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Release Date: August 18, 1999


For immediate release

The Federal Reserve Board today announced its approval of the application of Bank Iowa, Red Oak, Iowa, to acquire the Red Oak branch of U.S. Bank, N.A., Minneapolis, Minnesota.

Attached is the Board's Order relating to this action.


FEDERAL RESERVE SYSTEM
Bank Iowa
Red Oak, Iowa

Order Approving Acquisition of a Branch

Bank Iowa, a state member bank, has applied under section 18(c) of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)) (the "Bank Merger Act") to acquire the branch of U.S. Bank, N.A., Minneapolis, Minnesota ("U.S. Bank"), located at 802 Broadway, Red Oak, Iowa ("Branch").1 Bank Iowa proposes to merge Branch into a nearby Bank Iowa branch on consummation of this proposal.

Notice of the application, affording interested persons an opportunity to submit comments, has been given in accordance with the Bank Merger Act and the Board's Rules of Procedure (12 C.F.R. 262.3(b)). As required by the Bank Merger Act, reports on the competitive effects of the merger were requested from the United States Attorney General and the Federal Deposit Insurance Corporation. The time for filing comments has expired, and the Board has considered the application and all the facts of record in light of the factors set forth in the Bank Merger Act.

Bank Iowa controls $72.6 million in deposits, representing less than one percent of total deposits in depository institutions2 in Iowa.3 Branch controls $17.8 million in deposits, and, on consummation of this proposal, Bank Iowa would control deposits of $92.4 million, representing less than one percent of total deposits in depository institutions in the state.

The Bank Merger Act prohibits the Board from approving an application if the proposal would result in a monopoly or would be in furtherance of any attempt to monopolize the business of banking.4 The Bank Merger Act also prohibits the Board from approving a proposal that would substantially lessen competition or tend to create a monopoly in any relevant market, unless the Board finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effects of the transaction in meeting the convenience and needs of the community to be served.5

The Board has carefully considered the competitive effects of the proposal as required by the Bank Merger Act. Bank Iowa and Branch compete in the Montgomery County, Iowa, banking market.6 The Board has reviewed the competitive effects of the proposal in this market in light of all the facts of record, including the characteristics of the market and the projected increase in the concentration of total deposits in insured depository institutions in this market ("market deposits")7 as measured by the Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines").8

Bank Iowa is the fourth largest depository institution in the market, controlling $21.9 million in deposits, representing 11.5 percent of market deposits. Branch represents the fifth largest depository institution in the market, controlling $17.8 million in deposits, representing 9.4 percent of market share. On consummation of this proposal, Bank Iowa would become the second largest depository institution in the market, controlling deposits of $39.7 million, representing 20.9 percent of market deposits. The HHI would increase by 216 points to 2941.

As the Board has indicated in previous cases, in a market in which the competitive effects of a proposal exceed the DOJ Guidelines, the Board will consider whether other factors tend to mitigate the competitive effects of the proposal. The number and strength of factors necessary to mitigate the competitive effects of a proposal depend on the level of market concentration and size of the increase in market concentration. In this case, the structural effect of the proposed transaction would marginally exceed the DOJ Guidelines.

Several factors, including the structure of the Montgomery County banking market, indicate that the likely effect of consummation of this proposal on competition in the market would not be significantly adverse. Five depository institutions, including Bank Iowa, would operate in the market after consummation of this proposal. The largest competitor in the market controls approximately 45 percent of market deposits and two additional competitors (other than Bank Iowa) control approximately 17 percent and 16 percent of market deposits. Furthermore, Branch does not appear to be a strong competitor in the market. U.S. Bancorp entered the market through the acquisition of Branch in 1997, and Branch has lost market share in the past two years.

The Department of Justice has advised the Board that consummation of the proposal would not likely have a significantly adverse effect on competition in any relevant market.

After carefully reviewing all the facts of record, and for the reasons discussed in this order, the Board concludes that consummation of the proposal would not have any significantly adverse effects on competition or on the concentration of banking resources in the Montgomery County banking market or in any other relevant banking market. Accordingly, based on all the facts of record, the Board has determined that competitive factors are consistent with approval of the proposal.

Financial, Managerial and Other Considerations

The Bank Merger Act also requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in the proposal, and the convenience and needs of the communities to be served. The Board has reviewed carefully these factors in light of all the factors of record, including supervisory reports of examination assessing the financial and managerial resources of the organizations. Based on these and all the facts of record, the Board concludes that the financial and managerial resources and future prospects of Bank Iowa are consistent with approval.

In considering the convenience and needs factor, the Board has reviewed the record of Bank Iowa under the Community Reinvestment Act ("CRA"). The Board notes that Bank Iowa received a "satisfactory" rating at its last CRA performance examination by the OCC, as of December 1, 1997. Based on all the facts of record, the Board concludes that convenience and needs considerations, including the CRA performance record of Bank Iowa, are consistent with approval of the proposal.

Based on the foregoing and all the facts of record, the Board has determined that this application should be, and hereby is, approved. The Board's approval of this proposal is conditioned on compliance by Bank Iowa with the commitments made in connection with this application. For purposes of this action, the commitments and conditions relied on in reaching this decision are conditions imposed in writing by the Board and, as such, may be enforced in proceedings under applicable law.

The acquisition of Branch may not be consummated before the fifteenth calendar day after the effective date of this order, and this proposal may not be consummated later than three months after the effective date of this order, unless such period is extended by the Board or by the Federal Reserve Bank of Chicago, acting pursuant to delegated authority.

By order of the Board of Governors,9 effective August 18, 1999.

(signed)

Jennifer J. Johnson

Secretary of the Board


Footnotes

1 Bank Iowa would acquire Branch from Liberty Bank, FSB, Arnolds Park, Iowa, which acquired eight Iowa branches from U.S. Bank in May 1999.

2 In this context, depository institutions include commercial banks, savings banks, and savings associations.

3 All state banking data are as of December 31, 1998.

4 12 U.S.C. ' 1828(c)(5)(A).

5 12 U.S.C. ' 1828(c)(5)(B).

6 The Montgomery County banking market is defined as Montgomery County, plus Indian Creek township in Mills County, all in Iowa.

7 All market data are as of June 30, 1998. Market share data are based on calculations that include the deposits of thrift institutions weighted at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial banks. See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has included thrift deposits in the calculation of market share on a 50-percent weighted basis. See, e.g., First Hawaiian Inc., 77 Federal Reserve Bulletin 42 (1991).

8 Under the DOJ Guidelines, 49 Federal Register 26,823 (1984), a market in which the post-merger HHI is above 1800 is considered to be highly concentrated. The Department of Justice has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800 and the merger or acquisition increases the HHI by at least 200 points. The Department of Justice has stated that the higher than normal HHI thresholds for screening bank mergers or acquisitions for anticompetitive effects implicitly recognize the competitive effects of limited-purpose lenders and other nondepository financial institutions.

9 Voting for this action: Chairman Greenspan and Governors Kelley, Meyer, Ferguson and Gramlich.

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