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ORDERS ISSUED UNDER BANK HOLDING COMPANY ACT.

Orders Issued Under Section 3 of the Bank Holding Company Act

Citigroup Inc. New York, New York

Citigroup Holdings Company Wilmington, Delaware

Citicorp New York, New York

Order Approving Acquisition of a Bank

Citigroup Inc., Citigroup Holdings Company, and Citicorp, financial holding companies within the meaning of the Bank Holding Company Act ("BHC Act") (together, "Citigroup"), have applied under section 3 of the BHC Act (12 U.S.C. [sections] 1842) to acquire indirectly all the voting shares of European American Bank, Uniondale, New York ("EAB"). EAB is a wholly owned subsidiary of ABN AMRO, Amsterdam, The Netherlands. The proposed transaction is primarily a merger of EAB with and into Citibank, N.A., New York, New York ("Citibank NA"), a wholly owned subsidiary of Citigroup, with Citibank NA as the surviving entity.(1) As a merger of banks, the transaction is subject to review by the Office of the Comptroller of the Currency ("OCC") under the Bank Merger Act (12 U.S.C. [sections] 1828(c)). The OCC has completed its review under that Act and has today approved the merger based on its review of essentially the same standards as the Board is required to review under the BHC Act.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (66 Federal Register 13,927 (2001)). 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 section 3 of the BHC Act.

Citigroup, with total consolidated assets of $902.2 billion, is the largest commercial banking organization in the United States, controlling approximately 3.9 percent of the total assets of insured commercial banks in the United States, and is one of the largest commercial banking organizations in the world.(2) Citigroup operates the second largest depository organization in New York, with $53.6 billion in deposits, representing approximately 12.2 percent of total deposits in insured depository institutions in the state ("state deposits").(3) Citigroup also operates depository institutions in California, Connecticut, Delaware, Florida, Georgia, Illinois, Maryland, Nevada, New Jersey, South Dakota, Texas, Utah, Virginia, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands.

EAB operates only in New York and is the 11th largest depository institution in the state, with $10.9 billion in deposits, representing approximately 2.5 percent of state deposits. After consummation of the proposal, Citigroup would remain the second largest depository organization in New York, with $64.5 billion in deposits, representing approximately 14.6 percent of state deposits. Citigroup also would remain the largest commercial banking organization in the United States.(4)

Factors Governing Board Review of Bank Acquisition

The BHC Act sets forth the factors that the Board must consider when reviewing the formation of bank holding companies or the acquisition of banks. These factors are the competitive effects of the proposal in the relevant geographic markets; the convenience and needs of the community to be served, including the records of performance of the insured depository institutions involved in the transaction under the Community Reinvestment Act ("CRA");(5) the financial and managerial resources and future prospects of the companies and banks involved in the proposal; and the availability of information needed to determine and enforce compliance with the BHC Act and other applicable federal banking laws.(6)

The Board has considered these factors in light of a record that includes information provided by Citigroup, confidential supervisory and examination information, publicly reported financial and other information, and public comments submitted on the proposal.

Competitive Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or be in furtherance of a monopoly. The BHC Act also prohibits the Board from approving a proposal that would substantially lessen competition in any relevant banking market unless the anticompetitive effects of the proposal in that banking market are clearly outweighed in the public interest by the probable effects of the proposal in meeting the convenience and needs of the community to be served.(7)

Citigroup and EAB compete directly in the Metropolitan New York/New Jersey banking market ("New York banking market").(8) The Board has reviewed carefully the competitive effects of the proposal in the New York banking market in light of all the facts of record, including the number of competitors that would remain in the market, the relative shares of total deposits in depository institutions in the market ("market deposits") controlled by Citigroup and EAB,(9) the concentration level of market deposits and the increase in this level as measured by the Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"),(10) and other characteristics of the market.

Citigroup operates the second largest depository organization in the New York banking market, controlling market deposits of $51.4 billion, representing approximately 11 percent of market deposits. EAB is the eighth largest depository organization in the market, with deposits of $10.9 billion, representing approximately 2.3 percent of market deposits. On consummation of the proposal, Citigroup would continue to operate the second largest depository organization in the market, controlling deposits of $62.3 billion, representing approximately 13.4 percent of market deposits. The HHI for the market would increase 52 points to 931. The New York banking market would remain unconcentrated after consummation of the proposal, with numerous competitors in the market.

The Department of Justice has reviewed the proposal and advised the Board that consummation of the proposal would not likely have any significantly adverse competitive effects in the New York banking market or any other relevant banking market. The OCC has reviewed the competitive factors as part of its analysis under the Bank Merger Act and has approved the transaction. The Federal Deposit Insurance Corporation ("FDIC") has been provided an opportunity to comment and has not objected to the proposal.

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 likely result in a significantly adverse effect on competition or on the concentration of banking resources in the New York banking market or in any other relevant banking market.

Convenience and Needs Factor

In acting on a proposal under section 3 of the BHC Act, the Board is required to consider the effect of the proposal on the convenience and needs of the communities to be served and take into account the records of the relevant depository institutions under the CRA. The purpose of the CRA is to require the federal financial supervisory agencies to encourage insured depository institutions to help meet the credit needs of local communities in which they operate, consistent with safe and sound operation. Accordingly, the CRA requires the appropriate federal supervisory agency to take into account an institution's record of meeting the credit needs of its entire community, including low- and moderate-income ("LMI") neighborhoods, in evaluating bank expansion proposals. The Board has carefully considered the convenience and needs and the CRA performance records of Citigroup's subsidiary depository institutions and EAB in light of all the facts of record, including comments received on the effect the proposal would have on the communities to be served by the combined bank.

A. Summary of Public Comments

Eleven commenters responded to the Board's request for public comment on this proposal. These commenters opposed the proposal, requested that the Board approve the proposal subject to conditions suggested by the commenter, or expressed concerns about the record of Citigroup in meeting the convenience and needs of the communities it serves.(11) The commenters generally criticized Citigroup's record of home mortgage lending to LMI and minority residents and in LMI communities and communities with predominantly minority populations ("minority communities"). Some commenters asserted that Citigroup had low levels of home purchase mortgage lending to LMI or minority residents or in LMI or minority communities. Several commenters alleged or expressed concern that data submitted under the Home Mortgage Disclosure Act ("HMDA")(12) demonstrated that Citigroup engaged in disparate treatment of LMI or minority individuals in several areas in the United States, including New York, New York, and Los Angeles, Oakland, San Diego, and San Jose, California.(13) As discussed in more detail below, commenters criticized the lending and credit insurance practices of Citigroup's subprime lending subsidiaries, particularly those of Associates First Capital Corporation and its subsidiaries (collectively, "Associates").(14)

A commenter also criticized Citigroup's level of community development lending and investment activities in New York City as being too low, especially when compared with other banking institutions in the area. In addition, several commenters expressed concern that the proposal would result in branch closings that would adversely impact LMI and minority communities. A commenter also expressed concern about the possible termination or reduction of EAB's affordable housing and community development products and programs.

B. CRA Performance Examinations

As provided in the CRA, the Board has evaluated the convenience and needs factor in light of examinations by the appropriate federal supervisors of the CRA performance records of the relevant depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisors.(15) Citibank NA, the lead depository institution of Citigroup, received a "satisfactory" rating at its most recent CRA performance examination by the OCC, as of October 26, 1998 ("1998 CRA Evaluation"). The other subsidiary depository institutions of Citigroup, with one exception discussed below, received "outstanding" or "satisfactory" ratings at their most recent CRA performance examinations.(16) EAB received a "satisfactory" rating from the Federal Reserve Bank of New York, as of October 2, 2000.

Associates National Bank (Delaware), Wilmington, Delaware ("Associates Delaware"), a limited-purpose bank that engages only in credit card operations and represents less than 1 percent of the consolidated assets of Citigroup, received a "needs to improve" rating from the OCC, as of May 30, 1997, before Citigroup acquired the bank as part of its acquisition of Associates in November 2000.(17) As discussed in more detail below, the Board has carefully reviewed the steps taken by Associates Delaware and those taken by Citigroup since it acquired the bank to correct the deficiencies noted in the examination and has consulted with the OCC, the appropriate federal supervisor of Associates Delaware. Examiners found no evidence of prohibited discrimination or other illegal credit practices, or any substantive violations of fair lending laws at any of the other subsidiary insured depository institutions of Citigroup or EAB.

As discussed in more detail below, the Board has carefully considered the fair lending policies and procedures of Citigroup and all its affiliates, including Associates Delaware.(18) The Board also has evaluated substantial information submitted by Citigroup concerning the CRA performance of its subsidiary insured depository institutions since the dates of their most recent CRA performance evaluations. In addition, the Board has consulted with the OCC and has considered confidential supervisory information regarding Citigroup's CRA performance provided by the OCC.

C. CRA Performance Record of Citigroup

As noted above, Citigroup proposes to merge EAB into Citibank NA, with Citibank NA as the surviving entity. Accordingly, the branches and operations of EAB would become subject to the CRA policies of Citigroup and Citibank NA. Citigroup has represented that it would continue six of the major affordable mortgage programs of EAB and incorporate five of its other major affordable mortgage programs into existing programs of Citibank NA. In addition, Citigroup has represented that it would honor community development loan commitments made by EAB and pursue new community development loans that are currently under consideration by EAB.

Citibank NA. In the 1998 CRA Evaluation, examiners rated Citibank NA's lending activity as "high satisfactory" and found that the bank's community development activity substantially augmented its lending activity in the assessment areas in New York.(19) Examiners indicated that the overall record of lending of Citibank NA and, specifically, its home mortgage and small business lending were adequate for the size and complexity of the bank.(20) Citibank NA made $2.6 billion in HMDA-reportable loans during the review period,(21) which included $1.9 billion in home purchase loans, representing 71 percent of Citibank NA's total residential lending. Examiners commended Citibank NA for increasing the number of HMDA-reportable loans in the New York assessment area by more than 225 percent from October 1997 to October 1998.(22)

Citigroup stated that, in 1999, Citibank NA and its affiliates, CitiMortgage, Inc. ("CitiMortgage") and Source One Mortgage Corporation ("Source One"), made home purchase loans totaling $544 million in the New York assessment area, including loans totaling $18 million in LMI census tracts and loans totaling $18 million to LMI households.(23) Citigroup reported that the overall home purchase lending of Citibank NA, CitiMortgage, and Source One increased to $847 million in the New York assessment area in 2000, including loans totaling $28 million to borrowers in LMI census tracts and loans totaling $21 million to LMI households.(24)

Citibank NA offers a variety of loan products and programs designed to meet the credit needs of LMI individuals and communities through reduced interest rates, low down payment requirements, or flexible underwriting criteria. These affordable mortgage products include proprietary loan products and various products and programs of the Federal National Mortgage Association ("FNMA"), the State of New York Mortgage Agency ("SONYMA"), and other organizations.(25) Citigroup reported that Citibank NA and CitiMortgage made loans in the New York assessment area totaling more than $100 million through these affordable mortgage products and programs in 1999 and 2000,(26) including more than $62 million in affordable mortgage loans in the New York assessment area under programs of FNMA, the Federal Home Loan Mortgage Corporation, SONYMA, the Neighborhood Housing Services, and the New York City Housing Partnership. Other examples of Citigroup's affordable mortgage programs include the Mitchell Lama and Limited Equity Co-Ops loan program, which provides reduced interest rate loans to LMI borrowers for the purchase of cooperatives, and the Budget and Credit Counseling program, which provides home purchase financing to individuals who have undergone a rigorous program to improve their credit rating. Citigroup represented that Citibank NA and CitiMortgage made approximately 450 loans totaling more than $22 million under these two programs during 1999 and 2000.

In the 1998 CRA Evaluation, examiners concluded that Citibank NA had a good distribution of business loans with a principal amount of less than $1 million ("small business loans") to businesses of different sizes, particularly to businesses with revenues of $1 million or less, in the New York assessment area during the review period. Examiners reported that Citibank NA made 41 percent of its small business loans in the New York City PMSA to businesses with revenues of $1 million or less.

Citigroup represented that more than 55 percent of Citibank NA's small business loans in the New York City PMSA were made to businesses with revenues of $1 million or less in each of 1999 and 2000. In addition, Citigroup stated that it offers various outreach programs designed to provide loans and other assistance to small businesses in the New York assessment area, including the CitiBusiness Resource Network, which provides business and consulting services to small businesses and refers small businesses to third parties that provide their services at reduced rates to businesses in the Network program.

In the 1998 CRA Evaluation, examiners found that Citibank NA engaged in a high level of community development lending activity during the review period through its affiliate, Citibank Community Development ("CCD"), which compared very favorably with that activity by other lenders. Examiners reported that CCD made community development loans totaling more than $200 million in the New York assessment area during the review period. Approximately 82 percent were community development loans in the New York City PMSA. Examiners noted that CCD's community development lending had resulted in the creation of more than 14,000 units of affordable housing for LMI individuals.

Citigroup stated that, since the 1998 CRA Evaluation, it has made more than 200 community development loans totaling more than $240 million in the New York assessment area.(27) This community development lending includes $15 million in loans to assist in the rehabilitation of more than 12,000 housing units in the Northeast Bronx, $14.3 million in loans to a community-based corporation organized for the development and management of five buildings in the Bronx for low-income individuals, and $43 million in loans to the New York Equity Fund, a syndicator of low-income housing tax credits in New York.

In the 1998 CRA Evaluation, examiners concluded that Citibank NA had an excellent level of CRA-qualified investments that compared favorably with other lenders and responded positively to community needs. Examiners favorably noted that Citibank NA made approximately $115 million in CRA-qualified investments during the review period, including investments totaling $88 million in the New York assessment area. Examiners also noted that 59 percent of these CRA-qualified investments in the New York assessment area promoted affordable housing. In addition, examiners commended Citibank NA for making $6.9 million in qualified grants and contributions during the review period.

Citigroup represented that it has made more than $200 million in CRA-qualified investments and $29 million in grants to organizations in New York State since the 1998 CRA Evaluation. These grants and investments were used to promote affordable housing, small businesses and economic development, and other community development projects.(28)

Examiners indicated that Citibank NA is a leader in the development and use of technology, and that the bank's branching and other alternative delivery systems provided good access to all customers, including those in LMI areas. Examiners commended the bank for providing community development services in all its assessment areas. In addition, examiners commended the bank for providing credit counseling, educational seminars, individual consultations, and other educational programs for prospective homebuyers and other retail customers.

Citibank FSB

Overview. As previously noted, Citibank FSB received an "outstanding" CRA performance rating from the OTS in its 1999 CRA performance evaluation ("1999 CRA Evaluation"). Examiners strongly commended the savings association for its lending performance in all its assessment areas during the review period.(29) Examiners reported that Citibank FSB made more than 25 percent of its total HMDA-reportable loans in its combined nationwide assessment areas in LMI census tracts during the review period. Examiners noted that this percentage exceeded the percentage of total owner-occupied housing units in LMI census tracts in its combined assessment areas and the percentage level of total HMDA-reportable loans made by the aggregate of lenders ("aggregate lenders") in these LMI census tracts in 1997.(30) Examiners also noted that Citibank FSB offered a variety of home mortgage products and programs designed to meet the needs of first-time homebuyers and LMI borrowers, including programs offering reduced closing costs and down payment requirements and flexible underwriting standards.

In addition, examiners commended Citibank FSB for the variety of small business loan programs it provided and noted that the geographic distribution of its small business lending in low-income areas was generally favorable. Examiners also indicated that the savings association ranked first in small business loan originations (based on dollar amount) among savings associations nationwide and 12th in small business lending among all banks and savings associations in its combined assessment areas.

In the 1999 CRA Evaluation, examiners determined that Citibank FSB's overall community development lending was excellent. The examiners favorably noted that the savings association engaged in a variety of community development lending activities, including multifamily home mortgage lending that provided housing for LMI families and lending to community development organizations that focused on affordable housing programs and the stabilization or revitalization of economically distressed areas. Citibank FSB originated community development loans totaling more than $365 million during the review period.

Examiners also commended Citibank FSB for its community development investment program, which focused on providing equity investments for affordable housing, improving liquidity in the market for affordable mortgages, and strengthening community development financial institutions. During the review period, Citibank FSB doubled the amount of its CRA-qualified investments to approximately $63 million. Examiners also commended the savings association for making almost $5 million in community development grants during the review period.

In addition, examiners commended Citibank FSB for offering an extensive number of alternative systems for delivering retail banking services in LMI areas. Examiners also indicated that Citibank FSB provided an exceptional level of community development services, including educational seminars for LMI individuals, first-time homebuyers, and small business owners.

California. In the 1999 CRA Evaluation, examiners indicated that Citibank FSB had a strong overall record of lending in California during the review period. Examiners also found that the savings association's HMDA-reportable loans to LMI borrowers showed strong increases each year during the review period. For example, the percentage of Citibank FSB's total number of HMDA-reportable loans to LMI borrowers almost tripled to 33 percent from the beginning of 1996 and through the first quarter of 1999.(31)

Examiners indicated that the geographic distribution of Citibank FSB's small business loans in low-income census tracts compared favorably with the number of small businesses in these census tracts. Examiners also noted that Citibank FSB offered a diverse array of products to address short- and long-term financing needs of small businesses in California. In addition, examiners commended the savings association for creating a pilot small business program called Capital Access that provided loans to creditworthy, underserved small businesses, such as high technology businesses, growth businesses, export businesses, and businesses owned by minorities, women, and veterans. Examiners also noted that Citibank FSB actively promoted small businesses through workshops and seminars for small business owners, and that the savings association had an active Small Business Administration loan program in California.(32)

In the 1999 CRA Evaluation, examiners determined that Citibank FSB's community development loans in California, which totaled more than $63 million, represented an excellent volume of community development lending. Examiners also commended the savings association for making CRA-qualified investments totaling more than $21 million during the review period.

In addition, examiners noted favorably that Citibank FSB delivered retail banking services throughout its assessment areas in California through its branch network, a large network of ATMs, and the alternative delivery systems discussed above. Examiners also indicated that Citibank FSB offered a wide range of deposit and loan products at all its branches, including a low-cost checking account.(33)

D. CRA Performance Record of EAB

As noted above, EAB received a "satisfactory" rating for CRA performance from the Federal Reserve Bank of New York, as of October 2, 2000. Examiners rated EAB's performance under the lending test during the review period(34) as "high satisfactory," and commended EAB's loan volume and general responsiveness to the credit needs in the bank's assessment areas. For example, examiners found that EAB and its mortgage lending affiliate (collectively, "EAB") originated or purchased HMDA-reportable loans totaling approximately $1.3 billion during the review period.

In addition, examiners noted that EAB's overall geographic distribution of its housing-related and small business loans reflected good loan penetration throughout the LMI census tracts of its assessment areas, and they commended the bank's distribution of lending to customers of different income levels.(35) In particular, examiners commended EAB's geographic distribution of multifamily loans, which enhanced the distribution of the bank's other HMDA-reportable loans. Examiners found that the impact of EAB's multifamily loans was most important in its New York City assessment area, where examiners indicated that 69 percent of occupied housing units were rentals.

Examiners reported that EAB's small business loans reflected a good distribution among various income-level geographies. In its New York City assessment area, the bank originated 27 percent of its small business loans in LMI census tracts during the review period. This exceeded the percentage level achieved by the aggregate lenders, which originated an average of 25 percent of their loans in LMI census tracts. Eleven percent of EAB's small business loans in the Long Island PMSA were originated in LMI census tracts during the review period, which was only slightly less than the percentage level of the aggregate lenders. Examiners also noted that the majority of EAB's small business loans in its assessment areas were for amounts of $100,000 or less.

In addition, examiners commended EAB for its excellent level of community development lending. During the review period, the bank's community development loan commitments totaled $241 million, of which $135 million was for affordable housing initiatives, which examiners identified as a pressing need in both of the bank's assessment areas. In the New York City assessment area, $110 million of EAB's community development loans were directed toward affordable rental housing initiatives. Examiners noted that EAB's community development lending in the Long Island PMSA provided for the construction or rehabilitation of almost 300 affordable housing units, including some designed for the developmentally disabled and senior citizens.

Examiners rated EAB's performance under the investment test as "high satisfactory." Examiners reported that EAB's CRA- qualified investments during the review period totaled $10.5 million, consisting primarily of complex low-income housing tax credits that help provide affordable rental housing. EAB's investments included $6 million directed toward affordable housing initiatives, $3.3 million directed toward community service investments, and $1.2 million directed toward economic development initiatives.

E. Subprime Lending of Citigroup

As discussed above, several commenters criticized the lending and credit insurance practices of Citigroup's subprime lending subsidiaries, particularly those of Associates, which Citigroup acquired in November 2000. The commenters asserted that these entities are engaged in certain abusive lending practices, commonly referred to as "predatory lending," that are harmful to LMI and minority borrowers.(36) Several commenters requested that the Board deny the application in light of the recent lawsuit filed by the Federal Trade Commission ("FTC") against Associates and Citigroup, as the successor owner of Associates, or delay action on the proposal until this lawsuit and other consumer lawsuits concerning the lending and credit insurance sales activities of Associates and Citigroup are resolved.(37) The consumer protection claims in the FTC's lawsuit allege that Associates, before its acquisition by Citigroup in November 2000, engaged in abusive lending practices and lending law violations. There has been no adjudication of wrongdoing or injunctive action taken against Citigroup or any of its affiliates in connection with the FTC lawsuit.

Some commenters also asserted that Citigroup's other subprime lender affiliates, such as CitiFinancial Credit Company ("CitiFinancial"), engage in many of the same lending practices as Associates.(38) Commenters asserted that Citigroup has failed to correct these practices at Associates, CitiFinancial, and its other subprime lender affiliates.(39) Some commenters also contended, based in part on HMDA data, that Citigroup improperly markets higher-cost subprime loan products to minority and LMI communities while it markets lower-cost prime loan products to nonminority and more affluent communities.(40) In addition, several commenters alleged that Citigroup has indirectly supported predatory lending through its business relationships with unaffiliated third parties engaged in subprime lending.(41)

The Board notes that subprime lending is a permissible activity and provides needed credit to consumers who have difficulty meeting conventional underwriting criteria. An analysis of urban metropolitan data submitted under HMDA indicates that LMI and minority consumers, who traditionally have experienced difficulty in obtaining mortgage credit, have obtained loans at record levels in recent years.(42) Much of this increased lending can be attributed to the development of the subprime loan market.

The Board recognizes that the development of the subprime loan market has been marred with reports of abusive and deceptive practices that can deny the market's beneficial aspects to borrowers. Identifying the lending practices that can be considered "predatory" covers a potentially broad range of behavior and does not lend itself to a concise or comprehensive definition. Predatory lending generally entails either fraud or the misuse of loan provisions that might under ordinary circumstances enhance the credit market. A loan is not "predatory" simply because it is made at a high interest rate or involves high costs.(43)

Borrowers do not benefit from expanded access to credit if the credit involves abusive lending practices. Accordingly, the Board expects bank holding companies and their affiliates to conduct their subprime lending operations free of any abusive lending practices.

In reviewing the convenience and needs factor in this proposal, the Board has carefully considered the record of lending of Citigroup's affiliates, including those engaged in subprime lending, in light of all the comments received. The Board has reviewed the subprime loan products offered by Citigroup and the underwriting and compliance policies and procedures adopted by Citigroup and each of its subprime lending affiliates. The Board also has carefully reviewed the actions Citigroup has taken and is in the process of implementing to address concerns about the lending practices of Associates before its acquisition and to strengthen consumer protections in connection with the real estate-secured lending activities of CitiFinancial, CitiMortgage, and Citigroup's other affiliates that engage in subprime lending.(44) In addition, the Board has consulted with each federal supervisory agency responsible for the oversight of Citigroup's subprime lending affiliates.

In January 2001, the network of retail branches of Associates were transferred to CitiFinancial and the former Associates consumer finance businesses in the United States and Canada became subject to the underwriting and compliance policies, procedures, and programs of Citigroup and CitiFinancial.(45) CitiFinancial and Citigroup's other subsidiaries that engage in subprime lending have underwriting policies and procedures designed to prevent abusive lending practices, which include requiring all real estate-secured loan applications to be evaluated on an applicant's creditworthiness and ability to repay, using credit bureau scoring and proprietary models, and limiting points charged on certain refinanced loans. In addition, the subprime lending affiliates of Citigroup have adopted a number of programs and other policies and procedures, including centralized loan underwriting systems, fair lending self-assessments (including matched-pair analyses), branch and corporate audits, and fair lending and compliance training, that are designed to prevent deceptive and abusive lending practices.

The Board notes that many of the concerns expressed by commenters about the subprime lending activities of Citigroup focus on the historical practices of Associates, which Citigroup acquired in November 2000. In connection with its proposed acquisition of Associates, Citigroup announced in November 2000 consumer protection initiatives that are in the process of being implemented at CitiFinancial (including the former branches of Associates) and certain other affiliates.(46) These initiatives relate to loans secured by real estate in the United States and include enhancing oral and written disclosures to purchasers of credit insurance products concerning the cost, coverage, terms, and cancellation policies of the insurance products offered.(47) In addition, Citigroup affiliates that engage in subprime lending will not originate subprime real estate loans with balloon payments and will not originate or purchase real estate loans with negative amortization features.(48) The initiatives also include plans for a "referral-up" program to be implemented nationwide by the end of 2001 that will refer CitiFinancial loan applicants who meet certain qualification criteria to CitiMortgage for a prime mortgage loan. In addition, Citigroup is implementing a program at CitiFinancial to provide rate reductions to subprime loan borrowers who make timely payments and a graduation program at CitiFinancial and CitiFinancial Mortgage (AHES) that refers qualifying borrowers who have CitiFinancial subprime loans to CitiMortgage for a prime loan product.(49) As part of the initiatives, CitiFinancial also has created a compliance department that reviews pending and potential foreclosures to protect against inappropriate foreclosure proceedings against the borrowers' homes.(50)

Citigroup has adopted comprehensive policies and procedures that are reasonably designed to ensure compliance with the fair lending laws and to prevent abusive lending practices by its holding company affiliates. At the same time, the Board believes that the effective implementation of the initiatives and other consumer protection measures proposed or adopted by Citigroup is particularly important for addressing weaknesses in the historical performance record of Associates' subprime lending. Accordingly, the Board will conduct a thorough examination to assess the effectiveness of that implementation at Citigroup's subprime affiliates, CitiFinancial and CitiFinancial Mortgage (AHES).

To assist the Board in this monitoring and review, Citigroup must submit to the Board quarterly reports on the status of all major litigation involving any of its affiliates engaged in subprime lending activities and Citigroup's compliance with any resulting court orders or court-approved settlements. Citigroup must submit these quarterly reports for two years, or such longer time period as the Board in its sole discretion determines is needed, beginning on September 30, 2001.

If the examination of CitiFinancial or CitiFinancial Mortgage (AHES), including the monitoring of the implementation of the initiatives, indicates a problem with the oversight, procedures, or practices associated with the subprime lending of CitiFinancial or CitiFinancial Mortgage (AHES), the Board has broad supervisory authority under the banking laws to require Citigroup to take any other steps necessary to address deficiencies identified in the examination. The Board will coordinate its examination and monitoring with the other agencies responsible for enforcing laws that are applicable to these matters, including the appropriate banking supervisory agencies. The Board also will consider any information gathered in these reports or the examination in reviewing future proposals by Citigroup, as relevant and appropriate.

F. HMDA Data

The Board also has carefully considered Citigroup's lending record in light of comments on HMDA data reported by its subsidiaries.(51) In 1998 and 1999, Citigroup's lending to African-American and Hispanic individuals and to borrowers in minority census tracts,(52) as a percentage of its total HMDA-reportable lending (which includes home purchase, home improvement, and multifamily residential loans and refinancings), generally exceeded or was comparable to that of the aggregate lenders in many markets.(53) In addition, in 1998 and 1999, Citigroup's lending to LMI borrowers and in LMI census tracts in its assessment areas, as a percentage of the number of Citigroup's total HMDA-reportable loans, generally exceeded or was comparable to that of the aggregate lenders.

The HMDA data for the subcategory of home purchase loans, however, indicate some disparities. The percentages of Citigroup's home purchase loans originated to minorities and to borrowers in minority census tracts in 1998 and 1999 were less than the percentages of the aggregate lenders in several markets. For instance, the number of Citigroup's home purchase loans originated to African-American and Hispanic individuals and to borrowers in minority census tracts, as a percentage of Citigroup's total home purchase loan originations, in the PMSAs of New York City and Los Angeles in 1998 and 1999 generally lagged behind the percentage for the aggregate lenders. The data, however, generally show that Citigroup's home purchase lending to these individuals and communities significantly improved during this time period and substantially exceeded the percentage increases of the aggregate lenders.

Citigroup's percentage of home purchase loans originated to LMI borrowers and in LMI census tracts in 1998 and 1999 also generally were lower than the percentages of the aggregate lenders in many markets. However, the data also show that Citigroup's volume of home purchase loans to LMI borrowers and in LMI census tracts generally increased during this time period.(54)

Importantly, the HMDA data generally do not indicate that Citigroup is excluding any race or income segment of the population or geographic areas on a prohibited basis. The data, however, reflect certain disparities in the rates of loan applications, originations, and denials among members of different racial groups and persons at different income levels generally and in certain local areas. The Board is concerned when the record of an institution indicates disparities in lending and believes that all banks are obligated to ensure that their lending practices are based on criteria that ensure not only safe and sound lending, but also equal access to credit by creditworthy applicants regardless of their race or income level. The Board recognizes, however, that HMDA data alone provide an incomplete measure of an institution's lending in its community because these data cover only a few categories of housing-related lending. HMDA data, moreover, provide only limited information about the covered loans.(55) HMDA data, therefore, have limitations that make them an inadequate basis, absent other information, for concluding that an institution has not assisted adequately in meeting its community's credit needs or has engaged in illegal lending discrimination.

Because of the limitations of HMDA data, the Board has considered these data carefully in light of other information, including examination reports that provide an on-site evaluation of compliance by the subsidiary depository institutions of Citigroup with fair lending laws. As noted above, examiners found no evidence of prohibited discrimination or other illegal credit practices at any of the subsidiary depository institutions controlled by Citigroup.(56) The record also indicates that Citigroup has taken a number of affirmative steps to ensure compliance with fair lending laws. Citigroup has instituted corporate-wide compliance policies and procedures to help ensure compliance with all fair lending and other consumer protection laws and regulations, employed compliance officers and staff charged with monitoring compliance, and conducted regular corporate and branch audits of compliance. Citigroup's housing-related lending subsidiaries have established detailed fair lending procedures in addition to Citigroup's corporate policies and procedures, including extensive fair lending training programs for employees and fair lending self-assessments using matched-pair testing and statistical analyses. CitiMortgage and CitiFinancial also have implemented a "mystery shopping" program administered by a third party to help verify that compliance procedures are followed.

The Board also has considered the HMDA data in light of Citigroup's overall lending and community development activities discussed above, which show that Citigroup's subsidiary banks significantly assist in helping to meet the credit needs of their entire communities, including LMI areas.(57) The Board does not believe that, viewed in light of the entire record, the HMDA data indicate that Citigroup's record of performance in helping to serve the needs of its communities is inconsistent with approval of the proposal.

G. Branch Closings

Several commenters expressed concern about the possible effect of branch closings in Citigroup's New York assessment areas that might result from this proposal. The Board has carefully considered the comments concerning potential branch closings in light of all the facts of record, including the preliminary branch closing and consolidation information submitted by Citigroup, the branch closing policies of Citigroup and EAB, and the record of the two organizations in opening and closing branches. Citigroup has identified 24 branches, including nine EAB branches in supermarkets, that it intends to close or consolidate into nearby branches. None of the 24 branches proposed to be consolidated or closed is in a low-income census tract, and only three are in moderate-income census tracts. These three branches are on Long Island, and an existing branch of Citibank NA or EAB within relatively close proximity to each branch would remain to serve each branch's moderate-income community.(58)

Citigroup has represented that it would follow its existing branch closure policy before closing or consolidating any of the branches. The Board has carefully considered the branch closing policy of Citigroup and its record of opening and closing branches. Under Citigroup's branch closing policy, Citibank must review a number of factors before closing or consolidating a branch, including a profile of the branch, the marketplace demographics, a profile of the community in which the branch is located, and the effect on customers. Also, Citibank's CRA Director and legal/regulatory staff must approve any branch closing, consolidation, or relocation. Examiners have reviewed the branch closing policies and record of opening and closing branches of Citigroup's subsidiary banks under the branch closing policy on several occasions.(59) In the 1998 CRA Evaluation, examiners noted that Citibank NA had not closed any branches in LMI census tracts during the evaluation period. Citigroup represented that, since September 1998, Citibank NA has not closed or consolidated any branches in LMI census tracts.(60)

The Board also has considered that federal banking law provides a specific mechanism for addressing branch closings. Federal law requires an insured depository institution to provide notice to the public and to the appropriate federal supervisory agency before closing a branch.(61) In addition, the Board notes that the OCC, as the appropriate federal supervisor of Citibank NA, will continue to review Citibank NA's branch closing record in the course of conducting CRA performance examinations.

H. Conclusion on Convenience and Needs Consideration

In reviewing the effect of the proposal on the convenience and needs of the communities to be served, the Board has carefully considered the entire record; all the information provided by commenters, Citigroup, and EAB; evaluations of the performance of Citigroup's insured depository institution subsidiaries and EAB under the CRA; and confidential supervisory information.

Based on all the facts of record and for the reasons discussed above, the Board concludes that considerations relating to the convenience and needs factor, including the CRA performance records of the relevant depository institutions, are consistent with approval of the proposal.

Financial and Managerial Considerations

Section 3 of the BHC Act requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in the proposal and certain other supervisory factors. The Board has carefully considered these factors in light of all the facts of record, including public comments, supervisory reports of examination, other confidential supervisory information assessing the financial and managerial resources of the organizations, and other information provided by Citigroup.

In evaluating financial factors in expansion proposals by banking organizations, the Board consistently has considered capital adequacy to be especially important. The proposed acquisition is structured as a cash purchase of EAB's common stock and an exchange of preferred shares. Citigroup would not directly or indirectly incur any debt to finance the proposed transaction. The Board notes that Citigroup and its subsidiary depository institutions and EAB are well capitalized and would remain well capitalized on consummation of the proposal.

The Board also has considered the managerial resources of Citigroup and EAB, the examination reports of the federal financial supervisory agencies that supervise these organizations, including Citigroup's subsidiary depository institutions, and other confidential supervisory information. In addition, the Board has consulted with these federal financial supervisory agencies.

The Board received several comments on the proposal criticizing the managerial resources of Citigroup and its subsidiaries. Several commenters asserted that Citigroup's management has failed to implement effective policies and programs to address alleged abusive sales and lending practices of Citigroup's subsidiaries, including those engaged in subprime lending and insurance activities. These commenters asserted that adverse managerial resources are evidenced by the pending FTC lawsuit against Associates and Citigroup, as its successor owner, and by consumer lawsuits and complaints filed against Associates and other Citigroup affiliates.(62)

After reviewing all the facts of record, the Board concludes that Citigroup and its subsidiary depository institutions and EAB are well managed and have appropriate risk management systems in place.(63) In reaching this conclusion, the Board has considered the supervisory experience and assessments of management by the various bank supervisory agencies, Citigroup's efforts to address supervisory and other concerns about the operation and management of the organization, management's due diligence efforts and record of integrating other organizations, and the organization's record of compliance with applicable banking law. As previously discussed, the Board has reviewed the compliance policies and procedures of Citigroup and its subsidiaries, including those engaged in subprime lending, and consulted with the appropriate federal supervisory agencies and state supervisors.(64) Based on these and all other facts of record, the Board concludes that the financial and managerial resources and the future prospects of Citigroup and its subsidiary depository institutions and EAB are consistent with approval, as are the other supervisory factors the Board must consider under section 3 of the BHC Act.

Conclusion

Based on the foregoing and in light of all the facts of record, the Board has determined that the application should be, and hereby is, approved.(65) In reaching its conclusion, the Board has considered all the facts of record in light of the factors that it is required to consider under the BHC Act and other applicable statutes.(66) The Board's approval is specifically conditioned on compliance by Citigroup with all the representations and commitments made in connection with the application, the conditions described or referenced in this order, and on the receipt by Citigroup of all necessary regulatory approvals. These representations, commitments, and conditions are deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

The acquisition of EAB may not be consummated before the fifteenth calendar day after the effective date of this order, and the proposal may 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 Federal Reserve Bank of New York, acting pursuant to delegated authority.

By order of the Board of Governors, effective July 2, 2001.

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

(1.) Under the proposal, Citibank NA would acquire 100 percent of the voting shares of EAB for a moment in time and, immediately after acquiring the shares, merge EAB with and into Citibank NA.

(2.) Asset and U.S. ranking data are as of December 31, 2000.

(3.) In this context, depository institutions include commercial banks, savings banks, and savings associations. Deposit and state ranking data are as of June 30, 2000.

(4.) In connection with the proposed bank merger, EAB's branch in The Bahamas will be merged into Citibank NA's existing branch in The Bahamas.

(5.) 12 U.S.C. [sections] 2901 et seq.

(6.) See 12 U.S.C. [sections] 1842(c). The BHC Act requires review of additional factors in cases involving the acquisition of a bank by a foreign bank.

(7.) See 12 U.S.C. [sections] 1842(c).

(8.) The New York banking market is defined as New York City; Nassau, Orange, Putnam, Rockland, Suffolk, Sullivan, and Westchester Counties in New York; Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset, Sussex, Union, Warren, and a portion of Mercer Counties in New Jersey; Pike County in Pennsylvania; and portions of Fairfield and Litchfield Counties in Connecticut.

(9.) Market share data are as of June 30, 2000, adjusted to reflect mergers since that date, and are based on calculations that include the deposits of thrift institutions (savings banks and savings associations) weighted at 50 percent. The Board has indicated previously 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 52 (1991).

(10.) Under the DOJ Guidelines, 49 Federal Register 26,823 (June 29, 1984), a market is considered unconcentrated if the post-merger HHI is below 1000. 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 increases the HHI by more than 200 points. The Department of Justice has stated that the higher than normal HHI thresholds for screening bank mergers for anticompetitive effects implicitly recognize the competitive effects of limited-purpose lenders and other nondepository financial institutions.

(11.) Several commenters requested that Citigroup provide certain commitments and answer certain questions, or that the Board impose specific conditions or take specific actions, particularly with respect to the subprime lending activities of Citigroup's affiliates. A commenter also criticized the CRA-related pledge that Travelers Group Inc. ("Travelers") and Citicorp made in connection with their merger in 1998 as being vague and ineffective. Another commenter alleged that Citigroup's senior management had declined requests for meetings with some community groups. The Board notes that the CRA requires that, in considering an acquisition proposal, the Board carefully review the actual performance records of the relevant depository institutions in helping to meet the credit needs of their communities. Neither the CRA nor the federal banking agencies' CRA regulations require depository institutions to make pledges concerning future performance under the CRA, confer authority on the agencies to enforce pledges made to third parties, or require depository institutions to meet with particular persons. The Board also notes that future activities of Citigroup's subsidiary depository institutions will be reviewed by the appropriate federal supervisors in future performance examinations, and that their CRA performance records will be considered by the Board in any subsequent applications by Citigroup to acquire a depository institution.

(12.) 12 U.S.C. [sections] 2801 et seq.

(13.) A commenter asserted that Citigroup has discriminated in providing homeowners insurance by citing a complaint that was filed against Travelers in 1997. The Board considered a substantially identical comment in the proposed acquisition of Citicorp by Travelers. Travelers Group Inc., 84 Federal Reserve Bulletin 985, 1001 n.66 (1998) ("Travelers"). As noted in Travelers, the Fair Housing Council of Greater Washington and the National Fair Housing Alliance filed complaints with the Department of Housing and Urban Development ("HUD") in 1997, alleging that Travelers and other insurance companies systematically violated the Fair Housing Act in four cities, including Washington, D.C. Travelers denied the allegations of discrimination in these complaints, and there has been no adjudication of wrongdoing by HUD.

(14.) One commenter asserted that Citigroup should include in its CRA assessment areas those offices of Citigroup's subsidiaries engaged in the sale of insurance products where such products are cross-marketed with the bank products of Citigroup's subsidiary depository institutions. The regulations promulgated by the bank supervisory agencies require that a bank delineate its CRA assessment area based on the geographies in which the bank has offices, branches, and deposit-taking ATMs, as well as surrounding geographies in which the bank has originated or purchased a substantial portion of its loans. See, e.g., 12 C.F.R. 228.41(c). There is no requirement that a bank's CRA assessment area include geographies in which nonbank affiliates are located.

(15.) See Interagency Questions and Answers Regarding Community Reinvestment, 65 Federal Register 25,088 and 25,107 (2000).

(16.) Citibank (New York State), Pittsford, New York ("Citibank NYS"), received an "outstanding" rating from the FDIC, as of March 6, 2000; Citibank Delaware, New Castle, Delaware, received a "satisfactory" rating from the FDIC, as of May 15, 2000; Citibank (Nevada), N.A., Las Vegas, Nevada ("Citibank Nevada"), received an "outstanding" rating from the OCC, as of March 29, 1999; Citibank (South Dakota), N.A., received an "outstanding" rating from the OCC, as of May 24, 1999; Citibank Federal Savings Bank, Long Island City, New York ("Citibank FSB"), received an "outstanding" rating from the Office of Thrift Supervision ("OTS"), as of July 12, 1999; Travelers Bank and Trust, fsb, Newark, Delaware, received an "outstanding" rating from the OTS, as of February 5, 2001; Universal Bank, N.A., Columbus, Georgia, received a "satisfactory" rating from the OCC, as of February 22, 1999; Citibank USA (formerly The Travelers Bank USA), Newark, Delaware, received an "outstanding" rating from the FDIC, as of March 15, 1999; Universal Financial Corporation, Salt Lake City, Utah, received a "satisfactory" rating from the FDIC, as of March 31, 1999; Associates Capital Bank, Inc., Salt Lake City, Utah, received an "outstanding" rating from the FDIC, as of September 27, 1999; and Hurley State Bank, Sioux Falls, South Dakota, received a "satisfactory" rating from the FDIC, as of April 19, 1999.

(17.) Several commenters asserted that the Board should deny the proposal on the basis of the "needs to improve" CRA rating of Associates Delaware. These commenters cited previous Board actions denying applications of bank holding companies with subsidiary banks with less than satisfactory CRA ratings. See e.g., Totalbank Corporation of Florida, 81 Federal Reserve Bulletin 876 (1995); First Interstate BancSystem of Montana, Inc., 77 Federal Reserve Bulletin 1007 (1991). In these actions, the subsidiary banks with less than satisfactory CRA performance ratings were controlled by the applicants at the time the ratings were assigned and represented a significant portion of or all of the depository institutions controlled by the applicant. The Board has approved an application of a bank holding company that had a few subsidiary banks with less than satisfactory CRA ratings on the basis that the bank subsidiaries represented a small percentage of the organization's assets, the organization had taken concrete steps to address the banks' CRA deficiencies, and the problems did not indicate chronic CRA deficiencies at the organization. Sun Trust Banks, Inc., 76 Federal Reserve Bulletin 542 (1990). In addition to representing less than 1 percent of Citigroup's consolidated assets, Associates Delaware received its "needs to improve" rating before it was acquired by Citigroup. Moreover, examiners stated in the CRA performance evaluation that the bank had completed a majority of the corrective actions that it had initiated to address examiner concerns identified during a fair lending examination of the bank that was conducted concurrently with the CRA examination. Examiners also noted that Associates Delaware was taking steps to strengthen policies, procedures, training programs, and internal assessment efforts to prevent illegal discriminatory credit practices.

(18.) A commenter disagreed with regulations promulgated by the Board that permit Citigroup, as a financial holding company (as defined in section 4 of the BHC Act), to continue to engage in expanded financial activities that are permissible for financial holding companies while Associates Delaware has a less than satisfactory CRA performance rating. As noted above, Associates Delaware received its CRA rating before its acquisition by Citigroup. Under the Board's regulations, Citigroup would become subject to activity restrictions if Associates Delaware does not receive at least a satisfactory rating at its next CRA examination. See Federal Reserve System, 66 Federal Register 400, 404 (2001). As required in the regulations, Citigroup submitted to the OCC a corrective action plan outlining the steps that are necessary for the bank to achieve at least a "satisfactory" rating at its next CRA examination. See id. at 402 and 416 (to be codified at 12 C.F.R. 225.82(d)).

(19.) The assessment areas of Citibank NA in New York included the New York City Primary Metropolitan Statistical Area ("PMSA"), excluding Putnam County (the "New York City PMSA"), and the Nassau-Suffolk County, New York, PMSA (the "Long Island PMSA") (collectively, the "New York assessment area"). Examiners noted that the median cost of housing in the New York City PMSA was very high compared with median family incomes, particularly in Manhattan, the Bronx, and Brooklyn. Examiners indicated that only 5 percent of all owner-occupied units in the New York City PMSA were in low-income census tracts, resulting in a high demand for affordable rental housing. Examiners commended Citibank NA for responding to this demand with investments in city housing and community development funds.

(20.) Several commenters asserted that Citigroup's competitors, including EAB, have stronger lending records in the New York assessment area than Citigroup's record.

(21.) The review period was from October 4, 1996, to October 26, 1998. The HMDA data reviewed by examiners included data reported by Citibank NA and Citicorp Mortgage (renamed CitiMortgage), which became a subsidiary of Citibank NA during the review period.

(22.) Examiners attributed this increase to an increase in home improvement loans by Citibank NA. Citigroup has represented that the home improvement loans were made under a home improvement loan program it began in 1997. Several commenters criticized Citigroup for originating a large number of home improvement loans with low principal amounts, particularly in LMI and minority communities. In assessing the effects of this proposal on the convenience and needs of the communities to be served, the Board has carefully reviewed the entire record of lending of the institutions involved in the proposal. As discussed below, Citibank NA and Citigroup's other lending affiliates offer a broad range of mortgage and other lending products and programs. Neither the CRA nor the CRA regulations of the federal supervisory agencies dictate the types of loan products or the amount of loans a depository institution must provide.

These commenters also asserted that Citigroup's reliance on home improvement loans with low principal amounts failed to meet projections Citicorp made in a July 1998 letter agreement with the New York State Banking Department ("NYSBD") in connection with the merger of Travelers and Citicorp. The Board notes that compliance with projections in an agreement made with the NYSBD is a matter within the exclusive jurisdiction of the NYSBD. The Board has consulted with the NYSBD on Citigroup's lending record in New York State. The Board also notes that the NYSBD and Citigroup have entered into a letter agreement, executed on June 25, that clarifies the projections and extends them for an additional three years.

(23.) Citigroup acquired Source One in 1999 and merged it into CitiMortgage, a subsidiary of Citibank NA, in 2000.

(24.) Citigroup represented that the home purchase lending data include originations and purchases, excluding interaffiliate loan purchases.

(25.) Citigroup represented that CitiMortgage has initiated a five-year program with FNMA under which CitiMortgage has committed to originate and FNMA has committed to purchase $12 billion in affordable mortgage loans nationwide through a number of affordable mortgage programs of Citigroup.

(26.) This amount included mortgage loans totaling $77 million in the New York City PMSA.

(27.) Citigroup represented that it consolidated most of its community development lending and investment activities into a separate affiliate, the National Center for Community Development Enterprise, in March 2000.

(28.) These grants were made through an affiliate, the Citigroup Foundation. Citigroup represented that the Citigroup Foundation had made $75 million in community development grants nationwide in the past two years.

(29.) At the time of the CRA performance evaluation, Citibank FSB had 20 assessment areas in California, Illinois, Florida, Maryland, Virginia, Connecticut, New Jersey, Texas, and the District of Columbia. The review period was from January 1, 1997, through March 31, 1999.

(30.) The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that have reported HMDA data in a given market.

(31.) Examiners noted that the large increase in lending in LMI geographies from 1997 to 1998 resulted from the introduction of Citigroup's home improvement loan program, as discussed earlier in this order.

(32.) One commenter criticized Citibank FSB for developing a small business loan product in California that has a minimum loan amount of $100,000. The commenter asserted that this minimum prevents many small businesses owned by minorities and persons living in LMI areas from qualifying for loans under the program. In the 1999 CRA Evaluation, examiners reported that Citibank FSB made almost $135 million of loans with principal amounts of $100,000 or less during the review period, which represented almost 30 percent of the savings association's total dollar amount of small business lending.

(33.) One commenter asserted that Citibank FSB had eliminated low-cost deposit products designed to meet the needs of LMI consumers.

(34.) The review period was from January 1, 1998, through December 31, 1999.

(35.) The assessment areas of EAB included (i) the Long Island PMSA and (ii) a portion of the New York City PMSA that includes Bronx, Kings, New York, Queens, and Richmond Counties ("New York City assessment area").

(36.) Commenters asserted that Associates engages in abusive marketing and sales practices that include misleading customers about key terms of a loan, such as the cost of credit insurance associated with the loan and the effect of balloon payments, and coercing customers to refinance loans that result in high points (interest paid at settlement) and other refinance charges. Commenters also asserted that Associates maintains aggressive foreclosure policies. Several commenters requested that the Board conduct fair lending examinations of all Citigroup's nonbanking subsidiaries that engage in subprime lending before it acts on the proposal.

(37.) Several commenters asserted that the Board should deny Citigroup's proposal, citing the Board's earlier denial of an application of Shawmut National Corporation ("Shawmut National") to acquire a bank while Shawmut National's past mortgage lending operations were under investigation by the Department of Justice. See Shawmut National Corporation, 80 Federal Reserve Bulletin 47 (1994) ("Shawmut"). Unlike the facts in Shawmut, where the mortgage subsidiary under investigation was controlled by Shawmut National at all relevant times, the activities at issue in the pending FTC lawsuit involving Associates relate solely to the operations of Associates' affiliates before their acquisition by Citigroup. As noted below, the Board will monitor Citigroup's progress in addressing any adverse findings resulting from the FTC lawsuit or any other litigation.

(38.) For example, a commenter asserted that CitiFinancial has aggressive foreclosure policies. Commenters also noted that the lending and insurance practices of Associates, CitiFinancial, and Citigroup's Primerica Financial Services have resulted in several pending judicial proceedings in addition to the FTC litigation involving Associates and are the subject of consumer complaints filed with several state and federal supervisory authorities. There has been no adjudication of wrongdoing by any Citigroup affiliate in these matters.

(39.) Several commenters also asserted that the management of Citigroup has failed to take an appropriate leadership role in addressing predatory lending problems in the subprime lending market and has lobbied against some state and municipal legislative efforts to address predatory lending.

(40.) A commenter also asserted that the CRA is undermined when large financial holding companies without a significant presence in rural communities, such as Citigroup, acquire subprime lenders with a significant presence in rural communities, such as Associates.

(41.) Several commenters alleged that Citigroup has indirectly supported predatory lending by a number of unaffiliated consumer lenders through the warehouse lending and securitization activities of its subsidiary, Salomon Smith Barney, Inc., New York, New York ("SSB"). Citigroup indicated that SSB engages in underwriting securities backed by subprime mortgage loans and provides warehouse loans to some of its mortgage banking customers for which it underwrites securities. In addition, Citigroup represented that a company Citigroup acquired in December 2000 in connection with its acquisition of Associates, First Collateral Services ("FCS"), engages in traditional mortgage warehouse lending to consumer lenders, including some engaged in subprime lending.

The Board has considered all the facts of record, including the actions taken by SSB and FCS in connection with their relationships with unaffiliated consumer lenders. Citigroup stated that SSB does not control the origination of subprime loans from its unaffiliated mortgage banking customers, but that it reviews each lender's policies and procedures and sets eligibility criteria for the loans it will finance through its warehouse lending and securitization arrangements. In addition, SSB reviews a sample of any loan pool to be securitized and hires an outside firm to review the loans in the pool for compliance with consumer protection laws and its loan eligibility criteria before making any warehouse loan advance. Citigroup represented that FCS does not have a role (formal or otherwise) in the lending practices and credit review processes of its warehouse finance customers, and that as part of its agreements with customers, FCS requires its warehouse finance customers to comply with all applicable federal and state laws in their origination and servicing of mortgage loans. Moreover, the Board notes that the FTC, HUD, and Department of Justice have responsibility for enforcing the compliance with fair lending laws of nondepository institutions.

(42.) See Federal Financial Institutions Examination Council, Nationwide Summary Statistics for 1999 Home Mortgage Disclosure Act Data (August 2000) at Table 5. The HMDA data indicate that, between 1993 and 1999, the number of conventional home purchase loans made in census tracts with minorities as a percentage of population of between 50 and 79 percent increased 91.7 percent, and the number of such loans made in census tracts with minorities as a percentage of population of between 80 and 100 percent increased 100.7 percent. The data also indicate that the number of HMDA loans made in LMI census tracts increased 97.9 percent during the same period.

(43.) See 65 Federal Register 81,438 (2000) (proposed rule amending the Board's Regulation Z that implements the Home Ownership and Equity Protection Act).

(44.) CitiMortgage's lending activities include the subprime lending operations that comprised a small portion of Source One's mortgage loan business.

(45.) The legal entities through which the Associates' branches operated continue to exist and hold loans that were originated before the transfer of the branches to CitiFinancial. The former Associates Home Equity Services, now CitiFinancial Mortgage (AHES), engages in indirect, real estate-secured lending through brokers and correspondents and will continue to operate. The continuing Associates entities currently are operating and will continue to operate under Citigroup's lending and compliance policies and procedures.

(46.) Several commenters challenged the adequacy of these initiatives and expressed concern that Citigroup would not implement them effectively.

(47.) Currently, CitiFinancial customers have the choice of purchasing single premium credit life insurance, which is financed as part of the total loan amount, or no credit life insurance. Citigroup represented that CitiFinancial is in the process of obtaining the appropriate state insurance licenses so that it may offer nationwide credit life insurance with a premium paid monthly by the borrower. In addition, Citigroup represented that it will discontinue the sale of single premium credit insurance for all real estate-secured loans by the end of 2001.

(48.) Citigroup has represented that, in the case of purchased or existing subprime loans in Citigroup's portfolio, borrowers with balloon payments coming due will be given the option to refinance the loan in lieu of making the balloon payment.

(49.) Citigroup represented that qualifying subprime borrowers of CitiFinancial will not be required to pay prepayment penalties for refinancing their loans with CitiFinancial or any other Citigroup affiliate.

(50.) In addition, the initiatives being implemented include

(i) Giving subprime loan borrowers a choice of paying a higher interest rate loan in exchange for the elimination of a prepayment penalty fee;

(ii) Limiting prepayment fees to the lesser of three years after a loan is made or the maximum term mandated by state law;

(iii) Establishing toll-free "hotlines" for customers to seek redress for complaints and problems concerning their loans;

(iv) Implementing a "mystery shopper" program at CitiFinancial branches (including former Associates branches) administered by a third party to help ensure that compliance procedures are followed;

(v) Providing updated training on compliance (including fair lending) for all consumer finance employees;

(vi) Strengthening compliance by and oversight of loan brokers;

(vii) Enhancing fair lending self-evaluations in consultation with outside counsel;

(viii) Prohibiting refinancing of certain below-market rate loans by nonprofit organizations and certain other programs within a specified timeframe;

(ix) Implementing additional limits on points charged on the refinancing by CitiFinancial of some of its loans;

(x) Enhancing disclosures regarding refinancing; and

(xi) Evaluating CitiFinancial's policies and procedures to prevent "loan flipping" (e.g., repeated refinancing of a loan to charge high points or fees) and implementing additional appropriate safeguards.

(51.) Based on 1999 and 2000 HMDA data, commenters criticized Citigroup's record of home mortgage lending to African-American or Hispanic individuals in the following PMSAs and Metropolitan Statistical Areas ("MSAs"): New York City, Long Island, Buffalo, and Rochester, New York; Chicago, Illinois; Los Angeles, Oakland, San Diego, and San Jose, California; Washington, D.C.; Philadelphia, Pennsylvania; Newark, New Jersey; Memphis, Tennessee; St. Louis, Missouri; Tampa, Florida; Wilmington, Delaware; Phoenix, Arizona; Milwaukee, Wisconsin; and Salt Lake City, Utah. Commenters also criticized Citigroup's record of home mortgage lending to LMI individuals, based on 1999 and 2000 HMDA data, in the following MSAs: Los Angeles, San Diego, and San Jose, California; Sioux Falls, South Dakota; and Salt Lake City, Utah.

(52.) For purposes of this HMDA analysis, minority census tract means a census tract with a minority population of 80 percent or more, and Citigroup includes Citibank NA, Citibank NYS, Citibank FSB, CitiMortgage, and Source One. As previously noted, in 2000, Source One was merged into CitiMortgage through which it reported its 2000 HMDA data. The data reviewed in this analysis do not include loans purchased by Citigroup.

(53.) For example, the percentages of Citigroup's home purchase loans originated to borrowers in minority census tracts in the PMSAs of Los Angeles and Oakland, California, in 2000, exceeded the percentages achieved by the aggregate lenders in 1999. In the New York City PMSA, Citigroup's percentage of home refinance loans originated to Hispanics in 2000 exceeded that of the aggregate lenders in 1999.

(54.) The HMDA data indicate that, in the subcategory of home improvement loans, Citigroup's volume of lending to LMI borrowers and in LMI census tracts declined from 1998 through 2000.

(55.) The data, for example, do not account for the possibility that an institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not provide a basis for an independent assessment of whether an applicant who was denied credit was, in fact, creditworthy. Credit history problems and excessive debt levels relative to income (reasons most frequently cited for a credit denial) are not available from HMDA data.

(56.) As noted above, Associates Delaware received a "needs to improve" rating in its most recent CRA performance evaluation. This rating was received before Citigroup acquired control of Associates. Examiners stated that the bank initiated corrective actions to address the examiner criticisms, and that a majority of these actions were completed during the fair lending examination. Examiners also noted that additional steps were being taken to strengthen policies, procedures, training programs, and internal assessment efforts to prevent illegal discriminatory credit practices. Citigroup reported that it has strengthened the compliance processes at Associates Delaware since acquiring control of the bank in November 2000, and that it has increased compliance staff and expanded internal audit and control procedures. Citigroup also noted that all new employees receive fair lending training as part of their orientation, and that fair lending training recertification is conducted for all employees who received fair lending training in the past.

(57.) Two commenters alleged that some of Citigroup's lending subsidiaries have violated HMDA reporting requirements. These allegations have been forwarded to HUD. A commenter also alleged a pre-screening and reporting violation by Citibank NA under the Equal Credit Opportunity Act (15 U.S.C. [section] 1691 et seq.). The OCC, the appropriate federal supervisor for Citibank NA, has been informed of this allegation.

(58.) Remaining branches of Citibank NA or EAB would be located less than one-half mile from two of these branches and less than 1 1/2 miles from the third branch.

(59.) Two commenters also alleged that Citigroup has closed branches in LMI and predominantly minority communities in the past, citing press reports in 1996. The Board considered substantially identical comments when it approved the acquisition of Citicorp by Travelers in 1998. As noted in Travelers, the appropriate federal and state financial supervisors of the relevant subsidiary banks, Citibank NA and Citibank NYS, stated in CRA examination reports that the branch closures and consolidations in question had not negatively affected the accessibility of banking services in the banks' New York assessment areas, including LMI communities. See 84 Federal Reserve Bulletin at 999, 1000.

(60.) Citigroup reported that, since September 1998, Citibank NA has relocated one branch from an upper-income to a lower-income census tract and relocated a second branch within a moderate-income census tract.

(61.) Section 42 of the Federal Deposit Insurance Act (12 U.S.C. [section] 1831r-1), as implemented by the Joint Policy Statement Regarding Branch Closings (64 Federal Register 34,844 (1999)), requires that a bank provide the public with at least 30-days' notice and the appropriate federal supervisory agency with at least 90-days' notice before the date of the proposed branch closing. The bank also is required to provide reasons and other supporting data for the closure, consistent with the institution's written policy for branch closings.

(62.) A commenter also expressed concern that Citigroup conducted an inadequate due diligence review when it acquired Associates. The commenter further alleged, based on press reports, that SSB improperly provided advice to an unaffiliated bank holding company on a potential acquisition of EAB while Citigroup was considering whether to acquire EAB.

(63.) Several commenters also expressed concern that Citigroup has helped to finance various activities and projects worldwide that might damage the environment or cause other social harm. These contentions contain no allegations of illegality or action that would affect the safety and soundness of the institutions involved in the proposal, and are outside the limited statutory factors that the Board is authorized to consider when reviewing an application under the BHC Act. See Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973).

(64.) The Board also received several comments asserting that recent investigations of staff of the Subcommittee on Investigations of the Committee on Governmental Affairs of the United States Senate and the United States General Accounting Office demonstrate that Citibank NA and other affiliates of Citigroup lack sufficient policies and procedures and other resources to protect against money laundering. See Correspondent Banking: A Gateway for Money Laundering, S. Doc. No. 69-919 (1st Sess. February 5, 2001) (Report of the Minority Staff of the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs of the United States Senate); Suspicious Banking Activities, General Accounting Office, GAO-01120 (October 2000). The Board has reviewed carefully supervisory examinations of Citibank NA and consulted with the OCC, the appropriate federal financial supervisory agency of the bank, regarding the policies, procedures, and practices of Citigroup to comply with the Bank Secrecy Act. In addition, the Board has reviewed recent enhancements to Citigroup's policies and procedures to prevent money laundering that address the issues raised in those investigations.

(65.) Several 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 of the application. The Board has not received such a recommendation from the appropriate supervisory authorities. 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 considered carefully these commenters' requests in light of all the facts of record. In the Board's view, the public has had ample opportunity to submit comments on the proposal and, in fact, the commenters have submitted written comments that the Board has considered carefully in acting on the proposal. The commenters' requests fail to demonstrate why their written comments do not present their views adequately. 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 for a public meeting or hearing on the proposal are denied.

(66.) A number of commenters requested that the Board delay action or extend the comment period on the proposal. The Board has accumulated a significant record in this case, including reports of examination, confidential supervisory information, public reports and information, and considerable public comment. In the Board's view, for the reasons discussed above, commenters have had ample opportunity to submit their views and, in fact, have provided substantial written submissions that the Board has considered carefully in acting on the proposal. Moreover, the BHC Act and Regulation Y require the Board to act on proposals submitted under those provisions within certain time periods. Based on a review of all the facts of record, the Board has concluded that the record in this case is sufficient to warrant action at this time, and that a further delay in considering the proposal, an extension of the comment period, or a denial of the proposal on the grounds discussed above or on the basis of informational insufficiency is not warranted.
ROBERT DEV. FRIERSON
Associate Secretary of the Board


Orders Issued Under Sections 3 and 4 of the Bank Holding Company Act

Citigroup Inc. New York, New York

Citigroup Holdings Company Wilmington, Delaware

Citicorp New York, New York

Order Approving Acquisition of a Bank Holding Company

Citigroup Inc., Citigroup Holdings Company, and Citicorp, financial holding companies within the meaning of the Bank Holding Company Act ("BHC Act") (together, "Citigroup"), have applied under section 3 of the BHC Act (12 U.S.C. [sections] 1842) to acquire at least 51 percent of the voting shares of Grupo Financiero Banamex Accival, S.A. de C.V. ("Banacci"), and Bunco Nacional de Mexico, S.A. ("Banamex"), both in Mexico City, Mexico, and thereby indirectly acquire Banamex USA Bancorp, and its subsidiary, California Commerce Bank, both in Los Angeles, California ("CCB").(1)

Citigroup also has filed a notice under section 4(c)(13) of the BHC Act (12 U.S.C. [sections] 1843(c)(13)) and the Board's Regulation K (12 C.F.R. 211) to acquire Banamex, and its foreign banking and nonbanking investments.(2)

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (66 Federal Register 31,649 (2001)). 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 the BHC Act and other applicable statutes.

Citigroup, with total consolidated assets of $902.2 billion, is the largest commercial banking organization in the United States, controlling approximately 3.9 percent of the total assets of insured commercial banks in the United States, and is one of the largest commercial banking organizations in the world.(3) In California, Citigroup operates Citibank, Federal Savings Bank, San Francisco, California ("Citibank FSB"), the 11th largest depository organization in California, with $6 billion in deposits, representing approximately 1.3 percent of total deposits in insured depository institutions in the state ("state deposits").(4) Citigroup also operates depository institutions in New York, Connecticut, Delaware, Florida, Georgia, Illinois, Maryland, Nevada, New Jersey, South Dakota, Texas, Utah, Virginia, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands.

CCB operates only in California and is the 41st largest depository institution in the state, with $1.3 billion in deposits, representing less than 1 percent of state deposits. After consummation of the proposal, Citigroup would become the seventh largest depository organization in California, with $7.3 billion in deposits, representing approximately 1.6 percent of state deposits.

Interstate Analysis

Section 3(d) of the BHC Act allows the Board to approve an application by a bank holding company to acquire control of a bank located in a state other than the home state of such bank holding company if certain conditions are met.(5) For purposes of the BHC Act, the home state of Citigroup is New York, and CCB is located in California. Based on a review of the facts of record, including a review of the relevant state statutes, the Board finds that all the conditions enumerated in section 3(d) of the BHC Act for an interstate acquisition are met in this case.(6) In light of all the facts of record, the Board is permitted to approve the proposal under section 3(d) of the BHC Act.

Competitive Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or be in furtherance of a monopoly. The BHC Act also prohibits the Board from approving a proposal that would substantially lessen competition in any relevant banking market unless the anticompetitive effects of the proposal in that banking market are clearly outweighed in the public interest by the probable effects of the proposal in meeting the convenience and needs of the community to be served.(7)

Citigroup's subsidiary savings association, Citibank FSB, competes directly with CCB compete in the Los Angeles, California banking market ("Los Angeles banking market").(8) The Board has reviewed carefully the competitive effects of the proposal in the Los Angeles banking market in light of all the facts of record, including the number of competitors that would remain in the market, the relative shares of total deposits in depository institutions in the market ("market deposits") controlled by Citigroup and CCB,(9) the concentration level of market deposits and the increase in this level as measured by the Herfindahl-Hirschman Index ("HHI"), and other characteristics of the market.(10)

Citigroup operates the 15th largest depository organization in the Los Angeles banking market, controlling market deposits of $1.7 billion, representing approximately 1.2 percent of market deposits. CCB is the 22nd largest depository organization in the market, with deposits of $1.3 billion, representing less than 1 percent of market deposits. On consummation of the proposal, Citigroup would operate the ninth largest depository organization in the market, controlling deposits of $3 billion, representing approximately 2.1 percent of market deposits. The HHI for the market would increase 2 points to 1019. The Los Angeles banking market would remain moderately concentrated after consummation of the proposal, with numerous competitors in the market.

The Department of Justice has reviewed the proposal and advised the Board that consummation of the proposal would not likely have any significantly adverse competitive effects in the Los Angeles banking market or any other relevant banking market. The Office of the Comptroller of the Currency ("OCC") and the California Department of Financial Institutions ("CDFI") also have been provided an opportunity to comment and have not objected to consummation of the proposal.(11)

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 likely result in a significantly adverse effect on competition or on the concentration of banking resources in the Los Angeles banking market or in any other relevant banking market.(12)

Convenience and Needs Factor

In acting on a proposal under section 3 of the BHC Act, the Board is required to consider the effect of the proposal on the convenience and needs of the communities to be served and take into account the records of the relevant insured depository institutions under the Community Reinvestment Act ("CRA").(13) The purpose of the CRA is to require the federal financial supervisory agencies to encourage insured depository institutions to help meet the credit needs of local communities in which they operate, consistent with safe and sound operation. Accordingly, the CRA requires the appropriate federal supervisory agency to take into account an institution's record of meeting the credit needs of its entire community, including low- and moderate-income ("LMI") neighborhoods, in evaluating certain types of expansion proposals.

The Board has carefully considered the convenience and needs and the CRA performance records of Citigroup's subsidiary insured depository institutions and CCB in light of all the facts of record, including comments received on the effect the proposal would have on the communities to be served by the relevant insured depository institutions. In this regard, the Board recently conducted a detailed review of the CRA performance records of the insured depository institutions controlled by Citigroup and found those records to be consistent with approval of a bank expansion proposal.(14) The Board notes that the OCC also recently conducted a detailed review of the CRA performance record of Citibank, N.A., New York, New York ("Citibank NA"), the lead subsidiary insured depository institution of Citigroup, and found that record to be consistent with approval of a bank expansion proposal.(15)

A. Summary of Public Comments

Approximately 80 commenters responded to the Board's request for public comment on this proposal. All the commenters opposed the proposal, suggested that the Board approve the proposal subject to conditions suggested by the commenter, or expressed concerns about the record of Citigroup in meeting the convenience and needs of the communities it serves. One commenter also questioned whether CCB served the credit needs of its entire assessment area.(16)

The commenters generally criticized Citigroup's record of home mortgage lending to LMI and minority residents and in LMI communities and communities with predominantly minority populations ("minority communities"), particularly in New York and California.(17) Some commenters asserted that Citigroup had low levels of home purchase mortgage lending to LMI or minority residents or in LMI or minority communities.(18) Several commenters alleged or expressed concern that data submitted under the Home Mortgage Disclosure Act ("HMDA")(19) demonstrated that Citigroup engaged in disparate treatment of LMI or minority individuals in various areas in the United States, including New York, and Los Angeles, Oakland, San Diego, and San Jose, California.(20) In addition, several commenters expressed concern that consummation of the proposal would adversely affect Mexican national interests.(21)

In addition, commenters criticized the lending and credit insurance practices of Citigroup's subprime lending subsidiaries, particularly those of Associates First Capital Corporation and its subsidiaries (together, "Associates"), which Citigroup acquired in November 2000. The commenters asserted that these entities are engaged in certain abusive lending practices, commonly referred to as "predatory lending," that are harmful to LMI and minority borrowers.(22) Several commenters requested that the Board deny the application in light of the recent lawsuit filed by the Federal Trade Commission ("FTC") against Associates and Citigroup, as the successor owner of Associates, or delay action on the proposal until this lawsuit and other consumer lawsuits concerning the lending and credit insurance sales activities of Associates and Citigroup are resolved.(23) Some commenters also asserted that Citigroup's other subprime lender affiliates, such as CitiFinancial Credit Company ("CitiFinancial"), engage in many of the same lending practices as Associates.(24) In addition, some commenters contended, based in part on HMDA data, that Citigroup improperly markets higher-cost subprime loan products to minority and LMI communities while it markets lower-cost prime loan products to nonminority and more affluent communities. Several commenters also alleged that Citigroup has indirectly supported predatory lending through its business relationships with unaffiliated third parties engaged in subprime lending.

B. CRA Performance Examinations

As provided in the CRA, the Board has evaluated the convenience and needs factor in this case in light of examinations by the appropriate federal supervisors of the CRA performance records of the relevant depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisors.(25) Citibank N.A., the lead insured depository institution of Citigroup, received a "satisfactory" rating at its most recent CRA performance examination by the OCC, as of October 26, 1998. The other subsidiary depository institutions of Citigroup, with one exception discussed below, received "outstanding" or "satisfactory" ratings at their most recent CRA performance examinations.(26) CCB received a "satisfactory" CRA performance rating from the FDIC, at its most recent CRA examination as of January 10, 2000.

Associates National Bank (Delaware), Wilmington, Delaware ("Associates Delaware"), a limited-purpose bank that engages only in credit card operations and represents less than 1 percent of the consolidated assets of Citigroup, received a "needs to improve" rating from the OCC, as of May 30, 1997, before Citigroup acquired the bank as part of its acquisition of Associates in November 2000.(27) The Board has carefully reviewed the steps taken by Associates Delaware and those taken by Citigroup since it acquired the bank to correct the deficiencies noted in the examination and has consulted with the OCC, the appropriate federal supervisor of Associates Delaware.(28) Examiners found no evidence of prohibited discrimination or other illegal credit practices, or any substantive violations of fair lending laws at any of the other subsidiary insured depository institutions of Citigroup or at CCB. The Board also has evaluated substantial information submitted by Citigroup concerning the CRA performance of its subsidiary insured depository institutions since the dates of their most recent CRA performance evaluations. In addition, the Board has consulted with the OCC and has considered confidential supervisory information regarding Citigroup's CRA performance provided by the OCC.

C. CRA Performance Record of Citigroup

Citigroup proposes to acquire CCB and continue to operate it as a separate insured depository institution at this time. Citigroup has represented that it expects CCB will expand its CRA offerings to include products and programs offered by Citigroup, including Citigroup's community development programs for lending, investing, and services. In addition, Citigroup stated that it anticipates conforming CCB's current lending activities to Citigroup's fair lending policies and procedures.

The Board has carefully reviewed the CRA performance records of the insured depository institution subsidiaries of Citigroup. A detailed description of the CRA lending, investment, and service activities of those subsidiaries is included in the Citigroup/EAB Order. Based on its review of the record in this case, the Board reaffirms and adopts in this case the facts and findings detailed in the Citigroup/ EAB Order.

Because the proposal in this case involves the acquisition by Citigroup of an insured depository institution in California, the Board has devoted particular attention to the CRA performance records of Citibank FSB, Citigroup's subsidiary insured depository institution operating in California, as well as the CRA performance record of CCB.

Citibank FSB

Overview. As previously noted, Citibank FSB received an "outstanding" CRA performance rating from the OTS in its 1999 CRA performance evaluation ("1999 CRA Evaluation"). Examiners commended the savings association for its lending performance in its assessment areas during the review period.(29) Examiners reported that Citibank FSB made more than 25 percent of its total HMDA-reportable loans in its combined nationwide assessment areas in LMI census tracts during the review period.(30) Examiners noted that this percentage exceeded the percentage of total owner-occupied housing units in LMI census tracts in its combined assessment areas and the percentage of total HMDA-reportable loans made by the aggregate of lenders ("aggregate lenders") in these LMI census tracts in 1997.(31) Examiners also noted that Citibank FSB offered a variety of home mortgage products and programs designed to meet the needs of first-time homebuyers and LMI borrowers, including programs that offer reduced closing costs and down payment requirements and flexible underwriting standards.

In addition, examiners commended Citibank FSB for the variety of small business loan programs it provided and noted that the geographic distribution of its small business lending in low-income areas was generally favorable.(32) Examiners also indicated that the savings association ranked first in small business loan originations (based on dollar amount) among savings associations nationwide and 12th in small business lending among all banks and savings associations in its combined assessment areas.

In the 1999 CRA Evaluation, examiners determined that Citibank FSB's overall community development lending was excellent. The examiners favorably noted that the savings association engaged in a variety of community development lending activities, including multifamily home mortgage lending that provided housing for LMI families and lending to community development organizations that focused on affordable housing programs and the stabilization or revitalization of economically distressed areas. Citibank FSB originated community development loans totaling more than $365 million during the review period.

Examiners also commended Citibank FSB for its community development investment program, which focused on providing equity investments for affordable housing, improving liquidity in the market for affordable mortgages, and strengthening community development financial institutions. During the review period, Citibank FSB doubled the amount of its CRA-qualified investments to approximately $63 million. Examiners also commended the savings association for making almost $5 million in community development grants during the review period.

In addition, examiners commended Citibank FSB for offering an extensive number of alternative systems for delivering retail banking services in LMI areas. Examiners also indicated that Citibank FSB provided an exceptional level of community development services, including educational seminars for LMI individuals, first-time homebuyers, and small business owners.

California. in the 1999 CRA Evaluation, examiners indicated that Citibank FSB had a strong overall record of lending in its assessment areas in California during the review period.(33) Examiners also found that the savings association's HMDA-reportable lending to LMI borrowers increased significantly each year during the review period. For example, the percentage of Citibank FSB's total number of HMDA-reportable loans to LMI borrowers almost tripled to 33 percent from the beginning of 1996 and through the first quarter of 1999.(34)

Citigroup stated that Citibank FSB increased the number and dollar volume of its home purchase lending in LMI census tracts in California by 25 percent and 32 percent, respectively, as compared to its 1999 totals.(35) In 2000, 23 percent of Citibank FSB's total home purchase loans were made to borrowers in LMI census tracts in California, and more than 14 percent of its total home purchase loans were made to LMI households.(36)

In addition, Citigroup represented that the number of home purchase loans that Citibank FSB made to Hispanic and African-American borrowers increased by 10 percent and 5 percent, respectively, in 2000 as compared to its 1999 totals. Citigroup stated that more than 22 percent of its total home purchase loans were made to Hispanic individuals and almost 4 percent were made to African-American individuals.(37)

Examiners indicated that the geographic distribution of Citibank FSB's small business loans in low-income census tracts compared favorably with the number of small businesses in these census tracts. Examiners also noted that Citibank FSB offered a diverse array of products to address short- and long-term financing needs of small businesses in California. In addition, examiners commended the savings association for creating a pilot small business program called Capital Access that provided loans to creditworthy, underserved small businesses, such as high technology businesses, export businesses, and businesses owned by minorities, women, and veterans. Examiners also noted that Citibank FSB actively promoted small businesses through workshops and seminars for small business owners, and that the savings association had an active Small Business Administration loan program in California.

Citigroup stated that, in 2000, it more than doubled the number of loans to small businesses in California to more than 30,300 loans, and it increased the dollar volume of such loans by 45 percent to more than $372 million.(38) Citigroup added that more than 95 percent of its small business loans in 2000 were in amounts less than $100,000. In addition, Citigroup stated that it increased its lending to small businesses in LMI census tracts by 100 percent to more than 7,400 loans in 2000. Citigroup also stated that it made more than 9,100 small business loans in majority-minority census tracts in its California assessment areas in 2000, which more than doubled its total in 1999.(39)

In the 1999 CRA Evaluation, examiners determined that Citibank FSB's community development loans in California, which totaled more than $63 million, represented an excellent volume of community development lending. Examiners also commended the savings association for making CRA-qualified investments totaling more than $21 million during the review period.

Citigroup stated that it increased the amount of its community development financing in California to more than $153 million in 2000, more than double its 1999 total. Of this amount, more than $136 million was provided for development of affordable housing. Citigroup noted that this community development funding included a financing package of more than $30 million for an affordable housing/redevelopment project in the Mission Bay neighborhood in San Francisco that will include 100 apartments for low-income residents; $33.6 million in financing for three affordable housing projects that include 324 units of affordable housing in a low-income district of San Francisco; and financing for a housing rehabilitation project by a Hispanic community development organization serving East Los Angeles.

In addition, Citigroup stated that it made more than $17 million in qualified CRA investments in California during 2000 and the first six months of 2001. These investments included $5 million in a venture capital fund formed to invest in commercial real estate in LMI areas of Los Angeles; $10 million in a syndication formed to invest in telecommunications companies owned or managed by minority individuals; and $4 million in a Habitat for Humanity-related entity to help generate liquidity to build new housing for LMI community residents. Citigroup also stated that the Citigroup Foundation awarded more than $3 million in grants to organizations in California during the last two years.(40) Seventy percent of this funding was provided to organizations that work to revitalize neighborhoods, help low-income individuals develop assets, increase financial literacy, and improve educational opportunities for children.

In the 1999 CRA Evaluation, examiners noted favorably that Citibank FSB delivered retail banking services throughout its assessment areas in California through its branch network, a large network of ATMs, and alternative delivery systems.(41) Examiners also indicated that Citibank FSB offered a wide range of deposit and loan products at all its branches, including a low-cost checking account.

D. CRA Performance Record of CCB

As noted above, CCB received a "satisfactory" rating for CRA performance from the FDIC, as of January 10, 2000. CCB's primary business focus, as noted by examiners, is international lending, particularly commercial lending to companies doing business in or with Mexico. Examiners reported that CCB also offers secured and unsecured consumer credit cards nationwide, purchases mortgage loans originated within its assessment area, offers mortgage warehouse lines of credit, and engages in community development lending, investment, and services activities.(42)

Examiners rated CCB's performance under the lending test during the review period as "high satisfactory," and stated that the bank's lending levels reflected a strong responsiveness to the credit needs of its assessment area. In particular, examiners commended the bank for its excellent distribution of loans among borrowers of different income levels.(43) Examiners also commended the bank for its good record of serving the credit needs of the most economically disadvantaged areas of its assessment area and low-income individuals.

Examiners noted that CCB had substantially increased the volume of purchased HMDA-reportable loans in its assessment area since 1998. In 1999, 53 percent of CCB's purchased HMDA- reportable loans by number and dollar volume were in LMI census tracts. Examiners noted that this percentage of HMDA-reportable lending in LMI census tracts well exceeded that of the aggregate lenders in 1998. Examiners also noted that the number and dollar volume of the HMDA-reportable loans to LMI individuals that CCB purchased exceeded the percentage of LMI households in its assessment area.

In addition, examiners noted that CCB provided mortgage warehouse lines of credit to mortgage banking companies that extend funds primarily for loans guaranteed by the Federal Housing Administration and the Veterans Administration. In 1998 and 1999, CCB provided approximately $58 million through these lines of credit to finance 400 homes within its assessment area. Examiners noted that CCB reduced its processing fee for loans extended within its assessment area as an incentive for these mortgage banking companies to increase their lending in the area.

Examiners commended CCB for using innovative and flexible lending practices to serve the credit needs of its assessment area. In particular, examiners commended CCB for its secured consumer credit card program, which was designed to help meet the needs of LMI individuals, particularly new residents and immigrants without credit or employment history. In CCB's secured credit card program, the credit is secured by a savings account that is opened at the time the credit application is submitted. Originally, the minimum savings account needed to open and secure a CCB credit card was $300, but CCB lowered this amount to $200 in 1999. CCB also offers a semi-secured credit card program to participants in the secured card program who have maintained a good payment record for a defined period of time. Under this program, CCB increases the credit limit by 100 percent of the amount in the participant's savings account, up to a maximum credit limit of $2,000. CCB also offers a further upgrade to a fully unsecured credit card with a maximum credit limit of $3,000. Qualification for this upgrade also is based on the participant's tenure in the CCB credit card program and maintenance of a good payment record.

Examiners rated CCB's performance under the investment test as "high satisfactory." In particular, examiners commended CCB for increasing its qualified community development investment and grant levels by more than 350 percent since the previous CRA performance examination, which resulted in $14.1 million in qualified investments and grants. CCB's qualified investments included the purchase of three government-sponsored mortgage-backed securities with 90 percent of the securities' principal amount backed by loans to LMI borrowers in Los Angeles County; commitments to invest in two equity funds established to help rebuild distressed neighborhoods in California; and investments in community development corporations in California that provide small business and real estate loans to borrowers who do not qualify for conventional bank loans, loans to small businesses in LMI areas, or loans to LMI borrowers.

Examiners noted that the bank operates two branches in Los Angeles. One branch is in an upper-income census tract in Century City and the other branch is in a moderate-income census tract in East Los Angeles. CCB also has established an ATM to serve East Los Angeles. Examiners found that the branches offered reasonable accessibility to all portions of CCB's assessment area.(44) In addition, examiners found that the bank used its Call Center effectively as an alternative delivery system by offering bilingual telephone banking service with a toll-free number that is available 24 hours a day. Examiners noted that the Call Center processed more than one million customer inquiries and requests in 1999.

E. Subprime Lending of Citigroup

As noted above, the Board carefully reviewed the issues raised by commenters concerning the subprime lending activities of Citigroup. Many commenters raised substantially the same issues as were raised in connection with Citigroup's proposal to acquire EAB. These issues were carefully and fully reviewed by the Board in that case.(45) The Board reiterates its expectation that bank holding companies and their affiliates conduct their subprime lending operations free of abusive lending practices.(46) The Board has carefully considered the record of lending of Citigroup's affiliates, including those engaged in subprime lending, in light of all the comments received. In addition, the Board has consulted with each federal supervisory agency responsible for overseeing Citigroup's subprime lending affiliates.

CitiFinancial and Citigroup's other subsidiaries that engage in subprime lending have underwriting policies and procedures designed to prevent abusive lending practices, which include requiring all real estate-secured loan applications to be evaluated on an applicant's creditworthiness and ability to repay, using credit bureau scoring and proprietary models, and limiting points charged on certain refinanced loans. In addition, Citigroup's subprime lending affiliates have adopted a number of programs and other policies and procedures, including centralized loan underwriting Systems, fair lending self-assessments (including matched-pair analyses), branch and corporate audits, and fair lending and compliance training, that are designed to prevent deceptive and abusive lending practices.(47)

In January 2001, the network of retail branches of Associates was transferred to CitiFinancial, and the former Associates consumer finance businesses in the United States and Canada became subject to the underwriting and compliance policies, procedures, and programs of Citigroup and CitiFinancial. In connection with its proposed acquisition of Associates in November 2000, Citigroup announced consumer protection initiatives that are in the process of being implemented at CitiFinancial (including the former branch offices of Associates) and certain other affiliates.(48) These initiatives relate to loans secured by real estate in the United States and include enhanced oral and written disclosures to purchasers of credit insurance products concerning the cost, coverage, terms, and cancellation policies of the insurance products offered.(49) In addition, Citigroup affiliates that engage in subprime lending will not originate subprime real estate loans with balloon payments and will not originate or purchase real estate loans with negative amortization features.(50) The initiatives also include plans for a "referral-up" program to be implemented nationwide by the end of 2001 that will refer CitiFinancial loan applicants who meet certain qualification criteria to CitiMortgage for a prime mortgage loan. In addition, Citigroup is implementing a program at CitiFinancial to provide rate reductions to subprime loan borrowers who make timely payments and a graduation program at CitiFinancial and CitiFinancial Mortgage (AHES) that refers qualifying borrowers who have CitiFinancial subprime loans to CitiMortgage for a prime loan product.(51) As part of the initiatives, CitiFinancial also has created a compliance department that reviews pending and potential foreclosures to protect against inappropriate foreclosure proceedings against the borrowers' homes.(52)

For the reasons explained in this order and the Citigroup/ EAB Order, the Board believes that Citigroup has adopted comprehensive policies and procedures that are reasonably designed to ensure compliance with the fair lending laws and to prevent abusive lending practices by its holding company affiliates. As noted above, Citigroup has begun to implement many of these practices and consumer protection initiatives at CitiFinancial, including the former branch offices of Associates.

As indicated in the Citigroup/EAB Order, the Board will conduct a thorough examination to assess the effectiveness of the implementation of the initiatives and other consumer protection measures proposed or adopted by Citigroup at its subprime lending affiliates, CitiFinancial and CitiFinancial Mortgage (AHES).(53) The Board has broad supervisory authority under the banking laws to require Citigroup to take any other steps necessary to address deficiencies identified in the examination.

F. HMDA Data

The Board also has carefully considered Citigroup's lending record in light of comments about HMDA data reported by its subsidiaries.(54) These HMDA data-related comments were substantially similar to those considered by the Board in connection with its approval of Citigroup's proposed acquisition of EAB. The Board's analysis of Citigroup's HMDA data, as detailed in the Citigroup/EAB Order, is incorporated by reference herein.

As noted in the Citigroup/EAB Order, the HMDA data generally do not indicate that Citigroup is excluding any race or income segment of the population or geographic areas on a prohibited basis. The data, however, reflect certain disparities in the rates of loan applications, originations, and denials among members of different racial groups and persons at different income levels generally and in certain local areas. The Board is concerned when the record of an institution indicates disparities in lending and believes that all banks are obligated to ensure that their lending practices are based on criteria that ensure not only safe and sound lending, but also equal access to credit by creditworthy applicants regardless of their race or income level. The Board recognizes, however, that HMDA data alone provide an incomplete measure of an institution's lending in its community because these data cover only a few categories of housing-related lending. HMDA data, moreover, provide only limited information about the covered loans.(55) HMDA data, therefore, have limitations that make them an inadequate basis, absent other information, for concluding that an institution has not assisted adequately in meeting its community's credit needs or has engaged in illegal lending discrimination.

Because of the limitations of HMDA data, the Board has considered these data carefully in light of other information, including examination reports that provide an on-site evaluation of compliance by the subsidiary depository institutions of Citigroup with fair lending laws. As noted in the Citigroup/EAB Order, examiners found no evidence of prohibited discrimination or other illegal credit practices at any of the subsidiary depository institutions controlled by Citigroup.(56) The record also indicates that Citigroup has taken a number of affirmative steps to ensure compliance with fair lending laws. As discussed in the EAB Order, Citigroup has instituted corporate-wide compliance policies and procedures to help ensure compliance with all fair lending and other consumer protection laws and regulations, employed compliance officers and staff charged with monitoring compliance, and conducted corporate and branch audits of compliance. Citigroup's housing-related lending subsidiaries have established detailed fair lending procedures in addition to Citigroup's corporate policies and procedures, including extensive fair lending training programs for employees and fair lending self-assessments using matched-pair testing and statistical analyses. Citi-Mortgage and CitiFinancial also have implemented a "mystery shopping" program administered by a third party to help verify that compliance procedures are followed.

In addition, the Board has considered the HMDA data in light of Citigroup's overall lending and community development activities discussed above and in the Citigroup/ EAB Order, which show that Citigroup's subsidiary banks significantly assist in helping to meet the credit needs of their entire communities, including LMI areas.(57) The Board believes that, viewed in light of the entire record, the HMDA data indicate that Citigroup's record of performance in helping to serve the needs of its communities is consistent with approval of the proposal.

G. Conclusion on Convenience and Needs Consideration

In reviewing the effect of the proposal on the convenience and needs of the communities to be served, the Board has carefully considered the entire record, including all the information provided by commenters, Citigroup, and CCB; evaluations of the performance of Citigroup's insured depository institution subsidiaries and CCB under the CRA; and confidential supervisory information.

Based on all the facts of record and for the reasons discussed above and in the Citigroup/EAB Order, the Board concludes that considerations relating to the convenience and needs factor, including the CRA performance records of the relevant depository institutions, are consistent with approval of the proposal.

Financial and Managerial Considerations

Section 3 of the BHC Act requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in the proposal and certain other supervisory factors. The Board has carefully considered these factors in light of all the facts of record, including public comments, supervisory reports of examination, other confidential supervisory information assessing the financial and managerial resources of the organizations, and other information provided by Citigroup.

In evaluating financial factors in expansion proposals by banking organizations, the Board consistently has considered capital adequacy to be especially important. The proposed acquisition is structured as an exchange of cash and Citigroup shares, and Citigroup proposes to incur debt to finance the cash portion of the proposal. As a result of this acquisition, the Board notes that Citigroup's risk-based regulatory capital ratios would decline by approximately 90 basis points. Citigroup's ratios on a consolidated basis would remain above the well-capitalized thresholds applicable to banking organizations; however, bank regulatory capital ratios do not address insurance underwriting risks, nor do they take explicit account of diversification considerations, credit risk concentrations, or credit risk differentials within the loan portfolio. The Board believes that all banking organizations, particularly those undertaking significant expansion, should have robust risk management and economic capital assessment processes and need to ensure on an ongoing basis that their capital positions are adequate in relation to the full array of risks to which the organizations are exposed. As part of the ongoing supervisory process, the Board will continue to assess Citigroup's consolidated capital adequacy on this basis and in light of its future acquisition plans.

The Board also has considered the managerial resources of Citigroup and CCB, the examination reports of the federal financial supervisory agencies that supervise these organizations, including Citigroup's subsidiary depository institutions, and other confidential supervisory information. In addition, the Board has consulted with these federal financial supervisory agencies.

The Board received several comments on the proposal criticizing the managerial resources of Citigroup and its subsidiaries.(58) Several commenters asserted that Citigroup's management has failed to implement effective policies and programs to address alleged abusive lending and sales practices of Citigroup's subsidiaries, including those engaged in subprime lending and insurance activities.(59) These commenters asserted that adverse managerial resources are evidenced by the pending FTC lawsuit against Associates and Citigroup, as Associate's successor owner, and by consumer lawsuits and complaints filed against Associates and other Citigroup affiliates.(60)

After reviewing all the facts of record, the Board concludes that Citigroup and its subsidiary insured depository institutions and CCB are well managed.(61) In reaching this conclusion, the Board has considered the supervisory experience and assessments of management by the various bank supervisory agencies, Citigroup's efforts to address supervisory and other concerns about the operation and management of the organization, the management's due diligence efforts and record of integrating other organizations, and the organization's record of compliance with applicable banking law. As previously discussed, the Board has reviewed the compliance policies and procedures of Citigroup and its subsidiaries, including those engaged in subprime lending, and consulted with the appropriate federal supervisory agencies and state supervisors.(62) Based on these and all other facts of record, the Board concludes that the financial and managerial resources and the future prospects of Citigroup and its subsidiary depository institutions and CCB are consistent with approval, as are the other supervisory factors the Board must consider under section 3 of the BHC Act.(63)

Investments and Activities Abroad

Citigroup also has requested the Board's consent under section 4(c)(13) of the BHC Act and section 211.5(c) of the Board's Regulation K 12 C.F.R. 211.5(c)) to acquire Banamex and its foreign banking and nonbanking investments. Under section 4(c)(13) of the BHC Act, the Board may permit a bank holding company to acquire a company that does no business in the United States except as incident to its international or foreign business if the Board determines that the acquisition would not be substantially at variance with the purposes of the BHC Act and would be in the public interest. Regulation K provides that a bank holding company may acquire companies engaged in activities usual in connection with the transaction of banking or other financial operations abroad. Regulation K further states the Board's policy that investors shall at all times act in accordance with high standards of banking or financial prudence, having due regard for diversification of risks, suitable liquidity, and adequacy of capital.

The Board has reviewed information with respect to Banamex and its existing operations and has determined that Banamex may be considered well capitalized and well managed within the meaning of Regulation Y (12 C.F.R. 225.90). Banamex currently operates agencies in New York, New York, and Houston, Texas. Citigroup has committed that each of these agencies will engage only in activities permitted to an Edge corporation under Regulation K (12 C.F.R. 211.4(e)). Based on the facts of record, the Board has determined that all factors required to be considered under the BHC Act and Regulation K are consistent with approval. To the extent that any activities or investments of Banamex do not currently comply with the provisions of Regulation K, Citigroup has committed to conform these activities or investments within six months of the acquisition of Banamex.(64)

Conclusion

Based on the foregoing and in light of all the facts of record, the Board has determined that the application and notice should be, and hereby are approved.(65) In reaching its conclusion, the Board has considered all the facts of record in light of the factors that it is required to consider under the BHC Act and other applicable statutes.(66) The Board's approval is specifically conditioned on compliance by Citigroup with all the representations and commitments made in connection with the application and notice, the conditions described or referenced in this order, and on the receipt by Citigroup of all necessary regulatory approvals. These representations, commitments, and conditions are deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

The acquisition of Banacci, Banamex, and CCB may not be consummated before the fifteenth calendar day after the effective date of this order, and the proposal may 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 Federal Reserve Bank of New York, acting pursuant to delegated authority.

By order of the Board of Governors, effective July 16, 2001.

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

(1.) Citigroup also has proposed to form another intermediate bank holding company between Citigroup and CCB.

(2.) Banacci is a financial services holding company organized under the laws of Mexico. In addition to CCB and Banamex, Banacci's main financial subsidiaries are Acciones y Valores de Mexico, S.A. de C.V., which engages in securities activities, and Seguros Banamex AEGON, S.A. de C.V., which engages in insurance underwriting and related activities. As a financial holding company, Citigroup has proposed to acquire these Banacci nonbanking subsidiaries pursuant to section 4(k) of the BHC Act. 12 U.S.C. [sections] 1843(k).

(3.) Asset and U.S. ranking data are as of December 31, 2000.

(4.) In this context, depository institutions include commercial banks, savings banks, and savings associations. Deposit and state ranking data are as of June 30, 2000.

(5.) See 12 U.S.C. [sections] 1842(d). A bank holding company's home state is the state in which the total deposits of all banking subsidiaries of such company were the largest on July l, 1966, or the date on which the company became a bank holding company, whichever is later. 12 U.S.C. [sections] 1841(o)(4)(C).

(6.) See 12 U.S.C. [subsections] 1842(d)(1)(A) and (B) and 1842(d)(2)(A). Citigroup is well capitalized and well managed. On consummation of the proposal, Citigroup would control less than 10 percent of the total amount of deposits of insured depository institutions in the United States and less than 30 percent of the total amount of deposits of insured depository institutions in California. CCB has been in existence and operated continuously for at least five years, the period of time required by California law. See 12 U.S.C. [sections] 1842(d)(1)(B); Cal. Fin. Code [sections] 3825 (1999). The other requirements of section 3(d) also have been met.

(7.) See 12 U.S.C. [sections] 1842(c).

(8.) The Los Angeles banking market is defined as the Los Angeles Ranally Metro Area and the towns of Acton, Rancho Santa Margarita, and Rosamond, California.

(9.) Market share data are as of June 30, 2000, and are based on calculations that include the deposits of thrift institutions, except the deposits of Citibank FSB, weighted at 50 percent. The Board has indicated previously 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 52 (1991). Because Citibank FSB is affiliated with a commercial banking organization, its deposits are included at 100 percent. See First Banks, Inc., 76 Federal Reserve Bulletin 669 (1990).

(10.) Under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 49 Federal Register 26,823 (June 29, 1984), a market is considered moderately concentrated if the post-merger HHI is between 1000 and 1800. 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 increases the HHI by more than 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.

(11.) The CDFI approved Citigroup's proposed acquisition of CCB on July 12, 2001.

(12.) Several commenters urged the Board to deny this transaction because it would result in the acquisition by Citigroup of a banking organization that controls assets representing more than 10 percent of the assets controlled by banks in Mexico. These commenters argued that the provision restricting banking organizations from acquiring in excess of 10 percent of the total deposits in depository institutions in the United States should be applied to the acquisition by Citigroup of a Mexican bank. This provision of law does not apply outside the U.S., and the Mexican governmental authorities have already reviewed this transaction and found it to be in accordance with applicable Mexican law.

(13.) 12 U.S.C. [sections] 2901 et seq.

(14.) Citigroup, Inc., 87 Federal Reserve Bulletin 600 (2001) (proposal by Citigroup to acquire European American Bank) ("Citigroup/ EAB Order").

(15.) See Citigroup/EAB Order.

(16.) Several commenters requested that Citigroup provide certain commitments and answer certain questions, or that the Board impose specific conditions or take specific actions, particularly with respect to the subprime lending activities of Citigroup's affiliates. Several commenters also criticized the CRA-related pledge that Travelers Group Inc. ("Travelers") and Citicorp made in connection with their merger in 1998 as being vague, ineffective, and insufficient as compared to commitments by other commercial banking organizations. Commenters also alleged that Citigroup's senior management had declined requests for meetings with some community groups. The Board notes that the CRA requires that, in considering an acquisition proposal, the Board carefully review the actual performance records of the relevant depository institutions in helping to meet the credit needs of their communities. Neither the CRA nor the federal banking agencies' CRA regulations require depository institutions to make pledges concerning future performance under the CRA, confer authority on the agencies to enforce pledges made to third parties, or require depository institutions to meet with particular persons.

(17.) Commenters were concerned about Citigroup's stated intention to use the Banamex brand name to market banking products and services to Hispanics and predominantly Hispanic communities in the United States. These commenters were particularly concerned that Citigroup would focus its strategy on credit cards with high fees and interest rates and would not invest in or provide lower cost loans to these individuals or communities. In addition, commenters urged Citigroup to reduce the fees for and increase the availability of money transmission services.

(18.) Commenters also criticized Citigroup for providing electronic benefit transfers ("EBT") to low-income individuals in areas where it has no bank branches and otherwise offers no access to other banking services and noted that this business practice resulted in a lawsuit against Citigroup by the State of New York. The parties settled the lawsuit in April 2001 after Citigroup agreed to provide a number of automatic teller machines for use by EBT recipients without a surcharge.

(19.) 12 U.S.C. [sections] 2801 et seq.

(20.) A commenter asserted that Citigroup has discriminated in providing homeowners insurance by citing a complaint that was filed against Travelers in 1997. The Board considered a substantially identical comment in connection with its approvals of the proposed acquisition of EAB by Citicorp and the proposed acquisition of Citicorp by Travelers. See Citigroup/EAB Order; Travelers Group Inc., 84 Federal Reserve Bulletin 985, 1001 n.66 (1998). As noted in these orders, Travelers denied the allegations of discrimination in the complaints, and there has been no adjudication of wrongdoing by the Department of Housing and Urban Development ("HUD") or any court regarding this matter.

(21.) Included among these concerns are that consummation of the proposal could adversely affect the Mexican economy and banking system, in addition to LMI individuals and communities in Mexico, through anticipated Banamex branch closures by Citigroup to achieve reductions in Banamex operating costs. Citigroup has not announced any decisions regarding the closing of branches of Banamex in Mexico. If Citigroup determines to close any branches of Banamex, the Board expects Citigroup and Banamex to make and implement that decision in full compliance with applicable Mexican law. This is a matter that is not governed by U.S. banking law and is within the jurisdiction of the Mexican banking authority, not the Board.

(22.) Commenters asserted that Associates engaged in abusive marketing and sales practices that included misleading customers about key terms of a loan, such as the cost of credit insurance associated with the loan and the effect of balloon payments, and coercing customers to refinance loans that result in high points (interest paid at settlement) and other refinance charges. Commenters also asserted that Associates engaged in aggressive collection and foreclosure practices.

(23.) As noted in the Citigroup/EAB Order, the consumer protection claims in the FTC's lawsuit allege that Associates, before its acquisition by Citigroup in November 2000, engaged in abusive lending practices and lending law violations. There has been no adjudication of wrongdoing or injunctive action taken against Citigroup or any of its affiliates in connection with the FTC lawsuit. See Citigroup/EAB Order. A commenter asserted that the Board should deny Citigroup's proposal, citing the Board's earlier denial of an application of Shawmut National Corporation ("Shawmut National") to acquire a bank while Shawmut National's past mortgage lending operations were under investigation by the Department of Justice. See Shawmut National Corporation, 80 Federal Reserve Bulletin 47 (1994) ("Shawmut Order"). Unlike the facts in the Shawmut Order, where the mortgage subsidiary under investigation was controlled by Shawmut National at all relevant times, the activities at issue in the FTC's complaint in the pending lawsuit involving Associates relate solely to the operations of Associates' affiliates before their acquisition by Citigroup. The Board will monitor Citigroup's progress in addressing any adverse findings that may result from the FTC lawsuit or any other litigation.

(24.) Several commenters also asserted that the management of Citigroup has failed to take an appropriate leadership role in addressing abusive lending problems in the subprime lending market and has lobbied against some state and municipal legislative efforts to address predatory lending. In addition, commenters noted that the lending and insurance practices of Associates, CitiFinancial, and Citigroup's Primerica Financial Services have resulted in several pending judicial proceedings (in addition to the FTC litigation involving Associates) and that these practices are the subject of consumer complaints filed with several state and federal supervisory authorities. There has been no adjudication of wrongdoing by any Citigroup affiliate in these matters.

(25.) See Interagency Questions and Answers Regarding Community Reinvestment, 65 Federal Register 25,088 and 25,107 (2000).

(26.) Citibank (New York State), Pittsford, New York ("Citibank NYS"), received an "outstanding" rating from the Federal Deposit Insurance Corporation ("FDIC"), as of March 6, 2000; Citibank Delaware, New Castle, Delaware, received a "satisfactory" rating from the FDIC, as of May 15, 2000; Citibank (Nevada), N.A., Las Vegas, Nevada ("Citibank Nevada"), received an "outstanding" rating from the OCC, as of March 29, 1999; Citibank (South Dakota), N.A., Sioux Falls, South Dakota ("Citibank South Dakota"), received an "outstanding" rating from the OCC, as of May 24, 1999; Citibank FSB received an "outstanding" rating from the Office of Thrift Supervision ("OTS"), as of July 12, 1999; Travelers Bank and Trust, fsb, Newark, Delaware, received an "outstanding" rating from the OTS, as of February 5, 2001; Universal Bank, N.A., Columbus, Georgia, received a "satisfactory" rating from the OCC, as of February 22, 1999; Citibank USA (formerly The Travelers Bank USA), Newark, Delaware, received an "outstanding" rating from the FDIC, as of March 15, 1999; Universal Financial Corporation, Salt Lake City, Utah, received a "satisfactory" rating from the FDIC, as of March 31, 1999; Associates Capital Bank, Inc., Salt Lake City, Utah, received an "outstanding" rating from the FDIC, as of September 27, 1999; and Hurley State Bank, Sioux Falls, South Dakota, received a "satisfactory" rating from the FDIC, as of April 19, 1999.

(27.) Several commenters asserted that the Board should deny the proposal on the basis of the "needs to improve" CRA rating of Associates Delaware. In addition to representing less than I percent of Citigroup's consolidated assets, Associates Delaware received its "needs to improve" rating before it was acquired by Citigroup. Moreover, examiners stated in the CRA performance evaluation that the bank had completed a majority of the corrective actions that it had initiated to address examiner concerns identified during a fair lending examination of the bank that was conducted concurrently with the CRA examination. Examiners also noted that Associates Delaware was taking steps to strengthen policies, procedures, training programs, and internal assessment efforts to prevent illegal discriminatory credit practices. See Citigroup/EAB Order; see also Sun Trust Banks, Inc., 76 Federal Reserve Bulletin 542 (1990).

(28.) Several commenters disagreed with regulations promulgated by the Board that permit Citigroup, as a financial holding company (as defined in section 4 of the BHC Act), to continue to engage in expanded financial activities that are permissible for financial holding companies while Associates Delaware has a less than satisfactory CRA performance rating. As noted above, Associates Delaware received its CRA rating before it was acquired by Citigroup. Under the Board's regulations, Citigroup would become subject to activity restrictions if Associates Delaware does not receive at least a satisfactory rating at its next CRA examination. See Federal Reserve System, 66 Federal Register 400, 404 (2001). As required in the regulations, Citigroup submitted to the OCC a corrective action plan outlining the steps that are necessary for the bank to achieve at least a "satisfactory" rating at its next CRA examination. See id. at 402 and 416 (to be codified at 12 C.F.R. 225.82(d)).

(29.) At the time of the CRA performance evaluation, Citibank FSB had 20 assessment areas in California, Illinois, Florida, Maryland, Virginia, Connecticut, New Jersey, Texas, and the District of Columbia. The review period was from January 1, 1997, through March 31, 1999.

(30.) The evaluation of Citibank FSB's HMDA-reportable lending included lending of the following Citigroup entities in Citibank FSB's assessment areas: Citibank FSB; Citibank; Citicorp Mortgage (renamed CitiMortgage, Inc.); Citibank NYS; Citibank Nevada; Commercial Credit (renamed CitiFinancial).

(31.) The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that have reported HMDA data in a given market.

(32.) The evaluation of Citibank FSB's small business lending included lending of the following Citigroup entities in Citibank FSB's assessment areas: Citibank FSB; Citibank NA; Citibank NYS; Citibank Nevada; and Citibank South Dakota.

(33.) The assessment areas of Citibank FSB include the following PMSAs: Los Angeles-Long Beach, Orange County, Ventura, San Francisco, Oakland, and San Jose, all in California.

(34.) Examiners noted that the large increase in lending in LMI geographies from 1997 to 1998 resulted from the introduction by Citigroup of a program offering home improvement loans with low principal amounts. This program is discussed in more detail in the Citigroup/EAB Order.

(35.) Citigroup's representations regarding Citibank FSB's home mortgage lending included lending by the following Citigroup entities in Citibank FSB's California assessment areas: Citibank FSB; Citibank NA; CitiMortgage, Inc. ("CitiMortgage"), including Source One Mortgage Corporation, which was merged into CitiMortgage in 2000; Citibank NYS; and Citibank Nevada.

(36.) As noted in the Citigroup/EAB Order, Citigroup represented that CitiMortgage has initiated a five-year program with the Federal National Mortgage Association ("FNMA") under which CitiMortgage has committed to originate, and FNMA has committed to purchase, $12 billion in affordable mortgage loans nationwide through a number of affordable mortgage programs of Citigroup. Of this amount, $1.4 billion is allocated to Northern California and $1.2 billion is allocated to Southern California/Nevada.

(37.) Some commenters criticized the percentage of Citigroup's total home mortgage loans made to Hispanic individuals and communities as being too low and lagging behind the percentages achieved by other large depository organizations in the market.

(38.) Citigroup's representations regarding Citibank FSB's small business lending in its California assessment areas included lending by the following entities: Citibank FSB; Citibank South Dakota; and Universal Financial Corporation (Utah).

(39.) The term "majority-minority census tracts" means those tracts in which minority populations comprise at least 50 percent of the tract's population.

(40.) Some commenters asserted that Citigroup did not provide a sufficient amount of grants to nonprofit organizations operated by Hispanics.

(41.) Some commenters asserted that Citibank FSB maintained few branches in California, particularly in LMI areas. Citigroup stated that Citibank FSB currently has 78 branches in California, including 18 located in majority-minority census tracts.

(42.) The assessment area of CCB includes about 80 percent of the Los Angeles-Long Beach PMSA.

(43.) The review period was from January 1, 1998, through September 30, 1999.

(44.) A commenter asserted that CCB's branch in East Los Angeles provided little access to traditional banking services.

(45.) Commenters have expressed various concerns about the lending practices of Associates and other subsidiaries of Citigroup, including matters related to the sale of insurance, matters raised in affidavits or statements by former or current employees of these subsidiaries, and concerns about foreclosure practices of these subsidiaries. In connection with the Board's recent review of the proposed acquisition by Citigroup of EAB, the Board carefully and extensively considered these concerns, including information provided by commenters and the affidavit of a former CitiFinancial employee filed in the FTC litigation. Commenters have provided no additional information that warrants a change in the Board's findings on these matters in the Citigroup/EAB Order. As discussed in that order and below, the Board will conduct an examination of CitiFinancial pursuant to its supervisory authority.

(46.) Several commenters contended that Citigroup will employ at Banamex and its affiliates in Mexico various lending practices that commenters believe are abusive. The lending activities of Banamex and its affiliates in Mexico are subject to the supervision and legal requirements of Mexican law and the Mexican banking authorities. The Board expects Citigroup to operate with the highest integrity worldwide and in compliance with the laws of each country in which it operates.

(47.) See Citigroup/EAB Order.

(48.) Some commenters challenged the adequacy of these initiatives and expressed concern that Citigroup would not implement them effectively.

(49.) Citigroup recently announced that it will discontinue the sale of single premium credit insurance for all real estate- secured loans by the end of 2001. Citigroup represented that CitiFinancial is in the process of obtaining the appropriate state insurance licenses so that it may offer nationwide credit life insurance with a premium paid monthly by the borrower.

(50.) Citigroup has represented that, in the case of purchased or existing subprime loans in Citigroup's portfolio, borrowers with balloon payments coming due will be given the option to refinance the loan in lieu of making the balloon payment.

(51.) Citigroup represented that qualifying subprime borrowers of CitiFinancial will not be required to pay prepayment penalties for refinancing their loans with CitiFinancial or any other Citigroup affiliate.

(52.) In addition, the initiatives being implemented include:

(i) Giving subprime loan borrowers a choice of paying a higher interest rate loan in exchange for the elimination of a prepayment penalty fee;

(ii) Limiting prepayment fees to the lesser of three years after a loan is made or the maximum term mandated by state law;

(iii) Establishing toll-free "hotlines" for customers to seek redress for complaints and problems concerning their loans;

(iv) Implementing a "mystery shopper" program at CitiFinancial branches (including former Associates branches) administered by a third party to help ensure that compliance procedures are followed;

(v) Providing updated training on compliance (including fair lending) for all consumer finance employees,

(vi) Strengthening compliance by and oversight of loan brokers;

(vii) Enhancing fair lending self-evaluations in consultation with outside counsel;

(viii) Prohibiting refinancing of certain below-market rate loans by nonprofit organizations and certain other programs within a specified timeframe;

(ix) Implementing additional limits on points charged on the refinancing by CitiFinancial of some of its loans;

(x) Enhancing disclosures regarding refinancing; and

(xi) Evaluating CitiFinancial's policies and procedures to prevent "loan flipping" (e.g., repeated refinancing of a loan to charge high points or fees) and implementing additional appropriate safeguards.

(53.) This examination will include CitiFinancial's offices in various areas in the United States, including Southern California.

(54.) Based on 1999 and 2000 HMDA data, commenters criticized Citigroup's record of home mortgage lending to African-American, Hispanic, or Native-American individuals or to LMI individuals in various areas throughout the United States, particularly in New York and California.

(55.) The data, for example, do not account for the possibility that an institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not provide a basis for an independent assessment of whether an applicant who was denied credit was, in fact, creditworthy. Credit history problems and excessive debt levels relative to income (reasons most frequently cited for a credit denial) are not available from HMDA data.

(56.) As noted above, Associates Delaware received a "needs to improve" rating in its most recent CRA performance evaluation. This rating was received before Citigroup acquired control of Associates. Examiners stated that the bank had initiated corrective actions to address the examiner criticisms and implemented additional measures to strengthen policies, procedures, training programs, and internal assessment efforts to prevent illegal discriminatory credit practices.

(57.) Commenters alleged that some of Citigroup's lending subsidiaries have violated HMDA reporting requirements. The Board considered the same comments when it evaluated Citigroup's proposal to acquire EAB. As noted in the Citigroup/EAB Order, the Board has forwarded these allegations to HUD. Some commenters also noted that the New York State Banking Department ("NYSBD") and Citigroup entered into a letter agreement executed on June 25, 2001 ("June 2001 Agreement"), that stated two affiliates of Associates submitted erroneous 1999 and 2000 HMDA data. In the June 2001 Agreement, Citigroup committed to submit to HUD a corrected data report or a plan satisfactory to HUD for addressing the identified errors, within six months of the agreement.

(58.) One commenter alleged that Citigroup's management lacks ethnic diversity and raised questions regarding Citigroup's failure to use more minority vendors. Although the Board fully supports programs designed to promote equal opportunity and economic opportunities for all members of society, these issues are beyond the factors the Board is authorized to consider under the BHC Act. See, e.g., Deutsche Bank AG, 86 Federal Reserve Bulletin 509, 513 (1999).

(59.) Commenters also asserted that Citigroup relied on home improvement loans with low principal amounts, resulting in Citigroup's alleged failure to meet lending projections made by Citicorp a July 1998 letter agreement with the NYSBD in connection with the merger of Travelers and Citicorp. The Board notes that compliance with projections in an agreement made with the NYSBD is a matter within the exclusive jurisdiction of the NYSBD. In the June 2001 Agreement, the NYSBD and Citigroup clarified the projections and extended them for an additional three years.

(60.) These comments were substantially similar to those considered by the Board in connection with its approval of Citicorp's proposal to acquire EAB. See Citigroup/EAB Order.

(61.) Several commenters also raised other matters, including contentions regarding the terms under which Citigroup originally acquired its existing affiliate bank in Mexico, environmental claims, claims about lending activities in India, and concerns about the Board's ability to obtain information regarding the activities of offices of Banamex and Citigroup located outside the United States. All these matters are either outside the jurisdiction of the Board or have been previously considered by the Board and involve matters regarding which commenters have presented no new information.

(62.) The Board also received several comments asserting that recent investigations on money laundering activities by staff of the Subcommittee on Investigations of the Committee on Governmental Affairs of the United States Senate and the United States General Accounting Office and several press reports demonstrate that Citibank NA and other affiliates of Citigroup lack sufficient policies and procedures and other resources to protect against money laundering. See Correspondent Banking: A Gateway for Money Laundering, S. Doc. No. 69-919 (1st Sess. February 5, 2001) (Report of the Minority Staff of the Permanent Subcommittee on Investigations of the Committee on Governmental Affairs of the United States Senate); Suspicious Banking Activities, General Accounting Office, GAO-01-120 (October 2000). These comments also were substantially the same as those considered by the Board in connection with its approval of Citigroup's proposal to acquire EAB. As noted in the Citigroup/EAB Order, the Board has carefully reviewed supervisory examinations of Citibank NA and consulted with the OCC, the appropriate federal financial supervisory agency of the bank, regarding the policies, procedures, and practices of Citigroup to comply with the Bank Secrecy Act. In addition, the Board has reviewed recent enhancements to Citigroup's policies and procedures to prevent money laundering that address the issues raised in those investigations. See Citigroup/EAB Order. A commenter also noted that Banamex was subject to a temporary cease-and-desist order issued by the Board in 1998 concerning the bank's compliance with U.S. anti-money laundering laws. The Board released Banamex from this order in March 2000 after determining that the bank had sufficiently enhanced its anti-money laundering compliance policies and procedures.

(63.) Commenters asserted that senior officials of Citigroup had improper ex parte communications with various U.S. and Mexican government officials regarding the proposed acquisition. The Board's policies regarding ex parte communications do not apply to contacts between an applicant and officials outside the Federal Reserve System, and do not govern communications with an applicant concerning issues that are not raised by a timely comment or communications when no application or other request for approval of the proposed acquisition is pending.

(64.) The Board also has received a comment questioning Citigroup's authority to own an interest in a telecommunications company whose shares are currently owned by Banamex. Citigroup will acquire and temporarily hold this interest pursuant to section 4(c)(13) of the BHC Act while Banamex divests control of the company, in accordance with the requirements of Mexican law, after Citigroup consummates its proposed acquisition of Banacci and Banamex. Citigroup must fully conform any remaining investment in the company to the merchant banking provisions of section 4(k) of the BHC Act (12 U.S.C. [sections] 1843(k)) and the Board's Regulation Y (12 C.F.R. Sub-part J), within six months of consummation.

(65.) Several 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 of the application. The Board has not received such a recommendation from the appropriate supervisory authority. 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 considered carefully these commenters' requests in light of all the facts of record. In the Board's view, the public has had ample opportunity to submit comments on the proposal and, in fact, the commenters have submitted extensive written comments that the Board has considered carefully in acting on the proposal. Many of the commenters' requests were based on issues that the Board carefully considered in connection with its action on Citigroup's proposal to acquire EAB. In addition, many requests were based on activities of Banacci or Citigroup in Mexico that are subject to the supervision and legal requirements of Mexican law and Mexican governmental authorities. The commenters' requests fail to demonstrate why their written comments do not present their views adequately or why a meeting or hearing otherwise would be necessary or appropriate. 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 for a public meeting or hearing on the proposal are denied.

(66.) A number of commenters requested that the Board delay action or extend the comment period on the proposal. The Board has accumulated a significant record in this case, including reports of examination, confidential supervisory information, public reports and information, and considerable public comment. In the Board's view, for the reasons discussed above, commenters have had ample opportunity to submit their views and, in fact, have provided substantial written submissions that the Board has considered carefully in acting on the proposal. Moreover, the BHC Act and Regulation Y require the Board to act on proposals submitted under those provisions within certain time periods. Based on a review of all the facts of record, the Board has concluded that the record in this case is sufficient to warrant action at this time, and that a further delay in considering the proposal, an extension of the comment period, or a denial of the proposal on the grounds discussed above or on the basis of informational insufficiency is not warranted.
JENNIFER J. JOHNSON
Secretary of the Board


Harrodsburg First Financial Bancorp, Inc. Harrodsburg, Kentucky

Order Approving the Formation of a Bank Holding Company

Harrodsburg First Financial Bancorp, Inc. ("Harrodsburg") has requested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act") (12 U.S.C. [sections] 1842) to acquire 55.7 percent of the voting shares of Citizens Financial Bank, Inc., Glasgow, Kentucky ("Citizens"), a de novo state-chartered bank, and thereby become a bank holding company. Harrodsburg, which is currently a savings and loan holding company, also has requested the Board's approval under sections 4(c)(8) and 4(j) of the BHC Act (12 U.S.C. [subsections] 1843(c)(8) and (j)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to retain and operate its wholly owned subsidiary savings association, First Financial Bank, also in Harrodsburg ("First Financial"), in accordance with section 225.28(b)(4) of Regulation Y (12 C.F.R. 225.28(b)(4)), after Harrodsburg becomes a bank holding company.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (66 Federal Register 21,158 and 22,559 (2001)). 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 the BHC Act.

First Financial, with total consolidated assets of $113.9 million, is the 98th largest depository organization in Kentucky, controlling deposits of $87.4 million, representing less than 1 percent of total deposits of insured depository institutions in the state.(1)

Competitive Considerations

The Board received comments on the competitive aspects of Harrodsburg's proposal to establish a de novo bank in Glasgow from two in-market competitors of Citizens who each claim that Barren County, Kentucky, currently is served by too many banks.(2) The Board has previously noted that the establishment of a de novo bank enhances competition in the relevant banking market and is a positive consideration in an application under section 3 of the BHC Act.(3) There is no evidence in this case that this transaction would lessen competition or create or further a monopoly in any relevant market.(4) Accordingly, the Board concludes that consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of banking resources in any relevant banking market, and that competitive considerations are consistent with approval.

Financial, Managerial, and Other Considerations

The BHC Act requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in the proposal and certain supervisory factors. The Board has reviewed information provided by Harrodsburg, confidential supervisory and examination information, and publicly reported financial and other information in assessing the financial and managerial strength of Harrodsburg, First Financial, and Citizens. The Board has reviewed the relevant factors in light of these and all other facts of record and concludes that the financial and managerial resources and future prospects of Harrodsburg, First Financial, and Citizens are consistent with approval, as are the other supervisory factors the Board must consider under the BHC Act.

Section 3 of the BHC Act also requires the Board to consider the effect of the transaction on the convenience and needs of the community to be served.(5) In evaluating this factor, the Board places particular emphasis on the ratings the insured depository institutions involved in a proposal received at their most recent examinations under the Community Reinvestment Act (12 U.S.C. [sections] 2901 et seq.) ("CRA"). First Financial received an overall rating of "satisfactory" from its primary federal supervisor, the Office of Thrift Supervision, at its most recent evaluation for CRA performance, as of January 1999. Citizens, a de novo bank that has not commenced operations, has not been evaluated for CRA performance by its primary federal supervisor, the Federal Deposit Insurance Corporation.

Citizens has filed a business plan with the State of Kentucky that calls for it to develop and apply flexible underwriting standards for loans that benefit low- or moderate-income areas or individuals, including purchase money and property improvement real estate loans; various consumer loans; and commercial, agricultural, church, and student loans. Citizens also intends to take advantage of active participation by its officers in Barren County civic clubs, associations, and other community organizations to ascertain the banking services needed by the community and to develop and provide these services to all segments of the community.

Based on all the facts of record, including First Financial's record of performance under the CRA, the Board concludes that convenience and needs considerations are consistent with approval of the proposal.

Nonbanking Activities

Harrodsburg also has filed a notice under sections 4(c)(8) and 4(j) of the BHC Act (12 U.S.C. [subsections] 1843(c)(8) and (j)) to retain and operate First Financial and thereby engage in operating a savings association. The Board has determined by regulation that operating a savings association is closely related to banking for purposes of the BHC Act.(6) Harrodsburg has committed to conduct this nonbanking activity in accordance with the limitations set forth in Regulation Y and the Board's orders and interpretations.

In order to approve this notice, the Board is required by section 4(j)(2)(A) of the BHC Act to determine that the retention and operation of its savings association by Harrodsburg "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."(7)

As part of its evaluation of these factors, the Board has considered the financial and managerial resources of Harrodsburg, First Financial, and Citizens 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 Harrodsburg's proposed retention of its nonbanking subsidiary, First Financial, in light of all the facts of record. For the reasons discussed, the Board has concluded that Harrodsburg's proposed retention of First Financial would not likely result in decreased or unfair competition or undue concentration of resources in the Anderson or Mercer Counties banking markets. Harrodsburg has indicated that the proposal would benefit the communities served by First Financial by allowing them continued access to First Financial's primary loan products, which are single-family and multifamily residential mortgages. Harrodsburg also stated that its continued operation of First Financial would preserve a proven competitor for deposit and loan products in the banking markets of Anderson and Mercer Counties.

The Board also concludes that the conduct of the proposed nonbanking activities within the framework of Regulation Y and 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 not be outweighed by its likely public benefits. Accordingly, the Board has determined that the balance of public interest factors it must consider under section 4(j)(2)(A) of the BHC Act is favorable and consistent with approval of Harrodsburg's notice to retain and operate First Financial.

Conclusion

Based on the foregoing and in light of all the facts of record, the Board has determined that the application and notice should be, and hereby are, approved. In reaching its conclusion, the Board has considered all the facts of record in light of the factors that it is required to consider under the BHC Act. The Board's approval is specifically conditioned on compliance by Harrodsburg with all commitments made in connection with the application and notice. The Board's determination on the nonbanking activities also is subject to all the terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c) (12 C.F.R. 225.7 and 225.25(c)), and the Board's authority to require such modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with, and to prevent evasion of, the BHC Act and the Board's regulations and orders thereunder. For purposes of this transaction, the commitments and conditions referred to in this order shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

The acquisition of Citizens may not be consummated before the fifteenth calendar day after the effective date of this order, or later than three months following the effective date of this order, and Citizens shall be open for business within six months following the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of St. Louis, acting pursuant to delegated authority.

By order of the Board of Governors, effective July 2, 2001.

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

(1.) Asset, deposit, and ranking data for First Financial are as of June 30, 2000.

(2.) Commenters claim that the financial performance of the banks currently operating in the Barren County has, in general, declined over the last three years, and they argue that the opening of a new bank in Barren County would only accelerate this trend, to the detriment of the local community. The Supreme Court has held that the antitrust Jaws are intended for the "protection of competition, not competitors." Brown Shoe Co. v. U.S., 370 U.S. 294, 319 (1962). See also BankAmerica Corporation, 66 Federal Reserve Bulletin 511, 515 (1980).

(3.) See Wilson Bank Holding Company, 82 Federal Reserve Bulletin 568 (1996).

(4.) Citizens and First Financial would not compete in the same local banking market. Citizens would operate in the Glasgow banking market (defined as Barren and Hart Counties and the western half of Metcalfe County, all in Kentucky), while First Financial competes in the Mercer and Anderson Counties, Kentucky, banking markets (defined as Mercer County and Anderson County, respectively).

(5.) 12 U.S.C. [sections] 1842(c)(2).

(6.) See 12 C.F.R. 225.28(b)(4)(ii).

(7.) 12 U.S.C. [sections] 1843(j)(2)(A).
ROBERT DEV. FRIERSON
Associate Secretary of the Board
COPYRIGHT 2001 Board of Governors of the Federal Reserve System
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Author:DEV. FRIERSON, ROBERT
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Date:Sep 1, 2001
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