protestant also alleges that Harlem Bank has discour-                 community, and that a majority of these credit exten-
      aged Native Americans from applying for credit by                     sions were to borrowers within Harlem Bank's delin-
      turning down potential borrowers before a credit ap-                  eated community." In addition, the FDIC determined
      plication was filed. In addition, Protestant alleges that             that the bank's loan records did not show a dispropor-
      although there is a substantial shortage of housing on                tionate impact of credit denials or credit extensions on
      the Fort Belknap Indian Reservation, Harlem Bank                      any protected group. Moreover, the FDIC did not find
      has not extended an adequate amount of residential                    any evidence of practices intended to discourage ap-
      loans to Native Americans.                                            plications for the bank's credit products, or any pro-
         In its consideration of the convenience and needs                  hibited discriminatory or other illegal credit practices.
      factor under the Bank Merger Act, the Board has                       Harlem Bank's loan policy states that the bank will not
      carefully reviewed the entire record of CRA perfor-                   discriminate in its credit practices.9
      mance of Billings Bank, Harlem Bank, and the other                       The record also indicates that Harlem Bank has
      merging banks, all comments received and Harlem                       made significant efforts to help meet the credit needs
      Bank's responses to those comments, and all other                     of Native Americans. According to the lending data
      relevant facts of record in light of the CRA, the                     provided by Harlem Bank, a substantial portion of the
      Board's regulations, and the Statement of the Federal
      Financial Supervisory Agencies Regarding the Commu-
                                                                               6. Id. at 13,745.
      nity Reinvestment Act ("Agency CRA Statement").5                         7. The Board notes that Rocky Mountain has committed to imple-
                                                                            ment the CRA policies and programs of Billings Bank in the commu-
                                                                            nities currently served by Harlem Bank.
                                                                               8. Harlem Bank's delineated community is approximated by Blaine
        3. 12 U.S.C. S 2903.                                                County and a small portion of the west side of Phillips County, both in
        4. The Fort Belknap Community Council is the federally-recognized   Montana, and includes the entire Fort Belknap Indian Reservation.
      governing body of the Fort Belknap Indian Reservation, home to the       9. Rocky Mountain has recently added a corporate compliance
      Gros Ventre and Assinihoinc Tribes.                                   officer to provide support, audit, and training for its subsidiary banks
        5. 54 Federal Register 13,742 (1989).                               on CRA performance and related compliance matters.
November 1994



      1032 Federal Reserve Bulletin D November 1994


      bank's overall lending has been extended to Native       needs considerations, are consistent with approval of
      Americans.10 The bank extended 54.8 percent of the       this proposal.
      872 loans in its loan portfolio to Native Americans,
      which represents over 20 percent of the dollar value '))• Other Considerations
      of outstanding loans in the bank's portfolio. Harlem
      Bank's loan portfolio also indicates that the bank       The Board also has concluded that the financial and
      has extended 70.2 percent of its consumer loans,         managerial resources and future prospects of Rocky
      29.4 percent of its agriculture loans, 30 percent of its Mountain, Billings Bank and the merging banks, and
      commercial loans, and 19.3 percent of its real estate    all other supervisory factors the Board must consider
      loans to Native Americans. Moreover, from July 1,        under the Bank Merger Act, are consistent with ap-
       1993 to June 30, 1994, Harlem Bank made 62.3            proval.
      percent of its total loans to Native Americans, rep-        The Board also has considered the factors it is
      resenting 31.5 percent of the dollar amount of loans     required to consider when reviewing applications to
      extended.                                                establish branches pursuant to section 9 of the Federal
         Harlem Bank also participates in government-          Reserve Act (12 U.S.C. § 321 et seq.), and has deter-
      insured loan programs targeted to the Native Ameri-      mined that those factors are consistent with approval
      can community. In particular, Harlem Bank has            of the establishment of Billings Bank branches at the
      $623,800 in BIA-guaranteed loans in its portfolio.11     present sites of the merging banks' offices.
      Harlem Bank has not denied credit to individuals            Based on the foregoing and all other facts of record,
      proposing a BIA-guaranteed loan during the period        including the commitments made by Rocky Mountain,
      from January 1, 1992 to July 28, 1994. The bank has      Billings Bank and the merging banks, the Board has
      stated that it regularly solicits BIA-guaranteed loans   determined that the applications should be, and hereby
      on the Fort Belknap Indian Reservation, and main-        are, approved.12 The Board's approval is specifically
      tains contact with BIA credit administrators in Fort     conditioned on compliance by Rocky Mountain and its
      Belknap. Harlem Bank also has outstanding Small          subsidiaries with all the commitments made in connec-
      Business Administration loans and Farmers Home           tion with the applications. The commitments and
      Administration loans in an aggregate amount of over      conditions relied upon by the Board in reaching its
      $1 million.                                              decision are deemed to be conditions imposed in
         The 1993 Exam notes that the management and           writing by the Board in connection with its findings
      directorate of Harlem Bank are actively involved in      and decision, and, as such, may be enforced in pro-
      various civic and community groups to help ascertain     ceedings under applicable law.
      community credit needs, and the bank has made a             This transaction shall not be consummated before
      survey of bank customers to ascertain whether ser-       the thirtieth calendar day following the effective date
      vices offered were consistent with the needs of the      of this order, or later than three months after the
      delineated local community. The bank also advertises     effective date of this order, unless such period is
      on local radio stations and in newspapers and other      extended for good cause by the Board or by the
      publications circulated in and around Harlem. In ad-     Federal Reserve Bank of Minneapolis, acting pursuant
      dition, Harlem Bank has met with the Fort Belknap        to delegated authority.
      Indian Housing Authority to discuss credit needs on
      the reservation.
         In reviewing the convenience and needs factor
      under the Bank Merger Act, the Board has carefully          12. The Board notes that Protestant also criticized the employment
                                                               practices of Harlem Bank. Specifically, Protestant alleges that al-
      considered the entire record, including Protestant's     though more than half of the population in Harlem, Montana, is Native
      comments and the CRA record of performance.              American, Harlem Bank does not have any Native American employ-
      Based on this review, the Board believes that the        ees. Harlem Bank has indicated that it employs eight people, and
                                                               contends that it offers equal employment opportunity to qualified
      efforts of Billings Bank and all the merging banks to    individuals without regard to race, color, creed, religion, national
      help meet the credit needs of all segments of their      origin, sex, age, physical or mental handicap, or marital status. The
      communities, including low- and moderate-income          Board notes that as a result of the proposed transaction, Billings Bank
                                                               will employ more than 50 people, serve as a depository of government
      neighborhoods, as well as all other convenience and      funds, and act as an agent in selling or redeeming U.S. savings bonds
                                                                              and notes; thus, it will be required by Department of Labor regulations
                                                                              to:
                                                                                 (1) File annual reports with the Equal Employment Opportunity
         10. According to U.S. census data, the population in Harlem Bank's      Commission; and
      delineated community is composed of approximately 40.8 percent             (2) Have in place a written affirmative action compliance program
      Native Americans.                                                          which states its efforts and plans to achieve equal opportunity in the
         11. Harlem Bank has approved two additional BIA-guaranteed              employment, hiring, promotion, and separation of personnel.
      loans totalling $446,000, which are awaiting BIA action.                See 41 C.F.R. 60-1.7(a) and 60-1.40.
November 1994



                                                                                                             Legal Developments                1033


        By order of the Board of Governors, effective                          Beach County, West Palm Beach, Florida ("Barnett-
      September 6, 1994.                                                       West Palm Beach"); Barnett Bank of Pasco County,
                                                                               Port Richey, Florida ("Barnett-Pasco County"); Bar-
       Voting for this action: Chairman Greenspan, Vice Chair-                 nett Bank of Pinellas County, St. Petersburg, Florida
      man Blinder, and Governors Kelley, Lindsey, Phillips, and                ("Barnett-Pinellas County"); Barnett Bank of South-
      Yellen. Absent and not voting: Governor La Ware.                         west Florida, Sarasota, Florida ("Barnett-Southwest
                                                                               Florida"); and Barnett Bank of Tampa, Tampa, Flor-
                                                 WILLIAM W. WILES
                                                                               ida ("Barnett-Tampa") (collectively, the "State Mem-
                                              .Secretary of the Board          ber Banks").2 The State Member Banks also have
                                                                               applied, pursuant to section 9 of the Federal Reserve
                                                                               Act (12 U.S.C. § 321), to establish and operate branch
      ACTIONS TAKEN UNDER THE FEDERAL DEPOSIT                                  offices at each of these locations.1
      INSURANCE CORPORATION IMPROVEMENT ACT
                                                                                  Notice of the applications, affording interested per-
                                                                               sons an opportunity to submit comments, has been
      By the Board                                                             given in accordance with the Bank Merger Act and the
                                                                               Board's Rules of Procedure (12 C.F.R. 262.3(b)).
      Barnett Bank of Palm Beach County                                        Reports on the competitive effects of the merger were
      West Palm Beach, Florida                                                 requested from the United States Attorney General,
                                                                               the OCC, and the Federal Deposit Insurance Corpo-
      Barnett Bank of Pasco County                                             ration. The time for filing comments has expired, and
      Port Richey, Florida                                                     the Board has considered the applications and all of
                                                                               the facts of record in light of the factors set forth in the
      Barnett Bank of Pinellas County                                          Bank Merger Act and the Federal Reserve Act.
      St. Petersburg, Florida
                                                                                  Barnett, with consolidated assets of $38.1 billion,
                                                                               controls 31 banks in Florida and Georgia.4 Barnett is
      Barnett Bank of Southwest Florida                                        the largest depository institution in Florida, control-
      Sarasota, Florida                                                        ling total deposits of $31.5 billion, representing ap-
                                                                               proximately 19.1 percent of total deposits in deposi-
      Barnett Bank of Tampa
                                                                               tory institutions in the state.5 The Florida branch
      Tampa, Florida                                                           offices of Glendale control deposits of $4.1 billion,
                                                                               representing approximately 2.5 percent of total depos-
      Order Approving the Merger of a Savings                                  its in depository institutions in Florida. Under this
      Association with Commercial Banks and the                                proposal, the State Member Banks would acquire 26 of
      Establishment of Branches                                                the Florida branches offices of Glendale, which control
                                                                               deposits of $1.4 billion, representing less than one
      Barnett Banks, Inc., Jacksonville, Florida ("Bar-                        percent of deposits in depository institutions in the
      nett"), proposes, through nine of its subsidiary banks,                  state. Upon acquisition by the State Member Banks of
      to acquire certain assets and assume certain liabilities                 these 26 Florida branch offices of Glendale, Barnett
      of the 60 Florida branch offices of Glendale Federal                     would remain the largest depository institution in
      Bank, F.S.B., Glendale, California ("Glendale").                         Florida, controlling deposits of $32.9 billion, repre-
      Five state member banks controlled by Barnett have
      applied under section 18(c) of the Federal Deposit
      Insurance Act (12 U.S.C. § 1828(c)) ("Bank Merger
      Act") and section 5(d)(3) of the Federal Deposit In-                     the Board to follow the procedures and consider the factors set forth
      surance Act (12 U.S.C. § !8I5(d)(3)), as amended by                      in the Bank Merger Act.
                                                                                  2. Four national banks controlled by Barnett propose to acquire the
      the Federal Deposit Insurance Corporation Improve-                       remaining 34 branches of Glendale. The national banks must obtain
      ment Act of 1991 (Pub. L. No. 102-242, § 501, 105                        the approval of the Office of the Comptroller of the Currency (the
      Stat. 2236, 2388-2392 (1991)), to acquire certain assets                 "OCC") under the Bank Merger Act before acquiring the assets and
                                                                               assuming the liabilities of these branches. These national banks are
      and assume certain liabilities of 26 of the 60 branches                  Barnett Bank of Broward County, N.A., Fort Lauderdale, Florida;
      of Glendale.' These banks are Barnett Bank of Palm                       Barnett Bank of Central Florida, N.A., Winter Park, Florida; Barnett
                                                                               Bank of Manatee County, N.A., Bradenton, Florida; and Barnett
                                                                               Bank of South Florida, N.A., Miami, Florida.
                                                                                 3. The locations of the branches that the State Member Banks
         I. Because the state member banks involved in this proposal are all   propose to establish are listed in the Appendix.
      members of the Bank Insurance Fund and are acquiring deposits of           4. Asset data are as of June 30, 1994.
      Glendale, which is a member of the Savings Association Insurance           5. Deposit and market data are as of June 30, 1993. In this context,
      Fund, prior Board approval is required for this proposal under section   depository institutions include commercial banks, savings banks, and
      5(d)(3) of the Federal Deposit Insurance Act. Section 5(d)(3) requires   savings associations.
November 1994



      1034 Federal Reserve Bulletin • November 1994


      senting 19.9 percent of total deposits in depository                      nett and several of its subsidiaries, including one of the
      institutions in the state.                                                State Member Banks. The DOJ has provided the
         Barnett and Glendale compete directly in the Sara-                     Board with the Department's conclusion regarding its
      sota, Tampa Bay, and West Palm Beach banking                              investigation, but has indicated that it is not able at this
      markets, all in Florida. Upon consummation of this                        time to provide the Board with the information the
      proposal, all of these banking markets would remain                       DOJ has compiled in its investigation. Barnett has
      unconcentrated or moderately concentrated6 as mea-                        indicated that it believes that the lending activities of
      sured by the Herfindahl-Hirschman Index ("HHI"). 7                        all of its subsidiaries, including the State Member
      After considering the competition offered by other                        Banks, fully comply with all federal fair lending laws,
      depository institutions in the market, the number of                      and has submitted to the Board extensive information
      competitors remaining in the market, the relatively                       about the lending efforts and programs at its banks,
      small increase in concentration as measured by the                        including a statistical analysis of the lending efforts of
      HHI,8 and all other facts of record, the Board con-                       two of its banks.
      cludes that consummation of the proposal would not                           The Board has an obligation under the Bank Merger
      result in a significantly adverse effect on competition                   Act and the Federal Reserve Act to act on applications
      in any relevant banking market.                                           submitted under these Acts in light of specified statu-
                                                                                tory factors. The Board must apply the criteria speci-
      Managerial Resources and Convenience and Needs                            fied by statute on the basis of the evidence of record
      Considerations                                                            before the Board and its findings must be supported by
                                                                                substantial evidence.
      In considering an application by a state member bank                         The Board notes that it has received no comment
      to acquire another insured depository institution by                      from the public in opposition to this proposal or
      merger or to establish an additional branch, the Board                    contending that Barnett is not serving the credit needs
      must consider the managerial resources of the compa-                      of its many local communities, including the low- and
      nies and banks involved in the proposal and the                           moderate-income neighborhoods in these communi-
      convenience and needs of the communities to be                            ties, and that there has been no adjudication of any
      served, and take into account the records of the                          violation of the federal fair lending laws by Barnett or
      relevant depository institutions under the Community                      any of its subsidiaries. The Board also notes that, of
      Reinvestment Act ("CRA") (12 U.S.C. § 2901                                the five State Member Banks involved in this proposal,
      et seq.). In reviewing this proposal, the Board has                       four received "outstanding" ratings and one received
      considered the fact that the Department of Justice                        a "satisfactory" rating from the Federal Reserve Bank
      ("DOJ") has conducted an investigation regarding the                      of Atlanta in their most recent CRA examinations.9
      compliance with federal fair lending statutes by Bar-                     The Board also notes that, of the remaining 26 Barnett
                                                                                subsidiary banks, nine received "outstanding" ratings
                                                                                and 13 received "satisfactory" ratings from their
         6. Market share data before consummation are based on calcu-           primary regulators in their most recent examina-
      lations in which the deposits of thrift institutions are included at      tions.10 Glendale received a "satisfactory" rating from
      50 percent. The Board previously has indicated that thrift institutions   the Office of Thrift Supervision, its primary regulator,
      have become, or have the potential to become, significant competitors
      of commercial banks. See WM Bancorp, 76 Federal Reserve Bulletin          in its most recent examination as of January 31, 1994.
      788 (1990); National City Corporation, 70 Federal Reserve Bulletin
      743 (1984). Because the deposits of the Glendale branches will be
      transferred to a commercial bank under this proposal, those deposits
      are included at 100 percent in the calculation of pro forma market
      share. See Norwe.sl Corporation, 78 Federal Reserve Bulletin 452
      (1992); First Banks, Inc., 76 Federal Reserve Bulletin 669 (1990).           9. Barnett-Pinellas County, Barnett-Pasco County and Barnett-
         7. Under the revised Department of Justice Merger Guidelines, 49       Southwest Florida received preliminary ratings of "outstanding" in
      Federal Register 26,823 (June 29, 1984), a market in which the            recent CRA examinations performed by the Federal Reserve Bank of
      post-merger HHI is less than 1000 is considered unconcentrated, and       Atlanta, as of April 18, 1994. These ratings represent an upgrade from
      a market in which the post-merger HHI is between 1000 and 1800 is         "satisfactory" ratings received by these three banks as of October 19,
      considered moderately concentrated. The Justice Department has            1992. Barnett-West Palm Beach received a rating of "outstanding" in
      informed the Board that a bank merger or acquisition generally will       its CRA examination performed by the Federal Reserve Bank of
      not be challenged (in the absence of other factors indicating anticom-    Atlanta, as of August 9, 1993. Barnett-Tampa received a preliminary
      petitive effects) unless the post-merger HHI is at least 1800 and the     rating of "satisfactory" in a recent CRA examination performed by
      merger increases the HHI by more than 200 points. The Justice             the Federal Reserve Bank of Atlanta, as of April 18, 1994, the same
      Department has stated that the higher than normal HHI thresholds for      rating received by this bank in its examination as of November 12,
      screening bank mergers for anticompetitive effects implicitly recog-      1991.
      nize the competitive effect of limited-purpose lenders and other             10. One of the subsidiary banks has not been evaluated for CRA
      non-depository financial institutions.                                    performance, and three of the subsidiary banks have not been
         8. The HHI would increase in these banking markets as follows:         evaluated for CRA performance since the CRA was amended to
      Sarasota—by 51 points to 1579; Tampa Bay—by 157 points to 1445;           require public written evaluations and disclosure of performance
                                                                                                                                               r
      and West Palm Beach—by 122 points to 987.                                 ratings.
November 1994



                                                                                                                 Legal Developments                1035


      A. Barnett's Record of Lending in its                                        by FannieMae.'3 Barnett also participates in multi-
      Community                                                                    family real estate projects for low- and moderate-
                                                                                   income persons.14
      The Board also has reviewed and considered the                                  In January 1992, Barnett implemented a small bus-
       policies and programs in place at Barnett. Barnett has                      iness banking strategy that includes the active partic-
      in place a number of credit and other bank products                          ipation in federal, state and local programs that pro-
       and marketing and outreach programs designed to help                        vide loans and other assistance to small business
      meet the banking needs of its entire community,                             owners. In that regard, Barnett's subsidiary banks are
       including minority and low- and moderate-income                            active participants in various loan programs sponsored
      borrowers, and to help increase home ownership op-                          by the Small Business Administration. As of March
      portunities for these borrowers. All these products and                      1994, Barnett's outstanding loan commitments to
      programs would become available in the Glendale                              small businesses exceeded $1 billion, and Barnett
      branches proposed to be acquired by Barnett.                                originated approximately $500 million in new loan
         Special Programs and Initiatives. In 1992, Barnett                       commitments to small businesses in 1993 alone.15
      pledged to lend more than $2 billion over a five-year                          As part of its $2 billion lending commitment, Barnett
      period to low- and moderate-income borrowers and                            established a goal of making $36 million in commercial
      businesses owned by minorities and women. Barnett                           loans to businesses owned by women and minorities
      designated $1 billion of that commitment to residential                     during each year of the five-year initiative. During
      mortgage loans, including loans made through its                             1993, Barnett's subsidiary banks, including the State
      special loan program known as "Home Ownership                               Member Banks, originated $85 million of such loans,
      Made Easy" (the "HOME Program"), which was                                  exceeding Barnett's annual production goal by
      introduced in the latter part of 1991." The HOME                             137 percent. In addition, Barnett is one of the largest
      Program offers more favorable financing terms and                           investors in the six Black Business Investment Corpo-
      flexible underwriting criteria, such as lower down                          rations located in Florida. Barnett's subsidiary banks,
      payment requirements and less restrictive underwrit-                        including the State Member Banks, have contributed a
      ing ratios. Loans under this program are priced at one                      total of $1 million of equity to these non-profit organi-
      half percent below Barnett's published rate for con-                        zations, which were established to provide loans and
      ventional fixed-rate mortgages, and there are no orig-                      guarantees, and offer equity capital, to businesses
      ination fees, ancillary bank fees or discount points. In                    owned by African Americans.
      addition to the HOME Program, many of Barnett's                                Barnett has marketing and outreach programs in
      banks have developed their own products or have                             place to help ensure that its customers and potential
      modified existing systemwide products to serve the                          customers are aware of the various products available
      individual needs of their markets.12 Barnett's goal                         from its subsidiary banks. Several of Barnett's subsid-
      under its $2 billion initiative was to provide                              iary banks have hired community residential lending
      $200 million in CRA-related residential mortgages in                        professionals who maintain regular contact with real
      1993. It exceeded this goal by 108 percent, providing                       estate professionals and churches and community
      over $400 million in such mortgages during that year.                       groups in the minority communities within the banks'
         Barnett also has recently entered into a new loan                        service areas, and who also originate loans in these
      purchase arrangement with the Federal National Mort-                        communities. Many of the banks have established
      gage Association ("FannieMae"), under which loans                           working relationships with minority real estate agents,
      made to low- and moderate-income borrowers using
      more lenient underwriting standards will be acquired
                                                                                     13. Under the terms of the arrangement, residential loans will be
                                                                                  made to low- and moderate-income borrowers by the Barnett subsid-
                                                                                  iary banks under a revised HOMB Program that will use even more
         11. Since the HOME Program was introduced in 1991, Barnett has           liberal income qualifying and credit history guidelines.
      made 4,400 mortgage loans under this program totalling approximately           14. For example, Barnett has provided a $26.7 million commitment
      $220 million.                                                               to the First Housing Development Corporation over the next several
         12. For example, Barnett-Pinellas County offers FHA/VA loans.            years for that organization's Low Income Housing Tax Credit
      During 1993, the bank originated 331 FHA/VA mortgage loans total-           Program. Several of Barnett's subsidiary banks participate in this
      ling $20.1 million. The bank also participates in the Pinellas County       initiative. For example, Barnett-Pinellas County has provided over
      Housing Finance Authority Bond Program, and has originated 120              $1 million to this program, and its Community Affairs Officer serves on
      loans totalling $141 million under this program as of June 1993. The        the First Housing Development Corporation's Board of Directors.
      bank has extended 86 loans for $3.9 million to low-income borrowers            15. Barnett also offers several special banking products and services
      participating in programs sponsored by the Tampa Bay Community              to small businesses, including small business checking, small business
      Development Corporation. In addition, the bank originated 178               merchant services, and other money management services. These
      HOME Program loans totalling more than $8 million in 1993, and              services provide assistance in managing the small business by, for
      originated 52 such loans totalling $2.2 million during thefirstquarter of   example, providing easy access to account information and quick
      1994.                                                                       available credit for ATM and credit card payments.
November 1994



      1036 Federal Reserve Bulletin • November 1994


      builders and other real estate professionals in their                     minority and low- and moderate-income communi-
      service areas. The Barnett subsidiary banks partici-                      ties.20 In addition, annual bonuses paid to residential
      pate in first-time homebuyer seminars, housing fairs                      real estate managers depend, in part, on CRA produc-
      and other mortgage counseling sessions in minority                        tion volume.21
      and low- and moderate-income areas.16                                        Barnett's subsidiary banks have a network of
         In 1993, Barnett spent approximately $1 million for                    branch offices that serve the minority and low- and
      advertising in the African-American and Hispanic                          moderate-income neighborhoods within their local ser-
      markets, and anticipates that it will spend $1.5 million                  vice areas. Barnett's office closing procedures require
      in 1994. Advertisements appear in both English and                        a community impact analysis before closing any
      Spanish, and in minority-oriented newspapers and on                       branch office, including an evaluation of the office's
      minority-oriented radio stations. In 1993, Barnett                        past CRA performance, a discussion of the planned
      hired an African-American advertising consultant to                       closing with community representatives, and a deter-
      provide additional guidance on effective methods of                       mination of whether the action will cause a negative
      reaching the African-American market, which resulted                      impact on the community.
      in a specific plan for 1994 using print and radio                            HMDA Data. Data submitted by the State Member
      advertising to generate additional awareness of Bar-                      Banks for 1992 and 1993 under the Home Mortgage
      nett's products. Barnett also retained a Hispanic ad-                     Disclosure Act ("HMDA") (12 U.S.C. § 2801 et seq.)
      vertising agency to help it develop advertising for the                   indicate an increase in the number of loan applications
      Hispanic market.17                                                        from African Americans and Hispanics to these banks,
         Direct mail campaigns aimed at households in CRA-                      as well as an increase in the number of originations to
      designated census tracts are used frequently by the                       minority loan applicants. For example, from 1992 to
      Barnett organization.18 For example, in early 1993,                       1993, loan applications from African Americans in-
      Barnett sent literature to 195,000 households in these                    creased from 371 to 597, and the applications from
      tracts. The solicitation was supplemented at certain                      Hispanics increased from 388 to 581. The number of
      subsidiary banks with a targeted advertising campaign                     originations made during that period to African Amer-
      and follow-up calls. This direct mailing campaign, as                     icans increased from 222 to 376, and the number of
      measured by new deposit accounts and loans gener-                         originations to Hispanics increased from 265 to 344.
      ated during 1993 within the targeted census tracts, led                      The HMDA data for 1992 and 1993 indicate dispar-
      to 1,650 new deposit accounts and 938 new installment                     ities in approvals and denials of loan applications
      and mortgage loans totalling approximately $11 mil-                       according to racial and ethnic group. Because all
      lion, i"                                                                  banks are obligated to adopt and implement lending
         Additional steps to increase lending to minorities                     practices that ensure not only safe and sound lending,
      and low- and moderate-income individuals have in-                         but also equal access to credit by creditworthy appli-
      cluded an incentive compensation package for em-                          cants regardless of race, the Board is concerned when
      ployees to encourage loan originations under Barnett's                    the record of an institution indicates disparities in
      special mortgage programs. For example, Barnett's                         lending to minority applicants. The Board recognizes,
      systemwide incentive plan pays higher commissions                         however, that HMDA data alone provide only a lim-
      for the origination of loan products designed to serve                    ited measure of any given institution's lending in its
                                                                                community. The Board also recognizes that HMDA
                                                                                data have limitations that make the data an inadequate
         16. For example, Barnett-Pinellas County holds monthly HOME
      Program educational classes, and mortgage counseling sessions are         basis, absent other information, for conclusively de-
      held weekly at the bank. Afirst-timehomebuyers seminar was held in        termining whether an institution has engaged in illegal
      February 1994 at a local realtor's office, and small business seminars    discrimination in making lending decisions. In addi-
      have been held. Barnett-Pasco County offers a Community Homcbuy-
      er's Program that provides a self-study course covering the steps         tion, successful efforts to increase outreach and the
      necessary to becoming a homeowner. This bank also participates in a       number of applications from low- and moderate-
      program providing money-management and homeosvnership counsel-            income and minority borrowers may affect denial
      ing services.
         17. Several of the subsidiary banks supplement this corporate-wide     rates.
      marketing program with their own efforts. For example, Barnett-              The Board notes that the most recent CRA exami-
      Southwest Florida advertises its products in several local publications
      that reach minorities and residents of low- and moderate-income           nations for the State Member Banks found no evi-
      census tracts.
         18. A CRA-designated tract has been defined by Barnett for these
      purposes as a census tract with median family income equal to less
      than 80 percent of the median family income for a particular metro-         20. An additional 10 to 20 basis points in commissions are paid on
      politan statistical area.                                                 these loans.
         19. A similar program in 1992 resulted in 1,486 new deposit accounts     21. Under the current incentive plan, 15 to 25 percent of a
      and 576 new installment and mortgage loans totalling approximately        residential manager's bonus is based on CRA loan production as a
      $10 million.                                                              percent of total loan production.
November 1994



                                                                                                           Legal Developments               1037


      dence of a pattern or practice of discriminatory credit                gage application process,24 and the active recruit-
      practices, or other practices having the intent or effect              ment of African Americans for employment as
      of discouraging credit applications.                                   originators, processors, underwriters and customer
                                                                             contact personnel in the residential lending depart-
      B. Compliance with Fair Lending Laws                                   ments of the subsidiary banks.

      During the past two years, Barnett has implemented                     Conclusions Regarding Managerial and Convenience
      a comprehensive fair lending compliance program at                     and Needs Factors
      its subsidiary banks to address its responsibilities for
      assuring fair lending under the Equal Credit Oppor-                    The Board has carefully considered the entire record
      tunity Act (15 U.S.C. S 1691 et seq.) and other fair                   available to it in reviewing these applications under the
      lending laws.22 This program includes comprehen-                       factors specified in the Bank Merger Act and the
      sive training for residential real estate employees,                   Federal Reserve Act. While the Board has considered
      including customer contact staff, to ensure a corpo-                   the views of the DOJ regarding the compliance by
      rate-wide understanding of Barnett's fair lending                      Barnett and certain of its subsidiaries with the federal
      responsibilities and the flexible mortgage products.                   fair lending laws, the Board does not have available to
      In 1992, all residential real estate employees were                    it the information or analysis developed by the DOJ in
      required to complete this training, and all new resi-                  its investigation. Accordingly, on the basis of the
      dential real estate employees at the banks receive fair                available facts of record, and for the reasons discussed
      lending and CRA training very soon after employ-                       in this order, the Board concludes that the conve-
      ment. In 1993, a fair lending self study module was                    nience and needs factor, including the CRA perfor-
      distributed to all employees and directors of the                      mance of the State Member Banks, and the managerial
      subsidiary banks, and in 1994, all mortgage under-                     factor, are consistent with approval of these applica-
      writers were required to attend FannieMae-spon-                        tions, and that the record does not provide a basis to
      sored training sessions on underwriting loans for                      deny these applications under the statutory factors the
      low- and moderate-income borrowers. Barnett also is                    Board must consider in applications of this type. In
      in the process of developing a diversity training                      acting on these cases, the Board has considered that
      program that will be offered to employees at all                       its action will not hinder the DOJ in its investigation or
      subsidiary banks.                                                      in any action that may result from that investigation.
         In 1993, Barnett implemented a second review                        The Board will monitor the DOJ investigation and
      process that requires a second review of mortgage                      retains broad authority to take appropriate supervi-
      loan applications recommended for denial.23 In addi-                   sory action, including action on future applications, if
      tion, Barnett has established and implemented poli-                    warranted.
      cies to ensure that residential appraisals upon which
      its subsidiary banks rely are performed in accor-                      Other Considerations
      dance with Barnett's fair lending policy. In that
      regard, Barnett's Residential Appraisal Policy pro-                    The Board also concludes that the financial resources
      vides specific instruction for detecting subtle forms                  and future prospects of the State Member Banks and
      of discrimination in the performance of appraisals.                    Glendale, and the other supervisory factors the Board
      Lenders have been instructed to reject any appraisal                   must consider under the Bank Merger Act, are consis-
      that suggests that neighborhood racial and/or ethnic                   tent with approval. In addition, the Board has consid-
      composition is a predictor of risk. Appraisals are                     ered the factors it is required to consider when approv-
      reviewed during the second review process when-                        ing applications for the establishment of branches
      ever a recommendation for denial is based on inad-                     pursuant to section 9 of the Federal Reserve Act, and
      equate collateral. Additional aspects of Barnett's fair                finds those factors also are consistent with approval.
      lending program include a "mystery shopper" pro-                       Moreover, the Board also has considered the specific
      gram to test how customers are treated in the mort-                    factors it must review under section 5(d)(3) of the
                                                                             Federal Deposit Insurance Act, and the record in this
                                                                             case shows that:
        22. This program, formally adopted in 1992, evolved from programs
      that were in place at many of the subsidiary banks by 1991. Barnett
      adopted a systemwide program to ensure uniform adherence to its fair     24. The purpose of the program was to detect any improper
      lending standards.                                                     discrimination occurring during the application process. According to
        23. Several subsidiary banks, including all of the State Member      the outside consultant who conducted the program in February 1993,
      Banks, have expanded their second review process to include certain    the experiences of the minority and non-minority testers were com-
      consumer and small business loans recommended for denial.              parable.
November 1994



      1038 Federal Reserve Bulletin • November 1994


        (1) The transaction will not result in the transfer of      Appendix
        any federally insured depository institution's federal
        deposit insurance from one federal deposit insur-           Branch offices of Glendale Federal Bank, F.S.B., to
        ance fund to the other;                                     be acquired by:
        (2) The State Member Banks currently meet, and
        upon consummation of the proposed transaction will          Barnett Bank of Tampa
        continue to meet, all applicable capital standards;
        and                                                         507 Oakfield Drive, Brandon, FL
        (3) The proposed transaction would comply with the          425 N. Florida Avenue, Tampa, FL
        interstate banking provision of the Bank Holding            203 W. Fletcher Avenue, Tampa, FL
        Company Act (12 U.S.C. § 1842(d)) if the Florida            5005 S. Dale Mabry Highway, Tampa, FL
        branches of Glendale were state banks that Barnett          8001 N. Dale Mabry Highway, Tampa, FL
        was applying to acquire directly. See 12 U.S.C.             305 S. Wheeler Street, Plant City, FL
        § 1815(d)(3).                                               303 N. Tamiami Trail, Ruskin, FL
                                                                    1609 Sun City Center Plaza, Sun City, FL
         Based on the foregoing and all the facts of record,        9400 56th Street, Temple Terrace, FL
      the Board has determined that these applications
      should be, and hereby are, approved. The Board's              Barnett Bank of Pinellas County
      approval of these applications is conditioned upon            26627 U.S. Highway 19 North, Clearwater, FL
      Barnett's compliance with the commitments made in
                                                                    3412 E. Lake Road, Palm Harbor, FL
      connection with these applications. This approval is
                                                                    250 37th Avenue North, St. Petersburg, FL
      further subject to Barnett obtaining any required ap-
                                                                    7600 66th Street North, Pineltas Park, FL
      provals under applicable state laws. For purposes of
                                                                    11290 78th Avenue, Seminole, FL
      this action, the commitments and conditions relied on
                                                                    719 S. Missouri Avenue, Clearwater, FL
      in reaching this decision are both conditions imposed
      in writing by the Board and, as such, may be enforced         Barnett Bank of Pasco County
      in proceedings under applicable law.
         This transaction may not be consummated before             9501 U.S. Highway 19, Port Richey, FL
      the thirtieth calendar day after the effective date of this   5205 U.S. Highway 19, New Port Richey, FL
      order, unless such period is shortened with the con-
      sent of the Attorney General, or later than three             Barnett Bank of Palm Beach County
      months after the effective date of this order, unless
      such period is extended by the Board or by the Federal        2301 W. Glades Road, Boca Raton, FL
      Reserve Bank of Atlanta, acting pursuant to delegated         9136 Glades Road, Boca Raton, FL
      authority.                                                    4000 N. Federal Highway, Boca Raton, FL
         By order of the Board of Governors, effective              1609 S. Congress Avenue, Boynton Beach, FL
      September 29, 1994.                                           7499 W. Atlantic Avenue, Delray Beach, FL
                                                                    800 U.S. Highway 1, North Palm Beach, FL
         Voting for this action: Chairman Greenspan, Vice Chair-    3300 PGA Boulevard, Palm Beach Gardens, FL
      man Blinder, and Governors Kelley, LaWare, Lindsey, Phil-     6404 Lake Worth Road, Lake Worth, FL
      lips and Yellen.
                                                                    Barnett Bank of Southwest Florida
                                        JENNIFER J. JOHNSON
                              Deputy Secretary of the Board         1670 S. Venice Bypass, Venice, FL
November 1994



                                                                                  Legal Developments        1039



      ACTIONS TAKEN UNDER THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF
      1991

      By the Secretary of the Board

      Copies are available upon request to the Freedom of Information Office, Office of the Secretary, Board of
      Governors of the Federal Reserve System, Washington, D.C. 20551.

                                                Acquired                  Acquiring              Approval
           Bank Holding Company
                                                 Thrift                    Bank(s)                 Date
      Keystone Financial, Inc.,         Pennsylvania National        American Savings      September 15, 1994
       Harrisburg, Pennsylvania           Bank,                       Bank,
                                          Pottsville, Pennsylvania    Tamaqua,
                                                                      Pennsylvania
      Union Planters Corporation,       Cherokee Valley Federal      Union Planters Bank   September 23, 1994
       Memphis, Tennessee                Savings Association,         of Chattanooga,
                                         Cleveland, Tennessee         National
                                                                      Association,
                                                                      Knoxville,
                                                                      Tennessee



      ACTIONS TAKEN UNDER THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF
      1991

     By the Director of the Division of Banking Supervision and Regulation and the General Counsel of
     the Board

     Copies are available upon request to the Freedom of Information Office, Office of the Secretary, Board of
     Governors of the Federal Reserve System, Washington, D.C. 20551.

                                                Acquired                  Acquiring             Approval
          Bank Holding Company
                                                 Thrift                    Bank(s)               Date
      Allied Irish Banks Limited pic,   Second National Federal      First National Bank   September 16, 1994
        Dublin, Ireland                   Savings Association,         of Maryland,
      First Maryland Bancorp,             Salisbury, Maryland          Baltimore,
        Baltimore, Maryland                                            Maryland
      American Bancshares, Inc.,        Oak Tree Federal Savings     First American Bank   August 29, 1994
        Monroe, Louisiana                 Bank,                        & Trust of
                                          New Orleans,                 Louisiana,
                                          Louisiana                    Monroe, Louisiana
     Central of Kansas, Inc.,           Central National             Central National      August 29, 1994
      Junction City, Kansas               Bank-Newton,                 Bank,
                                          Newton, Kansas               Junction City,
                                        Central Bank-Herington,        Kansas
                                          Herington, Kansas
     Century Bancshares, Inc.,          Second National Federal      Century National      September 16, 1994
       Washington, D.C.                   Savings Association,         Bank,
                                          Salisbury, Maryland          Washington, D.C.
November 1994



      1040 Federal Reserve Bulletin • November 1994



      FDICIA—Continued

                                               Acquired                Acquiring              Approval
          Bank Holding Company
                                                Thrift                  Bank(s)                Date
      The Citizens Bancorp of          Security Trust Federal     The Citizens Bank of   September 16, 1994
        Hickman, Inc.,                   Savings & Loan             Hickman,
        Hickman, Kentucky                Association,               Hickman,
                                         Knoxville, Tennessee       Kentucky
      Citizens Bancorporation, Inc.,   Oak Tree Federal Savings   Citizens Bank &        August 26, 1994
        Plaquemine, Louisiana            Bank,                      Trust Company,
                                         New Orleans,               Plaquemine,
                                         Louisiana                  Louisiana
      Crestar Financial Corporation,   Second National Federal    Crestar Bank,          September 16, 1994
        Richmond, Virginia               Savings Association,       Richmond, Virginia
                                         Salisbury, Maryland
      First Union Corporation,         Home Federal Savings       First Union National   September 2, 1994
        Charlotte, North Carolina        Bank,                      Bank of
                                         Washington, D.C.           Washington, D.C.
                                                                    Washington, D.C.
      Harbor Bankshares Corporation,   Second National Federal    The Harbor Bank of     September 16, 1994
       Baltimore, Maryland               Savings Association,       Maryland,
                                         Salisbury, Maryland        Baltimore,
                                                                    Maryland
      Mellon Bank Corporation,         Second National Federal    Mellon Bank (DE)       September 16, 1994
       Pittsburgh, Pennsylvania          Savings Association,       National
                                         Salisbury, Maryland        Association,
                                                                    Wilmington,
                                                                    Delaware
      Mercantile Bankshares            Second National Federal    The Chestertown        September 16, 1994
       Corporation,                      Savings Association,       Bank of Maryland,
       Baltimore, Maryland               Salisbury, Maryland        Chestertown,
                                                                    Maryland
      Mercantile Bankshares            Second National Federal    Peninsula Bank,        September 16, 1994
       Corporation,                      Savings Association,       Princess Anne,
       Baltimore, Maryland               Salisbury, Maryland        Maryland
      Minden Bancshares, Inc.,         Oak Tree Federal Savings   Minden Bank & Trust    August 29, 1994
       Minden, Louisiana                 Bank,                      Company,
                                         New Orleans,               Minden, Louisiana
                                         Louisiana
      One American Corporation,        Oak Tree Federal Savings   First American Bank    August 26, 1994
       Vacherie, Louisiana               Bank,                      & Trust Company,
                                         New Orleans,               Vacherie,
                                         Louisiana                  Louisiana
      Premier Bancorp, Inc.,           Oak Tree Federal Savings   Premier Bank, N.A.,    August 26, 1994
        Baton Rouge, Louisiana           Bank,                      Baton Rouge,
                                         New Orleans,               Louisiana
                                         Louisiana
      Regions Financial Corporation,   Oak Tree Federal Savings   Guaranty Bank &        August 26, 1994
        Birmingham, Alabama              Bank,                     Trust Company,
                                         New Orleans,              Baton Rouge,
                                         Louisiana                 Louisiana
November 1994



                                                                                       Legal Developments          1041


      FDICIA—Continued

                                                   Acquired                   Acquiring                Approval
           Bank Holding Company
                                                    Thrift                     Bank(s)                   Date
      Second Bancorp, Inc.,                TransOhio Federal            Second National          September 16, 1994
        Warren, Ohio                         Savings Bank,                Bank of Warren,
                                             Cleveland, Ohio              Warren, Ohio
      Shoreline Financial Corporation,     Great Lakes Bancorp, A       Shoreline Bank,          August 30, 1994
        Benton Harbor, Michigan              Federal Savings Bank,        Benton Harbor,
                                             Ann Arbor, Michigan          Michigan
      St. Martin Bancshares,               Oak Tree Federal Savings     St. Martin Bank &        August 26, 1994
        St. Martinville, Louisiana           Bank,                        Trust Company,
                                             New Orleans,                 St. Martinville,
                                             Louisiana                    Louisiana
      Star Bane Corporation,               TransOhio Federal            Star Bank, National      September 16, 1994
        Cincinnati, Ohio                     Savings Bank,                Association,
                                             Cleveland, Ohio              Cincinnati, Ohio
      UNB Corporation,                     TransOhio Federal            United National Bank     September 16, 1994
       Canton, Ohio                          Savings Bank,                & Trust Company,
                                             Cleveland, Ohio              Canton, Ohio


      APPLICATIONS APPROVED UNDER BANK HOLDING COMPANY ACT

      By the Secretary of the Board
      Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon
      request to the Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve
      System, Washington, D.C. 20551.

      Section 3

                                                                                                       Effective
                   Applicant(s)                                     Bank(s)
                                                                                                         Date
      AmSouth Bancorporation,                      The Tampa Banking Company,                    September 19, 1994
       Birmingham, Alabama                           Tampa, Florida
      Montana Community Banks, Inc.                Community Bank-Missoula Inc.                  September 27, 1994
       Ronan, Montana                                Missoula, Montana
      Union Planters Corporation,                  Commercial Bancorp, Inc.,                     September 13, 1994
       Memphis, Tennessee                            Obion, Tennessee
November 1994



      1042 Federal Reserve Bulletin D November 1994


      APPLICATIONS APPROVED UNDER BANK HOLDING COMPANY ACT

      By Federal Reserve Banks
      Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon
      request to the Reserve Banks.

      Section 3

                                                                               Reserve               Effective
                  Applicant(s)                      Bank(s)
                                                                                Bank                   Date
      AMH Holding Company,                The Citizens Bancorp of        Cleveland             September 2, 1994
       Morehead, Kentucky                   Morehead, Inc.,
                                            Morehead, Kentucky
      BancOne Corporation,                American Holding Co.,          Cleveland             August 31, 1994
        Columbus, Ohio                      Glencoe, Illinois
      BancOne Illinois Corporation,
        Springfield, Illinois
      Bancorp Connecticut, Inc.,          Southington Savings Bank,      Boston                August 29, 1994
        Southington, Connecticut            Southington, Connecticut
      Banknorth Group, Inc.,              North American Bank            Boston                September 13, 1994
        Burlington, Vermont                 Corporation,
                                            Farmington, New
                                            Hampshire
      CB&T Holding Corporation,           City Bank & Trust,             Atlanta               September 8, 1994
        New Orleans, Louisiana              New Orleans, Louisiana
      The Citizens Bancorp of             AMH Holding Company,           Cleveland             September 2, 1994
        Morehead, Inc.,                     Morehead, Kentucky
        Morehead, Kentucky
      CMB SOLO,                           Cheyenne Mountain Bank,        Kansas City           September 6, 1994
        Colorado Springs, Colorado          Colorado Springs,
                                            Colorado
      Community Bancshares, Inc.,         The Bank of Troup County,      Atlanta               September 16, 1994
        Cornelia, Georgia                   LaGrange, Georgia
      Country Bancshares, Inc.,           Paloma Bancshares, Inc.,       St. Louis             September 9, 1994
        Hull, Illinois                      Paloma, Illinois
      F & M Bancorporation, Inc.,         Union State Bank,              Chicago               September 8, 1994
        Kaukauna, Wisconsin                 Wautoma, Wisconsin
      Fairport Bancshares, Inc.,          The Bank of Fairport,          Kansas City           September 7, 1994
        Fairport, Missouri                  Fairport, Missouri
      First Citizens of Paris, Inc.,      Oakland National Bank,         Chicago               September 8, 1994
        Paris, Illinois                     Oakland, Illinois
      First Community Bancorp, Inc.       First Community Bank,          Minneapolis           September 12, 1994
        Glasgow, Montana                    Glasgow, Montana
      First Pryor Bancorp, Inc.,          The First National Bank of     Kansas City           September 7, 1994
        Pryor, Oklahoma                     Pryor Creek,
                                            Pryor, Oklahoma
      FNB Bancshares, Inc.,               First National Bank of         Atlanta               September 9, 1994
       Springfield, Georgia                 Effingham,
                                            Springfield, Georgia
      GHB, Inc.,                          Greenhorn Valley Bank,         Kansas City           August 31, 1994
       Colorado City, Colorado              Colorado City, Colorado
November 1994



                                                                                       Legal Developments      1043


      Section 3—Continued

                                                                                 Reserve           Effective
                Applicant(s)                       Bank(s)
                                                                                  Bank               Date
      Grant Park Bancshares, Inc.,       First National Bank of         Chicago               September 16, 1994
        Grant Park, Illinois               Grant Park,
                                           Grant Park, Illinois
      Greensburg Bancorp, Inc.,          Peoples Bancorp of Green       St. Louis             September 6, 1994
        Shepherdsville, Kentucky           County, Inc.,
                                           Greensburg, Kentucky
      Heritage Bancshares, Inc.,         First Exchange Bank,           Richmond              August 30, 1994
       Mannington, West Virginia           Mannington, West
                                           Virginia
      Hometown Bancorp, Inc.,            The Bank of Milan,             St. Louis             August 31, 1994
        Milan, Tennessee                   Milan, Tennessee
      Lakeland Bancorp, Inc.,            High Point Financial Corp.,    New York              August 26, 1994
        Oak Ridge, New Jersey              Branchville, New Jersey
      New Independent Bancshares,        The New Washington State       St. Louis             September 1, 1994
        Inc.,                              Bank,
        New Washington, Indiana            New Washington, Indiana
      Norwest Corporation,               First National Bank of         Minneapolis           September 6, 1994
        Minneapolis, Minnesota             Kerrville,
                                           Kerrville, Texas
      Peoples Bancorp of Mt. Pleasant,   The Peoples National Bank      Cleveland             August 31, 1994
        Inc.,                              of Mt. Pleasant,
        Mount Pleasant, Ohio               Mount Pleasant, Ohio
      Peoples First Corporation,         Libsab Bancorp, Inc.,          St. Louis             September 6, 1994
        Paducah, Kentucky                  Mayfield, Kentucky
      Peotone Bancorp, Inc.,             Westbanco, Inc.,               Chicago               September 15, 1994
        Peotone, Illinois                  Westville, Illinois
      Southwest Bancorp, Inc.,           Minooka Bancorp, Inc.,
        Worth, Illinois                    Minooka, Illinois
                                         Founders Bancorp, Inc.,
                                           Scottsdale, Arizona
      PFC Acquisition Corporation II,    Libsad Bancorp, Inc.,          St. Louis             September 6, 1994
        Paducah, Kentucky                  Mayfield, Kentucky
      Pioneer Bankshares, Inc.,          Pioneer II Bankshares, Inc.,   Dallas                September 14, 1994
        Fredericksburg, Texas              Dover, Delaware
                                         Pioneer National Bank,
                                           Fredericksburg, Texas
      Pioneer II Bankshares, Inc.,       Pioneer National Bank,         Dallas                September 14, 1994
        Dover, Delaware                    Fredericksburg, Texas
      Regions Financial Corporation,     American Bancshares, Inc.,     Atlanta               September 19, 1994
        Birmingham, Alabama                Monroe, Louisiana
      Salt Creek Valley Bancshares,      The Salt Creek Valley Bank,    Cleveland             August 25, 1994
        Inc.,                              Laurelville, Ohio
        Laurelville, Ohio
      Southeastern Banking               United Citizens Bank of        Atlanta               September 9, 1994
        Corporation,                      Alachua County,
        Darien, Georgia                   Alachua, Florida
      Southern Bancshares, Ltd.,         DeSoto Bancshares, Inc.,       St. Louis             August 30, 1994
        Carbondale, Illinois              De Soto, Illinois
November 1994



      1044 Federal Reserve Bulletin • November 1994


      Section 3—Continued

                                                                          Reserve         Effective
                  Applicant(s)                   Bank(s)
                                                                           Bank             Date
      Superior Bancorporation, Ltd.,   Community Bank and Trust      Minneapolis     September 19, 1994
        Superior, Wisconsin              Company,
                                         Superior, Wisconsin
      United Bancorp of Kentucky,      American Fidelity Bank &      Cleveland       August 29, 1994
       Lexington, Kentucky               Trust Company,
                                         Corbin, Kentucky
      United Bancorporation of         Drake-Lyman Bancshares,       Kansas City     September 9, 1994
       Wyoming, Inc.,                    Inc.,
       Jackson, Wyoming                  Sheridan, Wyoming
      ValliCorp Holdings, Inc.,        Mineral King National         San Francisco   September 6, 1994
       Fresno, California                Bank,
                                         Visalia, California
      Victory Bancshares, Inc.,        The Mt. Victory State Bank,   Cleveland       August 31, 1994
        Mount Victory, Ohio              Mount Victory, Ohio
      Village Investment Company,      Libertyville Savings Bank,    Chicago         September 16, 1994
        Libertyville, Iowa               Liberty ville, Iowa

      Section 4

                                              Nonbanking                  Reserve         Effective
                  AppilCanuSJ               Activity/Company               Bank             Date
      Banco Santander, S.A.,           to engage de nova in:         New York        September 9, 1994
        Santander, Spain                 (1) providing investment
                                         and financial advisory
                                         services, and
                                         (2) alone or in
                                         combination with such
                                         services, engaging in
                                         securities brokerage
                                         activities
      First Bank Shares of the South   Resource Financial            Atlanta         September 22, 1994
        East, Inc.,                      Services, Inc.,
        Alma, Georgia                    Alma, Georgia
      Norwest Corporation,             Michigan National Bank,       Minneapolis     September 20, 1994
        Minneapolis, Minnesota           Southfield, Michigan
      Regions Financial Corporation,   Oak Tree Federal Savings      Atlanta         August 26, 1994
        Birmingham, Alabama              Bank,
                                         New Orleans, Louisiana
      UJB Financial Corp.,             Palisade Savings Bank,        New York
        Princeton, New Jersey            FSB,                                        August 26, 1994
                                         Ridgeneld Park, New
                                         Jersey
      United Bancorp of Kentucky,      Harlan Federal Bank, a        Cleveland
       Lexington, Kentucky               Federal Savings Bank,                       August 29, 1994
                                         Harlan, Kentucky
November 1994



                                                                                        Legal Developments        1045


      Sections 3 and 4

                                                   Nonbanking                   Reserve               Effective
                 Applicant(s)
                                                 Activity/Company                Bank                   Date
      King Bancshares, Inc.,                Turon Bane Shares, Inc.,      Kansas City            August 31, 1994
        Kingman, Kansas                       Turon, Kansas
      Norwest Corporation,                  Alexandria Securities and     Minneapolis           September 8, 1994
        Minneapolis, Minnesota                Investment Company,
                                              Alexandria, Minnesota
                                            Community State Bank of
                                              Alexandria,
                                              Alexandria, Minnesota


      APPLICATIONS APPROVED UNDER BANK MERGER ACT

      By Federal Reserve Banks
      Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon
      request to the Reserve Banks.

                                                                                Reserve               Effective
                 Applicant(s)                         Bank(s)
                                                                                 Bank                   Date
      Bank of Fresno,                       Mineral King National         San Francisco         September 6, 1994
        Fresno, California                    Bank,
                                              Visalia, California
      Crestar Bank,                         Second National Federal       Richmond              September 16, 1994
        Richmond, Virginia                    Savings Association,
                                              Salisbury, Maryland
      Old Kent Bank,                        Merchandise National Bank,    Chicago               September 14, 1994
        Elmhurst, Illinois                    Chicago, Illinois
                                            EdgeMark Bank-Lombard,
                                              Lombard, Illinois
                                            EdgeMark Bank-Rosemont,
                                              Rosemont, Illinois


      PENDING CASES INVOLVING THE BOARD OE                        continued by stipulation pending a hearing sched-
      GOVERNORS                                                   uled for October 4, 1994.
                                                                National Title Resource Agency v. Board of Gover-
      This list of pending cases does not include suits           nors, No. 94-2050 (8th Cir., filed April 28, 1994).
      against the Federal Reserve Banks in which the Board        Petition for review of Board's order, issued under
      of Governors is not named a party.                          section 4 of the Bank Holding Company Act, ap-
                                                                  proving the application of Norwest Corp., Minneap-
      Board of Governors of the Federal Reserve System v.         olis, Minnesota, to acquire Double Eagle Financial
        MacCallum, No. 94 Civ. 5652 (WK) (S.D. New                Corp., Phoenix, Arizona, and its subsidiary, United
        York, filed August 3, 1994). Action to freeze assets      Title Agency, Inc., and thereby engage in title
        of individual pending administrative adjudication of      insurance agency activities and real estate settle-
        civil money penalty assessment by the Board. On           ment services (80 Federal Reserve Bulletin 453).
        August 3, 1994, the court issued an order tempo-          The Board's brief was filed July 7, 1994.
        rarily restraining the transfer or disposition of the   Scott v. Board of Governors, No. 94-4117 (10th Cir.),
        individual's assets. The order was amended and            filed April 28, 1994. Appeal of dismissal of action
November 1994



      1046 Federal Reserve Bulletin • November 1994


        against Board and others for damages and injunctive      Adams v. Greenspan, No. 93-0167 (D. D.C., filed
        relief for alleged constitutional and statutory viola-     January 27,1993). Action by former employee under
        tions caused by issuance of Federal Reserve notes.         the Civil Rights Act of 1964 and the Rehabilitation
      Beckman v. Greenspan, No. CV 94-41-BCG-RWA                   Act of 1973 concerning termination of employment.
        (D. Mont., filed April 13, 1994). Action against           The Board's motion for summary judgment was
        Board and others seeking damages for alleged vio-          granted in part and denied in part on September 8,
        lations of constitutional and common law rights. The       1994. Trial is scheduled to commence on Novem-
        Board's motion to dismiss was filed May 19, 1994.          ber 15, 1994.
      DLG Financial Corp. v. Board of Governors, No.             Zemel v. Board of Governors, No. 92-1056 (D. D.C.,
        94-10078 (5th Cir., filed January 20, 1994). Appeal        filed May 4, 1992). Age Discrimination in Employ-
        of district court dismissal of appellants' action to       ment Act case. The parties' cross-motions for sum-
        enjoin the Board and the Federal Reserve Bank of           mary judgment are pending.
        Dallas from taking certain enforcement actions, and      Board of Governors v. Ghaith R. Pharaon, No. 91-
        for money damages on a variety of tort and contract        CIV-6250 (S.D. New York, filed September 17,
        theories. The case was consolidated on appeal with         1991). Action to freeze assets of individual pending
        Board of Governors v. DLG Financial Corp., Nos.            administrative adjudication of civil money penalty
        93_2944 and 94-20013 (5th Cir., filed December 14,         assessment by the Board. On September 17, 1991,
        1993 and December 31, 1993), an appeal of a tem-           the court issued an order temporarily restraining the
        porary restraining order and a preliminary injunc-         transfer or disposition of the individual's assets.
        tion obtained by the Board freezing assets of a
        corporation and an individual pending administra-
        tive adjudication of civil money penalty assessments     FINAL ENFORCEMENT DECISIONS ISSUED BY
        by the Board. On August 15, 1994, the court of           THE BOARD OF GOVERNORS
        appeals affirmed both the asset freeze order ob-
        tained by the Board and the district court's dismissal   In the Matter of
        of plaintiffs' claims.
      Richardson v. Board of Governors, et al., No. 94-          Augustus I. Cavallari
        4020 (10th Cir.), filed January 14, 1994. Appeal of
        dismissal of action against Board and others for         Participant in the Affairs of
        damages and injunctive relief for alleged constitu-
        tional and statutory violations caused by issuance of
                                                                 Summit National Bank, N.A.,
        Federal Reserve notes. The Board's brief was filed
                                                                 Torrington, Connecticut
        June 3, 1994.                                            OCCNo. AA-EC-92-115
      Scott v. Board of Governors, No. 94-0104 (D. D.C.,
        filed January 21, 1994). Petition for review of a        Final Decision
        Board order approving the application of Society
        Corporation, Cleveland, Ohio, to merge with Key-         This is an administrative proceeding pursuant to sec-
        Corp, Albany, New York (80 Federal Reserve Bul-          tion 8(e) of the Federal Deposit Insurance Act ("FDI
        letin 253 (1994)). On July 29, 1994, the Board filed a   Act"), 12 U.S.C. § 1818(e), in which the Office of the
        motion to dismiss.                                       Comptroller of the Currency of the United States of
      Board of Governors v. Oppegard, No. 93-3706 (8th           America ("OCC") seeks to prohibit Augustus I. Cav-
        Cir.,filedNovember 1,1993). Appeal of district court     allari from further participation in the affairs of any
        order ordering appellant Oppegard to comply with         federally-supervised financial institution as a result of
        prior order requiring compliance with Board prohibi-     his participation in misconduct during his legal repre-
        tion and civil money penalty orders. Oral argument       sentation of Summit National Bank N.A. (insolvent),
        was held June 16, 1994. On July 6, 1994, the Court of    Torrington, Connecticut ("Summit" or "the Bank").
        Appeals affirmed the district court order.               As required by the FDI Act, the proceeding has been
      Jackson v. Board of Governors, No. CV-N-93-401-            referred to the Board of Governors of the Federal
        ECR (D. Nev., filed June 14, 1993). Pro se action for    Reserve System ("Board") for final decision.
        violation of a prisoner's civil rights. On August 23,       The proceeding comes before the Board in the form
        1994, the court granted the Board's motion to dis-       of a Recommended Decision by Administrative Law
        miss.                                                    Judge ("ALJ") Walter J. Alprin, issued following an
      Bennett v. Greenspan, No. 93-1813 (D. D.C., filed          administrative hearing held on August 2-4, 1993, in
        April 20, 1993). Employment discrimination action.       Hartford, Connecticut, and the filing of post-hearing
        Trial is scheduled to commence on October 4, 1994.       briefs by the parties. In the Recommended Decision,
November 1994



                                                                                                         Legal Developments 1047


      the ALJ found that the OCC had proved its allegations                      B. The ALJ's Recommended Decision
      against Cavallari and recommended that the Board
      order his prohibition from participation in banking.1                      The ALJ concluded that Cavallari acted as an IAP
      Cavallari has filed exceptions to the Recommended                          with respect to Summit, in that he knowingly and
      Decision, arguing that the OCC failed to establish that                    recklessly breached his fiduciary duty as counsel to
      he was an "institution-affiliated party" subject to                         Summit, participated in a violation of a cease and
      administrative sanction under the FDI Act and that it                      desist order against Summit, and participated in an
      failed to establish that he acted with "willful or con-                    unsafe and unsound banking transaction that caused
      tinuing disregard" of the institution's safety or sound-                    loss to Summit. Recommended Decision ("RD")
      ness, a necessary finding for imposition of a prohibi-                     25-37.
      tion order.                                                                   The OCC's charges in this case stem from legal
                                                                                 work performed by Cavallari from January through
      Statement of the Case                                                      May 1991 in connection with the restructuring and
                                                                                 renewal of two non-performing loans Summit made in
      A. Statutory and Regulatory Background                                      1988 to Winthrop Broadcasting Corporation ("Win-
                                                                                 throp"). In the restructuring, Summit agreed to re-
      /. Institution-Affiliated Party                                            lease five Winthrop officers and shareholders (the
                                                                                 "Winthrop Guarantors") from their personal guaran-
      The FDI Act defines the term "institution-affiliated                       tees of the Winthrop loans in return for the corporate
      party" to include "any independent contractor (in-                         guarantee of another corporation, Comko, Ltd.
      cluding any attorney, appraiser, or accountant) who                        ("Comko"), owned by individuals who had a business
      knowingly or recklessly participates in:                                   or family relationship with the Winthrop guarantors,
           (A) Any violation of any law or regulation;                           and a security interest in radio equipment owned by
           (B) Any breach of fiduciary duty; or                                  Comko. Following the restructuring and renewal, the
           (C) Any unsafe or unsound practice, which                             Winthrop loans again went into default. Comko's
           caused or is likely to cause more than a minimal                      guarantee was essentially worthless; Comko was
           financial loss to, or a significant adverse effect on,                nearly insolvent at the time the guarantee was given,
           the insured depository institution." 12 U.S.C.                        and has since gone out of business. In the course of his
           § 1813(u)(4).                                                         representation of Summit, Cavallari had advised the
                                                                                 Bank that the exchange of guarantees was in the
      2. Standards for Prohibition Order                                         Bank's best interests, but had done nothing to ascer-
                                                                                 tain the relative value of the guarantees that were the
      An IAP may be prohibited from the banking industry if                      subject of the exchange.
      the appropriate Federal banking agency—here, the                              The ALJ found that Cavallari drafted the releases of
      Board—makes three separate findings:                                       the original Winthrop Guarantors and participated in
        (1) There must be a specified type of misconduct—                        the preparation of the security agreement and loan
        violation of law, unsafe or unsound practice, or                         renewal, was involved in several meetings and tele-
        breach of fiduciary duty;                                                phone calls in which negotiations had taken place and
        (2) The misconduct must have a prescribed effect—                        had billed Summit for "negotiations," and had recom-
        financial gain or other benefit to the respondent or                     mended, both orally and in writing, that Summit
        financial harm or other damage to the institution or                     engage in the release and the renewal as being in
        prejudice to the institution's depositors; and                           Summit's best interests. RD 27-28. The ALJ rejected
        (3) The misconduct must involve culpability of a                         Cavallari's arguments that he had been merely a
        certain degree—personal dishonesty or willful or                         "transactional attorney," as opposed to a regulatory
        continuing disregard for the safety or soundness of                      or in-house counsel, and that his role in the transac-
        the institution.                                                         tions had been so limited that Cavallari did not meet
                                                                                 the statutory standard for an IAP. Id. The ALJ found
                                                                                 that Cavallari had not acted merely imprudently or
         1. The OCC also issued against Cavallari a Notice of Charges
                                                                                 based upon a good-faith mistake, but had participated
      seeking restitution and a Notice of Assessment of Civil Money              both knowingly and recklessly in the transactions,
      Penalties that, pursuant to the statutory scheme, were referred by the     thereby satisfying the test for institution-affiliated
      ALJ to the Comptroller of the Currency for final decision. As
      discussed below, the Comptroller issued his decision on those charges      party. RD 37.
      on July 28, 1994, ordering Cavallari to pay restitution in the amount of      The ALJ found that the misconduct required for a
      $554,903 plus interest and to pay a civil money penalty in the amount
      of $83,000. OCC Decision and Orders ("OCC Dec"), No. OCC-AA-               prohibition order had been established in that Caval-
      EC-92-115 (July 28, 1994).                                                 lari's written and oral advice favoring the release of
November 1994



      1048 Federal Reserve Bulletin • November 1994


      the guarantors in exchange for the Comko guarantee                       C. Cavallari's Exceptions to the Prohibition
      without assessing the strength of either Comko or the                    Recommendation
      Winthrop Guarantors,2 and his participation in the
      loan modifications, constituted unsafe or unsound                        As his exceptions relate to the case for prohibition,
      practices, a breach of fiduciary duty as counsel and a                   Cavallari attacks both the legal and factual findings by
      violation of a final order to cease and desist.3 RD 44.                  the ALJ. First, he argues that as a transactional
      The exchange of loan guarantors from the Winthrop                        attorney who gave advice in good faith, he does not
      Guarantors to Comko had the effect of denying Sum-                       meet the statutory definition of an IAP. He excepts to
      mit recovery from the personal assets of the Winthrop                    the ALJ's finding that Summit relied on his advice in
      Guarantors, who had had at the time the loans were                       releasing the guarantees, arguing that the negotiations
      made a collective net worth of $16 million. RD 34. In                    as to the release were conducted prior to his involve-
      return for giving up any recovery against the Winthrop                   ment in the transaction. He argues that he was not
      Guarantors, Summit received a guarantee from                             responsible for valuing the existing and proposed
      Comko, which at that time had a negative net worth.                      security for the loans, and that his advice that the
      RD 34. The ALJ found that Cavallari's failure to                         transaction was in the best interests of the Bank was
      review the relevant financial information on either side                 based on information provided to him by the Bank's
      of the transaction before advising Summit's president                    president, Raymond Cordani, and its senior vice pres-
      that the exchange was in the Bank's best interest                        ident, Paul Kolok. Thus, he claims he did not "partic-
      constituted participation in an unsafe and unsound                       ipate" in any unsafe or unsound practice.
      practice. RD 35.                                                            Cavallari also contests the "loss" associated with
          The ALJ found that the second requirement for                        the exchange of guarantees. He argues that it was
      prohibition, the effect of the misconduct, had been                      improper for the ALJ to assume that the net worths of
      satisfied by the losses Summit sustained as a result of                  the Winthrop Guarantors had remained in 1991 at the
      the substitution of the worthless Comko guarantee for                    high levels documented at the time the loans were
      the individual guarantees of the Winthrop Guarantors.                    made in 1988, and that the FDIC is responsible for part
      RD 36, 45. Accepting the appraisals of the collateral                    of the loss because of its failure to take appropriate
      offered by the OCC, the ALJ found that, after deduct-                    collection action.
      ing the value of that collateral, Summit lost $554,903                      Finally, Cavallari argues without elaboration that
      on the Winthrop loans. RD 45.                                            his involvement in the transaction did not meet the
          The ALJ also found that Cavallari's conduct exhib-                   standard of "willful or continuing disregard" required
       ited willful and continuing disregard for safety or                     for a prohibition order.
       soundness, meeting the culpability test for prohibition.                   Cavallari also excepts to the numerous rulings by
      RD 45-46. The ALJ found that conclusion supported                        the ALJ allowing evidence into the record over Cav-
      by Cavallari's failure to review Comko's or Win-                         allari's objections that it was irrelevant, hearsay, un-
      throp's financial statements, failure to determine with                  authenticated, beyond the scope of direct examina-
      certainty whether the Winthrop Guarantors were sub-                      tion, or beyond the witness's knowledge or expertise.
      ject to litigation or risked having their assets attached,               Similarly, Cavallari excepts to the ALJ's exclusion of
      failure to review the cease and desist orders against                    testimony sought by Cavallari on grounds of rele-
      Summit that Cavallari knew existed, and general fail-                    vance.
      ure to act as responsible counsel to Summit. Id.
                                                                               D. The Comptroller's Decision

         2. The ALJ noted that Cavallari based his advice, in part, on the     In his Decisions and Order, the Comptroller of the
      impression that the Winthrop Guarantors were subject to "a great deal    Currency4 first determined that Cavallari was an insti-
      of litigation" casting doubt on their ability to perform on their        tution-affiliated party. He found that the failure to
      guarantees, when in fact Cavallari had no independent knowledge that
      the individuals were involved in litigation, and did not personally      assess the financial condition of the Winthrop Guaran-
      review the Guarantors' financial statements. RD 30.                      tors and Comko prior to the exchange of guarantees
         3. The ALJ found that Cavallari's participation in the exchange of    was "contrary to accepted standards of banking oper-
      the guarantees for the Winthrop loans constituted participation in the
      violation of a July 16, 1990 OCC temporary cease and desist order that   ation and resulted in abnormal risk of loss to the
      prohibited Summit from making extensions of credit to certain iden-
      tified individuals and their "related interests." RD 33, 36. The ALJ
      found that the exchange of guarantees constituted a new extension of
      credit to Winthrop and Comko, related interests of the individuals          4. The term "Comptroller" is used to denote the agency head who
      who were the subjects of the cease and desist order. RD 33. The ALJ      is charged with making the final decision in enforcement cases, as
      rejected Cavallari's argument that he did not know the terms of the      opposed to the "OCC" generally, which comprises, inter alia, the
      order, noting that Cavallari conceded knowledge of the existence of      agency's Enforcement and Compliance Division, which prosecuted
      the order and made no attempt to learn its terms. RD 33.                 this case.
November 1994



                                                                                                              Legal Developments                 1049


      Bank," making it an unsafe and unsound practice.                        vested with the power "to consider and rule upon all
      Defining "reckless" to mean "something more than                        procedural and other motions [other than granting a
      simple carelessness and something less than premedi-                    motion to dismiss] appropriate in an adjudicatory
      tated malice," the Comptroller found that Cavallari's                   proceeding." 12 C.F.R. 19.5(b)(7). An ALJ's eviden-
      participation in this unsafe or unsound practice was                    tiary rulings therefore are generally accorded defer-
      "reckless" for purposes of the definition of institution-               ence in the absence of an abuse of discretion or
      affiliated party. Because Winthrop itself had no capac-                 manifest unfairness. Upon review of the ALJ's eviden-
      ity to pay its loans, and Comko had large operating                     tiary rulings, the Board finds no such abuse of discre-
      losses and minimal net worth at the time of the                         tion or manifest unfairness and denies each of Caval-
      exchange of guarantees, while the individual Winthrop                   lari's exceptions to the hearing procedure.6
      Guarantors had previously had a combined net worth
      in excess of $16 million, the Comptroller found that it                 B. Findings of Fact
      was likely that the exchange of guarantees would
      result in "more than a minimal financial loss" to                       /. Relevant Individuals and Business Entities
      Summit. Accordingly, the Comptroller found Cavallari
      to be an IAP. OCC Dec. 11-13, 15.                                       a. Summit National Bank. At all times relevant to this
         On the basis of these findings, the Comptroller                      proceeding, Summit was a national banking associa-
      found that the statutory preconditions to the imposi-                   tion, chartered and examined by the OCC. During the
      tion of a civil money penalty and a restitution order                   period from December 11, 1990 to March 12, 1991,
      were met.5 After reviewing the statutory factors, the                   Summit's condition was poor and its capital base was
      Comptroller imposed a civil money penalty of $83,000                    approximately $6,000,000. On February 3, 1992, Sum-
      and required Cavallari to pay restitution in the amount                 mit was declared insolvent by the OCC due to heavy
      of $554,903.                                                            losses sustained on problem loans.
                                                                                 During the relevant time period, Raymond Cordani
      Findings and Conclusions                                                was Summit's president and chief executive officer
                                                                              and Paul Kolok was senior vice president. Richard D.
      Upon review of the administrative record and the                        Barbieri, Sr. ("Barbieri") served as a consultant to
      Decision and Orders of the Comptroller of the Cur-                      Summit during and after its organization, and had
      rency in the parallel restitution and civil money pen-                  recommended Cordani for his position at the Bank.
      alty cases, of which the Board takes official notice, the               Barbieri and Summit shared a lawyer, Anthony F.
      Board hereby makes its Final Decision, and adopts the                   DiFabio, who was also a shareholder of Winthrop
      ALJ's Recommended Decision, Recommended Find-                           Broadcasting Corporation ("Winthrop").
      ings of Preliminary Fact and Recommended Conclu-                           Cavallari, a Waterbury lawyer and longtime friend
      sions of Law, except as specifically supplemented or                    of Kolok, was retained by Summit in the fall of 1990 to
      modified herein. The Board therefore determines that                    perform legal work including collections, workouts
      the attached Order of Prohibition shall issue against                   and foreclosures. Among the loans he worked on were
      Cavallari, prohibiting him from future participation in                 two loans to Winthrop.
      the affairs of any federally-supervised financial institu-                 /;. Security Savings and Loan. Barbieri was also
      tion without the approval of the appropriate supervi-                   president and chief executive officer of a thrift institu-
      sory agency.                                                            tion, Security Savings and Loan of Waterbury, Con-
                                                                              necticut. John A. Corpaci was the executive vice-
      A. Procedural Issues                                                    president of Security, and Vinal Duncan was
                                                                              Security's vice chair. Paul Kolok was an officer at
      The Board denies Cavallari's exceptions to the ALJ's                    Security before leaving for Summit in 1988. Barbieri's
      procedural rulings. The ALJ is generally vested with                    son, Richard D. Barbieri, Jr. ("Barbieri Jr."), was an
      "all powers necessary to conduct a proceeding in a fair                 officer at Security. Cavallari was a shareholder of
      and impartial manner and to avoid unnecessary de-                       Security since its incorporation in 1974 and a borrower
      lay." 12 C.F.R. 19.5(a). More specifically, the ALJ is


         5. The Comptroller also found that Cavallari had violated the           6. Cavalhiri also requests oral argument on his exceptions, although
      temporary ccasc-and-dcsist order to which .Summit was subject,          it is unclear whether his request is directed to the Board or only to the
      providing another basis for imposition of civil money penalties under   Comptroller. Because the legal and factual issues have been thor-
      12 U.S.C. § I8I8(i). Because such a violation does not appear to give   oughly explained in the written submissions, the Board denies Cavai-
      rise to a prohibition order under 12 U.S.C. § lK18(e), the Board does   lari's request for oral argument to the extent that it was directed to the
      not reach this issue.                                                   Board.
November 1994



      1050 Federal Reserve Bulletin • November 1994


      from Security on numerous loans. Cavallari also per-                     prohibited Summit from making any extension of
      formed closings and title work for Security.                             credit to Barbieri, Corpaci, Barbieri Jr., or Duncan, or
         On July 12, 1990, the Office of Thrift Supervision                    their related interests, or to any person referred to the
      ("OTS") suspended Barbieri and Barbieri Jr. from                         Bank by them.
      their offices at Security and Corpaci was subsequently                      After the suspension actions by the OTS in July
      fired.                                                                    1990, Winthrop stopped making any payment on its
         c. Comko, Ltd. In September 1987, Barbieri, Cor-                      two loans, then carrying principal balances totalling
      paci and Duncan acquired an AM radio station in                          $614,358. In November 1990, Winthrop provided Sum-
      Waterbury, Connecticut, that was later held by them                      mit with a balance sheet showing a net worth of
      through Comko, Ltd., a corporation they owned.                           negative $1,026,394 and an income statement showing
      Comko ceased operations in April 1992.                                   a nine-month net loss of $375,093. At that point, the
         d. Winthrop Broadcasting Corporation. Barbieri,                       Winthrop loans were 122 days past due. On Decem-
      Corpaci and Duncan were interested in purchasing                         ber 5, 1990, Summit sent a letter to each of the
      another radio station but were precluded from doing so                   Winthrop Guarantors requesting updated and signed
      by multiple ownership restrictions imposed by the                        personal financial statements, personal tax returns for
      Federal Communications Commission. On Septem-                            1989, and payment of past-due interest. The Winthrop
      ber 13, 1987, Winthrop Broadcasting Corporation was                      Guarantors did not comply with the requests.
      formed to enable six individuals who were family                            b. The Restructuring Transactions. Shortly after the
      members and friends of Barbieri, Corpaci, and Duncan                     Winthrop Guarantors received the letters from Summit
      to purchase the radio station through a corporate                        requesting financial information, Barbieri and Corpaci
      entity.7                                                                 requested that Summit release their family members
                                                                               and friends from their guarantees and that the Winthrop
      2. The Winthrop Restructuring                                            loans be renewed into a single note with a 25-year
                                                                               amortization. In exchange for the release of guarantees,
      a. The Winthrop Loans. On September 22, 1988,                            Barbieri and Corpaci offered to give Summit:
      Barbieri and Corpaci arranged for Summit to make                            (1) A guarantee from Comko, which was owned by
      Winthrop a loan of $600,000 that was used to acquire a                      Barbieri, Corpaci and Duncan; and
      radio station and a parcel of real estate. The loan was                     (2) A security interest in the radio station equipment
      secured by a first mortgage on the radio station prop-                      owned by Comko. In exchange for renewing the
      erty and was guaranteed personally by five of the six                       Winthrop loans, Barbieri and Corpaci also offered
      family members and friends of Barbieri, Duncan, and                         Summit a first mortgage on a parcel of real estate
      Corpaci who were shareholders of Winthrop (the                              owned by the Barbieris, Corpaci and Duncan.
      "Winthrop Guarantors").
         Winthrop never was profitable and had difficulty                         On January 25, 1991, Summit retained Cavallari to
      servicing its Summit debt. On December 14, 1988,                         provide legal services relating to the Winthrop loans.
      Summit granted Winthrop an additional loan of                            Corpaci and Barbieri, on behalf of Winthrop and the
      $100,000, arranged by the Barbieris and Corpaci,                         Winthrop Guarantors as well as Comko, negotiated
      without security other than the personal guarantees of                   the restructuring deal with Kolok and Cavallari on
      the Winthrop Guarantors. This loan was renewed on                        behalf of Summit. As part of the restructuring, Caval-
      April 13, 1989 and again on July 12, 1989.                               lari agreed to act as trustee for Winthrop, Summit's
         On July 12, 1990, OTS issued enforcement orders                       debtor, to hold the real property to be mortgaged to
      against Security and its principals that, among other                    Summit. Accordingly, on February 25, 1991, the real
      things, immediately suspended Barbieri and Barbieri                      estate was conveyed from a trustee for the Barbieris,
      Jr. from all offices and positions at Security. Corpaci                  Corpaci, and Duncan to Cavallari, as trustee for Win-
      was fired by Security. Almost immediately thereafter,                    throp. The use of trustees was designed to prevent
      on July 16, 1990, the OCC issued a temporary order to                    interference in the deal from creditors of Winthrop and
      cease and desist against a number of Barbieri-related                    of the individuals involved.
      banks including Summit that, among other things,                            On February 26, 1991, Kolok and Cavallari met with
                                                                               Barbieri and Corpaci. Kolok and Cavallari discussed
                                                                               the terms of the deal with Cordani over a speaker
        7. Barbieri Jr. was a 20 percent shareholder and president; Vinal
      Duncan's son was a 20 percent shareholder and vice president;            telephone and both indicated to Cordani that the deal
      Corpaci's sister was a 20 percent shareholder, treasurer and corporate   should go forward. Cavallari orally advised Cordani
      secretary; a business partner of Barbieri's and Corpaci's was a          that the release of the Winthrop Guarantors in ex-
      20 percent shareholder and vice-president; another Barbieri friend
      was a 10 percent shareholder; and DiFabio was a !0 percent share-        change for the corporate guarantee and Comko secu-
      holder.                                                                  rity interest was in the best interests of the Bank.
November 1994



                                                                                                              Legal Developments                1051


        At the time that he advised Summit that the                            subject. Cavallari later testified that he based his
     transaction should go forward, Cavallari had not                          opinion in part on the belief that the Winthrop Guar-
     determined either the value of the guarantees Summit                      antors were judgment-proof because their personal
     was releasing, or the value of the guarantees and                         assets had been attached as a result of litigation over
     collateral it would get in return. Specifically, al-                      guarantees they had provided to the Bank of Boston.
     though he knew that Barbieri and Corpaci sought the                       In fact, the Winthrop Guarantors had not had property
     release of their family members' and friends' guar-                       attached by the Bank of Boston.10
     antees, Cavallari did not determine the net worths of                        On or about April 30, 1991, Cavallari conveyed the
     the Winthrop Guarantors. In addition, although the                        real estate he was holding as trustee to Winthrop,
     Bank's records reflected the negative net worth of                        which subsequently granted Summit a first mortgage
     Winthrop, Cavallari did not obtain financial informa-                     on the property in consideration of Summit's renewal
     tion relating to Barbieri and Corpaci's other Water-                      of Winthrop's loans. At the same time, the Winthrop
     bury radio enterprise, Comko, whose guarantee was                         loans were combined into a single note with a five-year
     being substituted for that of the Winthrop Guaran-                        maturity that was drafted by Cavallari. The amortiza-
     tors. Nor did he obtain any valuation of the radio                        tion schedules of the two original notes were extend-
     equipment in which Summit was to receive a security                       ed" and the interest rates reduced.12 The renewal had
     interest. The record does not even reflect that                           the effect of dramatically reducing the monthly amount
     Cavallari ever specifically inquired of Summit's man-                     due on the loans (from almost $11,000 to approxi-
     agement as to any of these issues. In short, Cavallari                    mately $5,500) and of changing the status of the loans
     had absolutely no reasonable basis on which to                            from seriously past due to "current." Summit's re-
     advise that the restructuring was in the Bank's best                      newal of the Winthrop loans was not supported by any
     interests.                                                                new financial information regarding Winthrop, and
        In other ways, as well, Cavallari's actions show that                  was not approved by Summit's loan committee or by
     he was heedless of the Bank's interests. During the                       the board of directors. The renewal of the loans
     February 26, 1991 meeting, Cavallari obtained a cor-                      contributed to the postponement of the liquidation of
     porate guarantee from Comko that was part of the                          the collateral securing the loans during a time when the
     consideration for the release of the Winthrop Guaran-                     market for the collateral was declining, and made
     tors that was seriously defective in a number of                          Winthrop's unencumbered assets available to other
     respects.8 In addition, Cavallari failed to obtain a                      creditors.
     security interest in the radio equipment that was to be                      Winthrop defaulted on the renewed note after mak-
     pledged to support the Winthrop loans.9                                   ing three payments, the last on February 3, 1992, each
       Had he inquired about Comko's financials, Cavallari                     of which was late and consisted only of interest due,
     could have learned that Comko was nearly insolvent                        and not principal. At that time the principal balance
     and was incurring large losses. Comko suffered a net                      was $614,358, with an accrued interest of $12,663.
     loss of $292,129 in 1990, and had a net worth of $49,068                  Winthrop thereafter continued to sustain losses and
     by year-end. Accordingly. Comko was incapable of                          remained insolvent, while Comko continued to sustain
     servicing or retiring the Winthrop loans.                                 losses and went out of business.
       At Cordani's request, Cavallari provided him a                             After February 3, 1992, the OCC declared Summit
     written opinion on May 14, 1991 that the restructuring                    insolvent and appointed the FDIC as receiver. As of
     was in the best interests of the bank. The letter, which                  July 19, 1992, the principal balance due on the Win-
     restated oral advice provided earlier by Cavallari,                       throp loans was $596,775 and the accrued interest was
     contained unqualified statements of tact concerning                       $172,464. >3 The ALJ found that the FDIC had not
     the litigation faced by the Winthrop Guarantors and                       received any additional recoveries on the loans from
     the relative lack of litigation to which Comko was

                                                                                  If). In his Exceptions, Cavallari argues that this advice related
       8. The guarantee was not dated, did not state whose loans were          primarily to the legal issue of whether the guarantee was enforceable
     being guaranteed, did not state which institutions held the loans being   against Comko and whether Summit's security interest in Comko's
     guaranteed, did not state the original or outstanding balances of the     property was properly filed. The text of the opinion letter, which in his
     loans being guaranteed, did not refer accurately to the second loan,      testimony Cavallari characterized as a "business opinion," does not
     was not supported by a corporate resolution from Comko authorizing        support this argument; rather, the subject of the letter is whether the
     the guarantee, was not notarized, and did not contain the signature of    exchange of guarantees "was in the best interest of the bank."
     any witness.                                                                 11. The amortization schedule on the $600,000 note was extended
       9. The technical defects in the Comko guarantee were remedied           from X to 25 years, and on the $100,000 note from past due to 25 years.
     when Corpaci's attorneys provided Cavallari with a new corporate             12. The interest rates were reduced from 13 and 13.5 percent
     guarantee dated March 15, 1991 and a security interest in the Comko       respectively to escalating rates of 10,11 and 11.5 percent over 5 years.
     radio equipment dated March 16, 1991. The record docs not reflect            13. The FDIC applied the three payments made following the
     whether these corrections were due to any efforts on Cavallari's part.    renewal to principal.
November 1994



      1052 Federal Reserve Bulletin • November 1994


      any additional source, and did not expect to receive        never approved the arrangement and that Cavallari was
      any such recoveries in the future.                          still responsible on the $1.8 million loan.14
                                                                     In December 1990, Cavallari was deposed by the
      3. Cavallari's Prior Involvements with Barbieri and         OTS as part of its investigation of the Security princi-
      Kolok                                                       pals. The deposition focused on the Arlington Partner-
                                                                  ship and Gaston Farms transactions and Cavallari's
      Cavallari came to the Winthrop restructuring transac-       actions as Kolok and Barbieri's nominee in those
      tion with a significant amount of information about the     transactions. At the deposition, the OTS lawyer spe-
      various parties involved in the transaction. He himself     cifically suggested that Cavallari's actions on behalf of
      had been involved in a previous nominee arrangement         Barbieri and Kolok constituted a fraud on Security.
      with Barbieri and Kolok, and was aware of certain              b. Victoria Court. Victoria Court was a real estate
      allegations concerning Comko's principals from his          project in Waterbury owned by a number of individu-
      representation of Summit in another matter. These           als financed with loans from the Bank of Boston in
      involvements, detailed below, provided Cavallari with       which Summit participated. The loans were supported
      a background that should have made him aware of the         by personal guarantees of the principals, including
      need for caution by the Bank in going forward with the      Barbieri, Corpaci and Duncan. In September 1990,
      restructuring.                                              Cavallari was retained by Summit to represent its
         a. Gaston Farms and Arlington Partnership. In 1987       interests with respect to the Victoria Court loans,
      and early 1988 Barbieri, on behalf of Security, arranged    which had become troubled. On September 19, 1990,
      for a Security subsidiary to act as a joint venture         Cavallari attended a meeting with Kolok at the Bank of
      partner with a real estate developer in connection with     Boston offices to discuss Victoria Court. Four debtors,
      two real estate transactions known as Gaston Farms          including Barbieri and Corpaci, were present. In his
      and Arlington Partnership. When the Security board of       subsequent memorandum describing the meeting,
      directors denied permission for the subsidiary to par-      Cavallari noted that many of the debtors faced regu-
      ticipate due to prior regulatory criticism, Barbieri,       latory and criminal problems and that the Bank of
      concerned about the thrift's liability for backing out of   Boston attorney had stated that several fraudulent
      its commitment, instructed Kolok to seek a nominee to       transfers had been made to family members of the
      act as the joint venture partner with the developer.        guarantors.
      Cavallari, a longtime friend of Kolok, agreed to be that
      nominee. Cavallari and Kolok entered into nominee           C. Conclusions of Law
      agreements, dated November 3, 1987 and January 14,
      1988, respectively, whereby Cavallari agreed to exe-        1. Institution-Affiliated Party
      cute all necessary public and bank documents for the
      project, and Kolok agreed to hold Cavallari harmless        The Board's determination whether Cavallari is an
      for any resulting liability. In accordance with the nom-    IAP is not made on a clean slate; the IAP issue is
      inee agreements, Cavallari obtained loans from Secu-        common to this case and to the parallel OCC proceed-
      rity to finance the joint ventures without disclosing the   ing seeking the remedies of restitution and civil money
      existence of the nominee agreements to Security's           penalties against Cavallari. The Board takes official
      board of directors, even though at Security's request he    notice that the Comptroller of the Currency has
      provided an opinion letter from another lawyer regard-      adopted the ALJ's finding that Cavallari is an IAP.
      ing the enforceability of the loan agreements against       OCC Dec. at 9-14. Rather than readdress those issues,
      him. Cavallari testified that his own financial picture     the Board defers to and incorporates the conclusion of
      was insufficient to justify the loans made to him, and      the Comptroller, Summit's primary regulator, as to the
      that he agreed to engage in the nominee arrangements        IAP determination.15
      in the hope of receiving additional legal work from
      Security.
         After the Arlington Partnership project experienced
      difficulties, Cavallari met with Barbieri in May 1990 and      14. At the time Security was declared insolvent and closed, much of
                                                                  the $1.8 million loan was still outstanding. Cavallari was ultimately
      asked to be released from his obligation on Security's      sued by the Resolution Trust Corporation in October 1991 as receiver
      $1.8 million loan to the joint venture. Barbieri, then      for Security for a $950,000 deficiency on the loan. It is unclear what
      president and CEO of Security, suggested ways for           actions, if any, Cavallari took to enforce Kolok's obligations under the
                                                                  nominee agreement.
      Cavallari to negotiate with Security for a release from        15. In his Brief in support of his Exceptions, Cavallari argues that he
      his obligation. After Barbieri was suspended from Se-       is not an IAP on the basis of the legislative history of the definition of
                                                                  that term. It is true that the legislative history provides that Congress
      curity on July 12, 1990, an attorney for Security wrote     did not "intend to subject attorneys to agency enforcement actions for
      Cavallari in September 1990 stating that Security had       those good faith activities falling within the traditional attorney-client
November 1994



                                                                                                                   Legal Developments                 1053


        The Board therefore adopts the ALJ's recom-                                transaction—that the exchange of guarantors was in
      mended findings and conclusions as to the IAP deter-                         the best interests of the Bank. As the ALJ found, this
      mination to the same extent, and for the same reasons,                       constituted participation in an unsafe or unsound
      as the Comptroller. The Board accordingly concludes                          practice.
      that Cavallari acted as an IAP of Summit in his                                 b. Effects. The Board adopts the ALJ's conclusion
      participation in the exchange of the Comko guarantee                         that Summit sustained financial loss as a result of the
      and security for those of the Winthrop Guarantors, in                        exchange of guarantors that satisfies the requirements
      that he at least recklessly participated in an unsafe or                     of 12 U.S.C. § 1818(e)(l)(B)(i). The ALJ found that
      unsound practice which caused loss to Summit. His                            Summit sustained a loss of $554,904 as a result of the
      conduct therefore satisfied the definitional standards                       transactions, after applying the appraised value of the
      under which an independent contractor such as an                             collateral. The Board adopts these findings as to the
      outside counsel may be found to have acted as an IAP.                        existence of financial loss, and rejects Cavallari's
      12 U.S.C. § 1813(u)(4).">                                                    arguments that the loss is partly due to inaction by the
                                                                                   FDIC'9
      2. Substantive Basis for Prohibition                                            c. Culpability. The Board adopts the ALJ's finding
                                                                                   that Cavallari's participation in the exchange of
      a. Misconduct, The Board adopts the ALJ's finding                            guarantors reflects willful disregard for safety or
      that Cavallari's participation in the transaction by                         soundness satisfying the criteria of 12 U.S.C.
      which the Winthrop Guarantors were released from                             § 1818(e)(l)(C)(ii).M
      their obligations constituted participation in an unsafe                        "Willful disregard for safety or soundness" is not
      or unsound banking practice.17 For the reasons iden-                         defined in the FDI Act. Previously, the Board has
      tified above, Summit's release of the individual guar-                       found that " 'willful disregard for safety or soundness'
      antors in exchange for the Comko guaranty and secu-                          is established by intentional conduct that constitutes
      rity interest, with no assessment of the relative                            an unsafe or unsound banking practice . . . ." In the
      prospects of recovery, constituted a banking practice                        Matter ofMagee, 78 Federal Reserve Bulletin 968, 974
      so imprudent, under the circumstances, as to consti-                         (1992) (emphasis added). This is consistent with the
      tute an unsafe and unsound banking practice.18 Cav-                          definition adopted by the OTS in a series of cases
      allari was Summit's sole counsel in the consummation                         interpreting the phrase.
      of that transaction, and rendered a written opinion to
      Bank management—that he admitted simply memori-                                 Willful disregard for the safety or soundness of an insured
      alized advice previously given at the time of the                            institution is established when an individual (a) purposely, as
                                                                                   opposed to accidentally, commits an act and that act evi-
                                                                                   dences neglect or lack of thoughtful attention to the institu-
                                                                                   tion's safety or soundness, or (b) acts with plain indifference
      relationship," and that "providing advice in good faith to a client          to the institution's safety and soundness. See In re Kim, OTS
      financial institution, by itself, should not lead to an enforcement          Order No. AP 93-30, 22-23 (Apr. 15, 1993) [appeal pending,
      action." H.R. Rep. No. 54, 101st Cong., 1st Sess. 467 (1989).
      Nevertheless, the unique facts of this case — specifically, Cavallari's
                                                                                   No. 93-70425 (9th Cir.,filedMay 6, 1993)].
      personal knowledge of facts that should have given rise to greater
      caution on behalf of the Bank — are sufficient to support a finding that     In re Lopez, OTS Order No. AP 92-74 (May 17, 1994),
      Cavallari's services regarding the exchange of guarantors on the
      Winthrop loan were not provided in good faith. Thus, Cavallari is not        at 37 n. 68.
      the kind of attorney the legislative history states should be protected         In the Board's view, this definition correctly sets out
      from agency enforcement actions.                                             the meaning of the statutory phrase. Willful disregard
         16. Even if the Board were required to make a wholly separate
      determination as to the IAP issue, the conclusion would be the same.         for safety and soundness is different than willful par-
      The Board's conclusions as to the substantive requirements for
      prohibition, infra, establish that Cavallari participated recklessly in an
      unsafe or unsound practice that caused loss to Summit.
         17. The Board agrees with the Comptroller that there is no evidence          19. Cavallari argues that the FDIC might have sued Winthrop as the
      in the record regarding the appropriate standard of care, and thus does      primary obligor on the loans, or Comko as guarantor. The evidence of
      not adopt the ALJ's findings that Cavallari's actions also constituted       those companies' financial condition (Comko is no longer in business,
      a breach of his fiduciary duty to the Bank. With regard to the ALJ's         and Winthrop was insolvent in 1991) suggests that such action would
      finding that Cavallari violated the final ccase-and-desist order imposed     not have substantially reduced Summit's losses.
      by consent against Summit on April 25, 1991, the Board notes that by            Moreover, even if one does not accept the ALJ's assumption that
      the time that order was issued, the exchange of guarantees in which          the Winthrop Guarantors' net worths were unchanged from their
      Cavallari had participated was completed. Accordingly, the Board             earlier levels of roughly $16 million, it is reasonable to assume that the
      does not adopt the ALJ's finding that Cavallari violated the final           net worths of the five guarantors exceeded the financial strength of
      cease-and-desist order issued against Summit.                                Comko, which the ALJ found had a negative net worth, and thus that
         18. See First Nat'I Hunk of Eden v. Comptroller of the Currency,          the exchange of guarantees resulted in a "more than minimal" amount
      568 F.2d 610, 611 n.2 (8th Cir. 1978) (per curium) (unsafe or unsound        of loss to Summit. This is all that is needed to support a finding of IAP
      banking practice is a practice "deemed contrary to accepted standards        status and of "effects" for purposes of a prohibition order.
      of banking operations which might result in abnormal risk or loss to a         20. The Board docs not reach the issue of whether Cavallari's
      banking institution or shareholder").                                        actions constituted "continuing" disregard.
November 1994



      1054 Federal Reserve Bulletin • November 1994


      ticipation in an unsafe or unsound transaction. One        been attached by Bank of Boston as a result of the
      certainly disregards an institution's safety and sound-    Victoria Court problems were not the Winthrop
      ness when one is simply oblivious to it. To deliberately   Guarantors, as he testified in an attempt to rational-
      and consciously take part in an action that evidences      ize their release from the guarantees, but instead
      utter lack of attention to an institution's safety and     included Barbieri, Corpaci and Duncan, the individ-
      soundness is to willfully disregard that institution's     uals behind Comko.21 Cavallari admitted to acting as
      safety and soundness.                                      a trustee for Winthrop in the conveyance of real
         That standard is certainly met by the facts of this     estate as a means of avoiding attachment by credi-
      case. Here, the record shows that Cavallari provided       tors.
      an opinion that the substitution of guarantors on the         For all of these reasons, Cavallari unavoidably was
      Winthrop loans was in the best interests of the Bank       on notice that the exchange of guarantees was a
      without undertaking any independent inquiry into the       hazardous undertaking for Summit, since Summit gave
      basic facts of the transaction: the current financial      up rights to pursue immediate recovery against indi-
      condition of the current and new guarantors and the        viduals whose net worth Cavallari did not ascertain in
      value of the new collateral.                               return for a guarantee from a corporation owned by
         Moreover, even if no independent inquiry had            individuals who Cavallari knew were in financial,
      been conducted, Cavallari had actual knowledge             regulatory and criminal trouble. It is not enough, given
      based on past dealings with individuals involved that      all of Cavallari's knowledge, including knowledge of
      should have put him on notice that the transaction         Kolok's previous dealings with Barbieri, for Cavallari
      was not in fact fair to the Bank or that, at a minimum,    to claim that he was simply acting on the information
      the representations of Bank management and those           and decisions conveyed to him by Kolok. Cavallari's
      negotiating on behalf of the borrower regarding the        failure to obtain any information about the relative
      loan restructuring should have been viewed with            value of security interests being exchanged, and to
      suspicion. Cavallari had reason to know that Bar-          require a security interest in Comko's radio equipment
      bieri, who negotiated the Winthrop/Comko transac-          at the time of the release of the Winthrop Guarantors,
      tions on behalf of the borrowers, had been termi-          demonstrates more than mere negligence. It evidences
      nated from his position at Security and was the            a willingness to turn a blind eye to Summit's interests
      subject of regulatory scrutiny. He knew that Barbieri      in the face of known risks. Substantial evidence sup-
      and the other owners of Comko faced financial,             ported the ALJ's conclusion that Cavallari's actions
      regulatory and criminal problems. He knew from his         were not in the realm of good faith negligence, but
      dealings in the Arlington Partnership transaction that     reflected a willful disregard of the Bank's safety and
      Barbieri and Kolok were willing to put the financial       soundness.
      institution for which they worked at risk without its
      knowledge, and he was aware that Kolok was pur-            Conclusion
      porting to represent Summit in negotiations with his
      former boss, Barbieri, in the Winthrop/Comko trans-        For the foregoing reasons, the Board orders that the
      action. He was aware of the accusation of the Bank         attached Order of Prohibition issue against Cavallari.
      of Boston attorneys regarding fraudulent transfers to         By Order of the Board of Governors, this 26th day
      family members by the Victoria Court guarantors, a         of September, 1994.
      group that included Barbieri, Corpaci and Duncan,
      and he knew that in the Winthrop/Comko transaction                                           Board of Governors of the
      Barbieri and Corpaci were seeking the release of                                               Federal Reserve System
      their own family members and friends. He was aware
      that Summit, which had business dealings with Bar-                                                    WILLIAM W. WILES
      bieri and whose management was connected with
                                                                                                        Secretary of the Board
      him, was subject to a cease and desist order by the
      OCC, an order whose contents he never inquired
      into. He was aware that other transactions in which
      he had engaged with Barbieri and Kolok were being
                                                                    21. Cavallari was retained to represent Summit's interests in Vic-
      investigated by the OTS, and that OTS attorneys had        toria Court and therefore was on notice that the Bank of Boston
      suggested that they might be fraudulent. He had            litigation over Victoria Court resulted in the attachment of the
      reason to know that the persons whose property had         personal property of the individuals who owned Comko, not the
                                                                 Winthrop Guarantors, as he professed to believe.
November 1994



                                                                                         Legal Developments         1055


      Order of Prohibition                                        In the Matter of

      WHEREAS, pursuant to section 8(e) of the Federal            MCORP
      Deposit Insurance Act, as amended (the "Act")               Dallas, Texas
      (12 U.S.C. § 1818(e)), the Board of Governors of the
      Federal Reserve System ("the Board") is of the opin-        and
      ion, for the reasons set forth in the accompanying
      Final Decision, that a final Order of Prohibition should    MCORP MANAGEMENT, INC.
      issue against AUGUSTUS I. CAVALLARI;                        Dallas, Texas
         NOW, THEREFORE, IT IS HEREBY ORDERED,
      pursuant to sections 8(e) and 8(j) of the Federal Deposit   Docket No. 88-062-B2-HC
      Insurance Act, as amended (12 U.S.C. §§ 1818(e) and
      18180)), that:                                              Order Dismissing Notice of Charges and of Hearing
         1. In the absence of prior written approval by the
         Board, and by any other Federal financial insti-          On March 30, 1989, the Board of Governors of the
         tution regulatory agency where necessary pursu-           Federal Reserve System (the "Board of Governors")
         ant to section 8(e)(7)(B) of the Act (12 U.S.C.           issued a Notice of Charges and of Hearing (the "No-
         § 18I8(e)(7)(B)), AUGUSTUS I. CAVALLARI is                tice") pursuant to sections 8(b)(l) and 8(b)(3) of the
         hereby prohibited:                                        Federal Deposit Insurance Act, as amended (12 U.S.C.
           (a) From participating in the conduct of the affairs    §§ 1818(b)(l) and (3)), and section 5(b) of the Bank
           of any bank holding company, any insured depos-         Holding Company Act of 1956, as amended (12 U.S.C.
           itory institution or any other institution specified    8 1844(b)), against MCorp, a registered bank holding
           in subsection 8(e)(7)(A) of the Act (12 U.S.C.          company, and MCorp Management, a nonbank subsid-
           § 1818(e)(7)(A));                                      iary of MCorp. The Notice alleged that the respondents
           (b) From soliciting, procuring, transferring, at-      engaged in certain violations of law and unsafe and
           tempting to transfer, voting or attempting to vote     unsound practices in connection with their activities
           any proxy, consent, or authorization with respect      within the jurisdiction of the Board of Governors.
           to any voting rights in any institution described          On June 28, 1994, the United States Bankruptcy
           in subsection 8(e)(7)(A) of the Act (12 U.S.C.         Court for the Southern District of Texas, Houston
           § 1818(e)(7)(A));                                      Division, entered an order confirming a bankruptcy
           (c) From violating any voting agreement previ-         plan in In re MCorp Financial, Inc., MCorp Manage-
           ously approved by the appropriate Federal bank-        ment, and MCorp, Civil Action No. 93-395, jointly
           ing agency; or                                         administered cases under Chapter 1] of the United
           (d) From voting for a director, or from serving or     States Bankruptcy Code. The plan confirmed by the
           acting as an institution-affiliated party as defined   bankruptcy court incorporated a settlement agreed to
           in section 3(u) of the Act (12 U.S.C. § 1813(u)),      by the Federal Deposit Insurance Corporation
           such as an officer, director, or employee.             ("FDIC") as a creditor in the bankruptcy proceeding.
                                                                  Pursuant to the settlement and bankruptcy plan, the
                                                                  FDIC received, inter alia, a cash payment from the
        2. This Order, and each provision hereof, is and          bankruptcy estate as recovery for its claims in the
        shall remain fully effective and enforceable until        bankruptcy action, including claims that were based
        expressly stayed, modified, terminated or sus-            on the same transactions that are at issue in the
        pended in writing by the Board.                           Notice. In addition, neither MCorp, MCorp Manage-
                                                                  ment, nor any successor entities will survive the
         This Order shall become effective upon the expira-       bankruptcy proceeding as a bank holding company,
      tion of thirty days after service is made.                  and there appears to be no further supervisory purpose
         By Order of the Board of Governors, this 26th day        in continuing with this enforcement action.
      of September, 1994.                                            NOW, THEREFORE, IT IS HEREBY ORDERED,
                                                                  pursuant to section 8(b) of the Federal Deposit Insur-
                                                                  ance Act, as amended (12 U.S.C. § 1818(b)) that:
                                  Board of Governors of the           1. The Notice issued in this matter on March 30,
                                    Federal Reserve System            1989 is dismissed, with prejudice; and
                                                                     2. The provisions of this Order shall not bar, estop
                                         WILLIAM W. WILES            or otherwise prevent the Board of Governors, or
                                      Secretary of the Board         any federal or state agency or department, from
November 1994



      1056 Federal Reserve Bulletin D November 1994


        taking any other action affecting MCorp or MCorp     State Bank of India
        Management, or any of their current or former        Bombay, India
        institution-affiliated parties.
                                                             The Federal Reserve Board announced on Septem-
        By Order of the Board of Governors of the Federal    ber 22, 1994, the issuance of a Cease and Desist Order
      Reserve System effective this 21st day of September,   against the State Bank of India, Bombay, India.
      1994.
                                Board of Governors of the
                                  Federal Reserve System
                                                             WRITTEN AGREEMENTS APPROVED BY              FEDERAL
                                      WILLIAM W. WILES       RESERVE BANKS
                                   Secretary of the Board
                                                             National Bank of Greece
                                                             Athens, Greece
      FINAL ENFORCEMENT ORDERS ISSUED BY THE
      BOARD OF GOVERNORS
                                                             The Federal Reserve Board announced on Septem-
      First Bank of Philadelphia                             ber 14, 1994, the execution of a Written Agreement
      Philadelphia, Pennsylvania                             among the National Bank of Greece, Athens, Greece,
                                                             and its branches in Boston and Chicago, the Federal
      The Federal Reserve Board announced on Septem-         Reserve Banks of New York, Boston, and Chicago,
      ber 2, 1994, the issuance of a Prompt Corrective       the Commissioner of Banks for the Commonwealth of
      Action Directive by Consent against First Bank of      Massachusetts, and the Federal Deposit Insurance
      Philadelphia, Philadelphia, Pennsylvania.              Corporation.

				
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