|For immediate release|
The Federal Reserve Board today announced its approval of the notice and application of Firstar Corporation, Milwaukee, Wisconsin, to merge with Star Banc Corporation, Cincinnati, Ohio ("SBC"), and thereby acquire SBC's subsidiary bank, Star Bank, N.A., also of Cincinnati, Ohio, and SBC's nonbanking subsidiaries.
Attached is the Board's Order relating to this action.
Firstar Corporation ("Firstar"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 3 of the BHC Act (12 U.S.C. § 1842) to merge with Star Banc Corporation ("SBC") and thereby acquire SBC's wholly owned subsidiary bank, Star Bank, N.A. ("Star Bank"), both of Cincinnati, Ohio.1 Firstar also has requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to acquire the nonbanking subsidiaries of SBC.2
Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 45,246 (1998)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in sections 3 and 4 of the BHC Act.
Firstar, with total consolidated assets of approximately $20 billion, is the 38th largest commercial banking organization in the United States, controlling less than 1 percent of the total assets of insured commercial banks in the United States ("total banking assets").3 Firstar is the second largest commercial banking organization in Wisconsin, controlling deposits of $12.8 billion in the state. Firstar also operates subsidiary banks in Arizona, Florida, Iowa, Illinois, and Minnesota and engages in a number of permissible nonbanking activities nationwide.
SBC, with total consolidated assets of approximately $14.9 billion, is the 50th largest commercial banking organization in the United States, controlling less than 1 percent of total banking assets. SBC's subsidiary bank, Star Bank, operates in Indiana, Kentucky, Ohio, and Tennessee. After consummation of the proposal, Firstar would become the 24th largest commercial banking organization in the United States, with consolidated assets of approximately $34.9 billion, representing approximately 1 percent of total banking assets.
Competitive, Financial, and Managerial Factors
The BHC Act also requires the Board to consider the financial and managerial resources of the companies and banks involved and certain other supervisory factors. The Board has carefully considered the financial and managerial resources and future prospects of Firstar, SBC, and their respective subsidiary banks and other supervisory factors in light of all the facts of record, including supervisory reports of examination assessing the financial and managerial resources of the organizations and confidential financial information provided by Firstar. Based on these and all the other facts of record, the Board concludes that the financial and managerial resources and future prospects of Firstar, SBC, and their subsidiary banks are consistent with approval, as are the other supervisory factors that the Board must consider under section 3 of the BHC Act.
Convenience and Needs Factor
A. CRA Performance Examinations
All of Firstar's subsidiary banks received "outstanding" or "satisfactory" ratings in the most recent examinations of their CRA performance. Firstar's lead subsidiary bank, Firstar Bank Milwaukee, Milwaukee, Wisconsin ("Firstar Milwaukee"), received a "satisfactory" rating in its most recent CRA performance evaluation by the Office of the Comptroller of Currency ("OCC"), as of November 1997. Firstar Bank Wisconsin, Madison, Wisconsin ("Firstar Wisconsin"), received an "outstanding" rating in its most recent CRA evaluation by the Federal Reserve Bank of Chicago ("Reserve Bank"), as of April 1997, and Firstar Bank Illinois, Waukegan, Illinois ("Firstar Illinois"), received a "satisfactory" rating in its most recent CRA examination by the Reserve Bank, as of June 1996. SBC's subsidiary bank, Star Bank, also received an "outstanding" rating in its most recent CRA examination by the OCC, as of December 1996.
The examinations found no evidence of prohibited discrimination or illegal credit practices at the subsidiary banks of Firstar or SBC. Examiners concluded that the banks solicited and accepted credit applications from all segments of their service communities. Examiners also generally noted that loans made by the banks were reasonably distributed throughout the local communities served, including in LMI communities, and that the banks served all members of those communities, including LMI individuals. In addition, examiners generally determined that the banks' delineation of the local communities they served were reasonable and did not arbitrarily exclude any LMI census tracts.
Firstar represents that, after consummation of the proposal, it will adopt SBC's approach to meeting its responsibilities under the CRA.9 Firstar states that, by adopting SBC's CRA approach, it would draw on SBC's expertise in providing innovative financing to projects benefitting LMI communities to expand Firstar's investments in such communities. Firstar also has indicated that it would follow SBC's community banking approach to agricultural lending, which features locally based loan officers who have direct contact with their customers in rural communities. Firstar also intends to seek out partnerships with community organizations in Firstar markets similar to partnerships established by SBC with community-based groups in several of its markets. In addition, Firstar has noted that it would retain some of its CRA programs that have proven successful. Consequently, the Board has taken into account the CRA performance records of SBC and Firstar in evaluating the proposal.
B. SBC's CRA Performance Record
The CRA performance examination characterized Star Bank's responsiveness to the credit needs of its assessment areas as excellent and commended Star Bank's penetration of consumer loans in LMI census tracts. Examiners noted, for example, that 30 percent of the total dollar volume of home equity loans made by Star Bank from January 1, 1995, through June 30, 1996, were made in LMI census tracts. Examiners stated that this percentage was favorable because only 18 percent of the owner-occupied housing units in Star Bank's assessment areas were in LMI communities.
Star Bank also established a Small Business Banking Group ("BBG") to meet the credit and banking needs of small business owners. Star Bank's BBG originated more than 3,300 small business loans in 1997, totaling $376 million, and made more than 1,400 small business loans in the first five months of 1998, totaling $150 million. The CRA performance examination commended Star Bank's lending to small businesses and small farms and noted that the bank had an excellent record of extending credit to businesses and farms of different sizes. Examiners also noted that Star Bank participated in federal and state small business lending programs, including two Small Business Administration ("SBA") loan programs. Examiners determined that Star Bank originated 117 SBA loans under these programs in 1995, totaling approximately $25 million.
The CRA performance examination commended Star Bank for originating a high level of community development loans. Examiners cited Star Bank's origination of 21 loans from January 1994 through July 1996, totaling $70 million, that resulted in the rehabilitation of 1,848 units of affordable rental housing. Examiners also noted that Star Bank entered into an agreement with the City of Cleveland, Ohio ("Cleveland Agreement"), to provide $25 million in loans to focus on LMI neighborhoods from 1994 through 1998. As of June 1996, Star Bank had extended $25.9 million of credit under the Cleveland Agreement, which represented 104 percent of Star Bank's original commitment. Firstar notes that, in March 1998, Star Bank began a five year, $5.15 billion Community Development Initiative to engage in community development activities, including making small business loans, agricultural loans, and loans to businesses in LMI census tracts. Firstar has committed to carry out this initiative.
Examiners found that Star Bank had a good distribution of branches throughout its assessment areas. For example, examiners noted favorably that 27 percent of Star Bank's branches in Cincinnati were in LMI communities, which exceeded the percentage of families in Cincinnati that resided in those census tracts (19 percent). Examiners also noted that Star Bank offered a variety of alternative delivery systems, including banking by phone, by automatic teller machines ("ATMs"), and by home computer.
C. Firstar's CRA Performance
Examiners commended Firstar Milwaukee's lending to small businesses, including small businesses in LMI census tracts. Examiners also noted that Firstar Milwaukee had introduced a small business line-of-credit program. The program offered a streamlined applications process and was designed for emerging small businesses that needed to build a credit history. From the time of the program's inception in 1996 through November 1997, Firstar Milwaukee originated 147 small business credit lines under this program, totaling more than $3.5 million.
Firstar Milwaukee also has participated in a variety of governmentally insured, guaranteed, and subsidized loan programs. For example, Firstar represents that its banks have participated in the SBA's "Low Doc" program, which offers quick approvals to qualifying small businesses and farms. Firstar notes that Firstar Milwaukee originated a total of 40 SBA loans in 1996, totaling $6.2 million, and 43 SBA loans in 1997, totaling $9.1 million. Firstar also states that Firstar Milwaukee has actively participated in Veterans Administration ("VA") and Federal Housing Administration ("FHA") loan programs. Firstar Milwaukee made 149 VA loans in 1996, totaling $13.2 million, and 159 VA loans in 1997, totaling $14.2 million. The bank also originated 114 FHA loans in 1996, totaling $8.6 million, and 330 such loans in 1997, totaling $25 million.
Examiners noted that Firstar Milwaukee offered a variety of low-cost checking accounts to consumers, small businesses, community groups and nonprofit organizations. Examiners also noted that Firstar Milwaukee cashed federal government benefit checks without charge. Examiners found this check-cashing service to be unique in the bank's assessment area because it was offered free to customers and to noncustomers of the bank.
Firstar Wisconsin. The CRA examination of Firstar Wisconsin found that the bank had a strong record of small business and small farm lending. Examiners noted that, in 1996, Firstar Wisconsin made more than 3,600 small business loans and originated more than 230 small farm loans. Examiners stated that approximately 500 of the small business and farm loans, totaling approximately $42 million, were made in LMI areas.10
The CRA performance examination determined that Firstar Wisconsin offered a variety of governmentally insured, guaranteed, and subsidized loans to small businesses, small farms, and LMI borrowers. Examiners noted, for example, that Firstar Wisconsin originated 149 SBA loans, totaling $35.4 million, and 69 Farm Service Agency ("FSA") loans, totaling $11.7 million, in 1996. Examiners also commended the bank for using a Department of Housing and Urban Development ("HUD") lending program to offer nontraditional mortgage loans on real property in certain Native American reservations, where conventional mortgage lending was difficult because borrowers often did not own the mortgaged real estate outright.
Firstar states that, since the CRA performance examination, Firstar Wisconsin has continued to participate actively in various government-guaranteed loan programs. For example, Firstar reports that Firstar Wisconsin made more than 130 SBA loans in 1997, totaling $37.8 million, and that the bank made 56 SBA loans in the first six months of 1998, totaling $15.2 million. Firstar also states that Firstar Wisconsin and its affiliates in Wisconsin continue to participate in various lending programs operated by the Wisconsin Housing and Economic Development Authority ("WHEDA"). In 1997, for example, Firstar Wisconsin originated 92 loans through WHEDA, of which almost half were made in rural communities. Firstar banks in Wisconsin originated 30 loans, totaling $463,000, under the WHEDA Credit Relief Outreach Program during 1997. In addition, Firstar notes that it introduced this year the WHEDA Home Improvement Loan Program, which makes home improvement loans available to agricultural borrowers.11
The CRA performance examination commended the bank's responsiveness to the credit needs of LMI individuals and areas. For example, according to the CRA performance examination, Firstar Wisconsin and its affiliate, Firstar Home Mortgage Corporation ("FHMC"), made more than 10 percent of their housing-related loans in LMI census tracts, and 21 percent of their housing-related loans to LMI borrowers. Examiners characterized the dispersion of housing-related loans in LMI census tracts and to LMI borrowers as strong.12
Examiners noted that Firstar Wisconsin made extensive use of innovative and flexible lending practices and programs.13 Examiners also cited favorably Firstar's ongoing participation in the ADVOCAP program, which provided mortgage loans with flexible underwriting standards to LMI families. In addition, examiners noted that Firstar Wisconsin had made investments in a number of projects to fund the purchase and rehabilitation of affordable rental and multifamily housing units.
D. Conclusion on the Convenience and Needs Factor
In order to approve a notice under section 4(c)(8) of the BHC Act, the Board also must determine that the proposed activities are a proper incident to banking, that is, that the proposal "can reasonably be expected to produce benefits to the public . . . that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."17 Firstar has indicated that, after consummation of the proposal, it would be able to provide more products and services with greater efficiency to current and future customers of Firstar and SBC. Firstar would achieve greater operational efficiencies, greater economies of scale, and eliminate redundant systems and technologies. These efficiencies would strengthen Firstar's ability to compete more effectively in the markets in which it operates. Firstar would draw on its product strengths and those of SBC to offer more products at more locations than either organization could offer separately. In addition, as the Board has previously noted, there are public benefits to be derived from permitting capital markets to operate so that bank holding companies can make potentially profitable investments in nonbanking companies and from permitting banking organizations to allocate their resources in the manner they consider to be most efficient when such investments and actions are consistent, as in this case, with the relevant considerations under the BHC Act.18
As part of its evaluation of these factors, the Board considers the financial condition and managerial resources of the notificant and its subsidiaries, including the companies to be acquired, and the effect of the proposed transaction on those resources. For the reasons noted above, and based on all the facts of record, the Board has concluded that financial and managerial considerations are consistent with approval of the notice.
The Board also has considered the competitive effects of the proposed acquisition by Firstar of the nonbanking subsidiaries of SBC. Numerous competitors would remain in each of the markets in which Firstar and SBC compete. The Board concludes that consummation of this proposal would have a de minimis effect on competition in the markets for nonbanking services in which Firstar and SBC compete. Based on all the facts of record, the Board concludes that it is unlikely that significantly adverse competitive effects would result from the nonbanking acquisitions proposed in this transaction.
The Board also concludes that the conduct of the proposed nonbanking activities within the framework of Regulation Y and prior Board precedent is not likely to result in adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices, that would outweigh the public benefits of the proposal, such as increased customer convenience and gains in efficiency. Accordingly, based on all the facts of record, the Board has determined that the balance of public interest factors that the Board must consider under the proper incident to banking standard of section 4(c)(8) of the BHC Act is favorable and consistent with approval of Firstar's notice.
The acquisition of Star Bank shall not be consummated before the fifteenth calendar day following the effective date of this order, and the proposal shall not be consummated later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Reserve Bank, acting pursuant to delegated authority.
By order of the Board of Governors,21 effective October 28, 1998.
(signed) Robert deV. Frierson
Robert deV. Frierson
Nonbanking Activities of SBC
1 Firstar and SBC also have requested the Board's approval to hold and exercise options to acquire up to 19.9 percent of each other's voting shares, if certain events occur. The options would expire on consummation of the proposed merger.
3 All banking data, including rankings, assets, and deposits, are as of June 30, 1998.
4 Pub. L. No. 103-328, 108 Stat. 2338 (1994). A bank holding company's home state is the state in which the operations of the bank holding company's banking subsidiaries were principally conducted on July 1, 1966, or the date on which the company became a bank holding company, whichever is later.
5 For purposes of the Riegle-Neal Act, the Board considers a bank to be located in the states in which the bank is chartered, headquartered, or operates a branch.
6 Firstar is adequately capitalized and adequately managed as defined in the Riegle-Neal Act. 12 U.S.C. � 1842(d)(1)(A). SBC's only subsidiary bank, Star Bank, has been in existence and operated for the minimum period of time required by state law. 12 U.S.C. � 1842(d)(1)(B). On consummation of the proposal, Firstar would control less than 10 percent of the total amount of deposits of insured depository institutions in the United States, and Firstar and SBC do not both operate insured depository institutions in the same states. 12 U.S.C. � 1842(d)(2). All other requirements under section 3(d) of the BHC Act also would be met on consummation of the proposal.
7 See 12 U.S.C. � 1842(c).
8 The Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act provides that a CRA examination is an important and often controlling factor in the consideration of an institution's CRA record and that reports of these examinations will be given great weight in the applications process. See 54 Federal Register 13,742, 13,745 (1989); see also 62 Federal Register 52,105 (1997).
9 Firstar has stated that it would place its CRA and community development programs under the leadership of SBC's current Director of Community Development.
10 One commenter expressed concern about Firstar's commitment to agricultural lending in Wisconsin and alleged that Firstar's consolidation of certain agricultural loan origination and servicing operations into a single office has resulted in reduced lending by Firstar to small and LMI farm owners. Firstar denies any decreased emphasis on agricultural lending, noting that Firstar Wisconsin maintains a sizeable agricultural loan portfolio of $150 million. Firstar also represents that it employs 40 loan officers with agricultural lending authority and has implemented programs, including a simplified application for small loans and speedy processing, that demonstrate its commitment to agricultural lending. In addition, Firstar states that the consolidation of its agricultural lending operations does not limit its ability to extend credit to farms of all sizes.
11 One commenter expressed concern that Firstar has reduced its participation in FSA, WHEDA, and other government-guaranteed loan programs that benefit farmers and rural communities in Wisconsin. Firstar acknowledges that there has been some reduction in the volume of its origination of certain types of government-guaranteed loans designed for farmers and agricultural communities, but Firstar attributes this decrease in loan originations to changing market conditions and lower credit demand in Wisconsin.
12 One commenter alleged that Firstar's subsidiaries in Wisconsin make inadequate numbers of home mortgages to LMI individuals and in LMI communities. The commenter based the allegation on its analysis of certain data reported by Firstar in 1996 under the Home Mortgage Disclosure Act (12 U.S.C. � 2801 et seq.) ("HMDA"). As noted above, the CRA performance examinations of Firstar's subsidiary banks in Wisconsin noted that the banks had strong records of lending, including home mortgage lending, to LMI individuals and in LMI communities. Examiners of Firstar Wisconsin reached this conclusion based on their review of the bank's 1996 HMDA data and other data.
13 A commenter alleged that Firstar has been inflexible in working with farmers to restructure existing credit relationships or to resolve differences regarding loans and loan commitments. Firstar represents that it employs agricultural specialists to provide individualized attention to borrowers to resolve credit problems, consistent with safe and sound banking practices.
14 One commenter expressed concerns about the lack of branches or proprietary ATMs of Firstar Illinois in Waukegan, Illinois, and certain surrounding portions of Lake County, Illinois. Firstar represents that, although it does not maintain any branches or ATMs in Lake County, Firstar's subsidiaries provide financial assistance to, or engage in community development activities in conjunction with, a variety of community-based organizations operating in Lake County. The Board also notes that, under the CRA, an institution is evaluated on the basis of its record of serving the credit needs of its community, including areas in which the institution maintains an office, a branch or a deposit-taking ATM, as well as the surrounding areas in which the institution originates or purchases a substantial portion of its loans. An institution may not define its service community for CRA purposes in a manner that reflects illegal discrimination or excludes LMI geographies. The CRA performance examination of Firstar Illinois determined that the bank did not exclude any area from its delineated service community that it could have been reasonably expected to serve. Examiners also concluded that Firstar Illinois maintained branches and facilities in census tracts of all income levels and that the bank provided loan products and services that were similar at all its locations.
15 Firstar currently engages in insurance activities grandfathered under section 4(c)(8)(G) of the BHC Act ( 12 U.S.C. � 1843(c)(8)(G)) ("Exemption G"). Based on the structure of the transaction, the fact that Firstar would be the legal entity surviving the proposed merger, and all the other facts of this case, the Board has determined that Firstar would retain its grandfathered rights to engage in Exemption G activities after consummation of the proposed merger.
16 See 12 C.F.R. 225.28(b)(1), (3), (11)(i), and (14).
17 12 U.S.C. � 1843(c)(8).
18 See, e.g., Banc One Corporation, 84 Federal Reserve Bulletin 553 (1998); First Union Corporation, 84 Federal Reserve Bulletin 489 (1998).
19 Two commenters requested that the Board hold a public meeting or hearing on the proposal. Section 3 of the BHC Act does not require the Board to hold a public hearing on an application unless the appropriate supervisory authority for the bank to be acquired makes a timely written recommendation of denial. The Board has not received such a recommendation from the appropriate supervisory authorities. The Board's regulations provide for a hearing under section 4 of the BHC Act if there are disputed issues of material fact that cannot be resolved in some other manner. See 12 C.F.R. 225.25(a)(2).
Under its rules, the Board also may, in its discretion, hold a public meeting or hearing on an application to acquire a bank if a meeting or hearing is necessary or appropriate to clarify factual issues related to the application and to provide an opportunity for testimony. 12 C.F.R. 225.16(e). The Board has carefully considered the commenters' requests in light of all the facts of record. In the Board's view, commenters have had ample opportunity to submit their views, and, in fact, have submitted written comments that have been carefully considered by the Board in acting on the proposal. The commenters' requests fail to identify disputed issues of fact that are material to the Board's decision that may be clarified by a public meeting or hearing. The commenters also fail to indicate why a public meeting or hearing is necessary for the proper presentation or consideration of their views. As noted above, commenters have provided substantial written comments, which have been carefully considered by the Board. For these reasons, and based on all the facts of record, the Board has determined that a public meeting or hearing is not required or warranted in this case. Accordingly, the requests are hereby denied.
20 Commenters requested that the Board delay action on the proposal, extend the public comment period, or deny the proposal until (i) a pending CRA examination of Firstar Illinois is completed and the public has an opportunity to review the results of this examination; (ii) the Board investigates Firstar's treatment of LMI borrowers; (iii) the Board investigates Firstar's lending practices on certain Native American reservations; and (iv) Firstar and SBC provide additional information on their CRA plans and programs or respond to specific allegations or concerns raised by the commenters.
The requests for delay do not warrant postponement of the Board's consideration of the proposal. The Board has accumulated a significant record in this case, including reports of examination, supervisory information, public reports and information, and public comment. As noted above, in the Board's view, the commenters have had ample opportunity to submit their views and, in fact, have provided substantial written submissions that have been considered carefully by the Board in acting on the proposal. Based on a review of all the facts of record, the Board concludes that the record in this case is sufficient to warrant Board consideration and action on the proposal at this time, and further delay of consideration of the proposal, an extension of the comment period, or denial of the proposal on the grounds discussed above or on the basis of informational insufficiency is not warranted.
21 Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Meyer, Ferguson, and Gramlich. Absent and not voting: Governor Kelley.
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1998 Orders on banking applications