Orders issued under Bank Holding Company Act.

Orders Issued Under Section 3 of the Bank Holding Company Act

Wells Fargo & Company San Francisco, California

Order Approving the Acquisition of a Bank Holding Company

Wells Fargo & Company ("Wells Fargo") has requested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act") (12 U.S.C. [section] 1842) to acquire all the voting shares of Pacific Northwest Bancorp ("Pacific Northwest") and thereby indirectly acquire Pacific Northwest Bank ("PN Bank"), both in Seattle, Washington.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (66 Federal Register 39,563 (2003)). 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.

Wells Fargo, with total consolidated assets of approximately $363 billion, is the third largest commercial banking organization in the United States. Wells Fargo operates subsidiary depository institutions in Alaska, Arizona, California, Colorado, Idaho, Illinois, Iowa, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming. In Washington, Wells Fargo controls insured deposits of approximately $3 billion, representing approximately 4 percent of total deposits of insured depository institutions in the state ("state deposits"). (1) In Oregon, Wells Fargo controls insured deposits of approximately $4 billion, representing approximately 12 percent of state deposits.

Pacific Northwest, with total consolidated assets of approximately $3.1 billion, is the 139th largest commercial banking organization in the United States. Pacific Northwest also operates subsidiary depository institutions in Washington and Oregon. In Washington, Pacific Northwest controls insured deposits of approximately $1.8 billion, representing approximately 3 percent of state deposits. In Oregon, Pacific Northwest controls insured deposits of approximately $263 million, representing less than 1 percent of state deposits. On consummation of this proposal, Wells Fargo would become the fourth largest commercial banking organization in Washington, controlling deposits of approximately $5 billion, representing approximately 7 percent of state deposits; Wells Fargo would remain the third largest commercial banking organization in Oregon controlling deposits of $4 billion, representing, approximately 13 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. (2) For purposes of the BHC Act, the home state of Wells Fargo is Minnesota, and Pacific Northwest is located in Washington and Oregon. (3) Based on a review of all the facts of record, including relevant state statutes, the Board finds that all the conditions for an interstate acquisition enumerated in section 3(d) are met in this case. (4) 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 would be in furtherance of any attempt to monopolize the business of banking in any relevant market. The BHC Act also prohibits the Board from approving a proposed bank acquisition that would substantially lessen competition in any relevant banking market unless the anticompetitive effects of the proposal are clearly outweighed in the public interest by the probable effect of the proposal in meeting the convenience and needs of the community to be served. (5)

Wells Fargo competes directly with Pacific Northwest in eight banking markets in Washington and Oregon. (6) The Board has reviewed carefully the competitive effects of the proposal in each of these banking markets in light of all the facts of record. In particular, the Board has considered the number of competitors that would remain in the markets, the relative shares of total deposits in depository institutions in the markets ("market deposits") controlled by Wells Fargo and Pacific Northwest, (7) 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"), (8) other characteristics of the markets, and commitments made by Wells Fargo to divest one branch.

A. Banking Market With Divestiture

In the Kittitas County banking market, Wells Fargo operates the sixth largest depository institution, controlling $27.5 million in deposits, representing 8.6 percent of market deposits. Pacific Northwest operates the largest depository institution in the market, controlling $72.1 million in deposits, representing 22.6 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the largest depository institution in the market, controlling deposits of $99.6 million, representing approximately 31.3 percent of market deposits.

To reduce the potential for adverse effects on competition in the Kittitas County banking market, Wells Fargo has committed to divest to an out-of-market commercial banking organization one branch with a specified level of deposits sufficient to make the proposal consistent with Board precedent and with the thresholds in the DOJ Guidelines. (9) After consummation, and taking into account the proposed divestiture, the Kittitas County banking market would remain moderately concentrated. Wells Fargo would become the fourth largest depository institution in the market, controlling deposits of approximately $67.5 million, representing 21 percent of market deposits. The HHI would decrease by 36 points to 1541. In addition, at least eight competitors would remain in the banking market.

B. Banking Markets Without Divestitures

Consummation of the proposal without divestitures would be consistent with Board precedent and the DOJ Guidelines in all seven of the remaining banking markets in which Wells Fargo and Pacific Northwest compete directly. (10) After consummation of the proposal, the seven markets would remain moderately concentrated, as measured by the HHI, and changes in concentration would be modest in each of these markets. In addition, numerous competitors would remain in the markets.

C. Views of Other Agencies and Conclusion

The Department of Justice also has conducted a detailed review of the competitive effects of the proposal and has advised the Board that, in light of the proposed divestiture, consummation of the proposal would not have a significantly adverse effect on competition in any relevant banking market.

Based on all the facts of record, 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 of the banking markets in which Wells Fargo and Pacific Northwest compete or in any other relevant banking market. Accordingly, based on all the facts of record and subject to completion of the proposed divestiture, the Board has determined that competitive factors are consistent with approval of the proposal.

Financial, Managerial, and Other Supervisory Factors

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 reports of examination, other confidential supervisory information received from the primary federal banking agency that supervises each institution, and information provided by Wells Fargo. Based on all the facts of record, the Board has concluded that considerations relating to the financial and managerial resources and future prospects of Wells Fargo, Pacific Northwest, and PN Bank are consistent with approval, as are the other supervisory factors under the BHC Act.

Convenience and Needs Considerations

In acting on a proposal under section 3 of the BHC Act, the Board is required to consider the effects of the proposal on the convenience and needs of the communities to be served and to take into account the records of the relevant insured depository institutions under the Community Reinvestment Act ("CRA"). (11) The CRA requires the federal financial supervisory agencies to encourage financial institutions to help meet the credit needs of local communities in which they operate, consistent with their safe and sound operation, and requires the appropriate federal financial 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 expansionary proposals. The Board has carefully considered the convenience and needs factor and the CRA performance records of the subsidiary depository institutions of Wells Fargo and Pacific Northwest, including public comments on the effect the proposal would have on the communities to be served by the resulting organizations.

A. CRA Performance Evaluations

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 insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the applications process because it represents a detailed, on-site evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor. (12)

Wells Fargo's lead bank, Wells Fargo Bank, N.A., also in San Francisco ("WF Bank"), received an "outstanding" rating at its most recent CRA performance evaluation by the Office of the Comptroller of the Currency ("OCC"), as of October 1, 2001. (13) All other subsidiary banks of Wells Fargo received either "outstanding" or "satisfactory" ratings at their most recent CRA performance evaluations. (14) PN Bank received a "satisfactory" rating at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation ("FDIC"), as of November 23, 1999.

B. CRA performance of WF Bank

1. Lending Test. In California, WF Bank received an "outstanding" rating under the lending test. Examiners noted that WF Bank's overall geographic distribution of loans was good, and they characterized the bank's lending performance in the San Francisco Metropolitan Statistical Area ("MSA") as excellent. In the assessment areas subject to a full-scope review, (15) WF Bank originated or purchased HMDA-reportable loans totaling $42.6 billion. In the San Francisco and Orange County MSAs, examiners reported that the proportion of WF Bank's home purchase loans in low-income census tracts exceeded the proportion of owner-occupied units in those areas. In the San Francisco and San Jose MSAs, the proportion of WF Bank's home purchase loans in moderate-income census tracts also exceeded the proportion of owner-occupied housing units. Examiners reported that WF Bank enhanced its efforts to meet the credit needs of its assessment areas through lending programs, such as the "Easy-To-Own No Money Down," "Easy-To-Own California 1% Down," and "Easy-To-Own 3% Down," which have flexible underwriting standards, low credit-score approvals, high loan-to-value allowances, and a variety of down payment options.

Wells Fargo has conducted a significant amount of mortgage lending since the latest CRA performance examination. In 2002, WF Bank originated and purchased HMDA-reportable loans totaling $88.6 billion, $7 billion of which were in LMI census tracts, (16) In the first six months of 2003, WF Bank originated and purchased HMDA-reportable loans totaling $57.2 billion, $4.8 billion of which were in LMI census tracts. (17)

Examiners reported that WF originated loans to small businesses in the assessment areas subject to a full-scope review totaling $6 billion during the evaluation period. Examiners described WF Bank's distribution of small loans to businesses in the Los Angeles-Long Beach, Oakland, Orange County, San Diego, and San Jose MSAs as excellent. In 2000, WF Bank had the largest market share of small loans to businesses in LMI census tracts in the assessment areas subject to a full-scope review. In the Orange County and Oakland MSAs, the portion of WF Bank's small loans to businesses in low-income tracts exceeded the proportion of all businesses in LMI tracts. In the San Francisco MSA, the portion of WF Bank's small loans to business in moderate-income census tracts also exceeded the proportion of businesses in such tracts.

Since its 2001 performance evaluation, WF Bank has offered Small Business Administration ("SBA") loans, such as SBA 7(a) and SBAExpress, that help small businesses obtain financing for which they would not otherwise qualify. WF Bank also offers "Community Express" loans through a pilot program developed by the SBA in collaboration with a national community group. To qualify for Community Express loans applicants must meet certain size standards and conduct business in specific geographic areas, usually LMI areas. In 2001, WF Bank introduced the Business Secured MasterCard. This credit card was designed to help establish credit for small businesses and has credit limits from $1,000 to $100,000 and the option to progress to a partially secured or unsecured card after a year. Since 2001, a total of 1,711 Business Secured MasterCard accounts have been opened in California.

Examiners reported that, through its community development lending, WF bank helped address a significant need for affordable housing. WF Bank made 84 community development loans for affordable housing in the assessment areas subject to a full-scope review, totaling $312 million. These loans included a $20.8 million construction loan to build a 293-unit apartment complex in Anaheim, which will provide affordable housing to households earning between 45 and 50 percent of the average median income, and a $10.5 million construction loan that helped build an 80-unit multifamily housing complex for families of low-income farm workers in Half Moon Bay. WF Bank also extended loans in the amounts of $7.5 million and $1.7 million to finance the construction of 195 units of affordable housing for LMI individuals in San Jose.

WF Bank made 108 community development loans, totaling $658 million, to revitalize or stabilize LMI areas and to promote economic development. Wells Fargo has represented that, since the performance evaluation in 2001, the bank has extended 71 community development loans in California, totaling $122.2 million.

2. Investment Test. In California, WF Bank received an "outstanding" rating under the investment test. Examiners noted that WF Bank's investment and grant activities helped address essential identified needs in the full-scope assessment areas. Community development investments in those assessment areas subject to a full-scope review totaled $162.4 million and included a $25 million investment in limited partnerships that invest in apartment complexes in California that qualify for low-income housing tax credits, and a $9 million investment in a real estate equity fund that provides equity to underutilized industrial and retail sites in LMI communities in Los Angeles. WF Bank also provided $1.5 million in grants to The Accelerated School, a charter school in South Central Los Angeles.

Since the evaluation in 2001, WF Bank has continued to make community development investments and grants. In California in 2002, the bank's community development investments totaled $54.5 million, and its grants totaled $18 million. During the first six months of 2003, WF Bank's community development investments in California totaled $41 million, and its grants totaled $9 million.

3. Service Test. In California, WF Bank received an "outstanding" rating under the service test. (18) WF Bank's alternative delivery systems include ATMs, banking by phone or mail, and Internet banking. During the evaluation period, the bank operated 874 branch offices and 6,611 ATMs. In addition, the bank provides Buses, which are mobile technology centers that primarily visit LMI areas; the Wellsfargo.com Bus, which provides consumer education and travels throughout the United States; and mobile branches for use in emergencies and when traditional branches are unable to function. Examiners found that WF Bank's banking services are accessible to essentially all portions of the assessment areas. During the evaluation period, WF Bank opened 28 branches and closed 199. Examiners reported that the bank's opening and closing activity had a neutral impact on LMI areas.

As of July 31, 2003, half of WF Bank's branches in California were in or within a mile of an LMI community. In 2001, WF Bank launched the Banking on Our Future program, a computer-based financial literacy program featuring instructions for young adult and adult residents in LMI areas. In May 2002, a Spanish language version of Banking on Our Future was introduced.

C. HMDA and Fair Lending Record

The Board also has carefully considered Wells Fargo's lending record in light of comments on HMDA data reported by its subsidiaries. (19) The HMDA data reflect certain disparities in the rates of loan applications, originations, and denials among members of different racial groups and persons at different income levels in certain local areas. (20) The 2001 and 2002 HMDA data indicate that Wells Fargo's denial disparity ratios for African-American and Hispanic applicants generally were higher than the denial disparity ratios for lenders in the aggregate for HMDA-reportable loans in the markets reviewed. (21) Wells Fargo's percentage of housing-related loan originations to borrowers in minority census tracts (22) generally was less than that of lenders in the aggregate in the markets. (23)

In 2002, however, Wells Fargo's housing-related loan originations to African-American individuals, as a percentage of its total HMDA-reportable lending, were equal to or exceeded that of the aggregate of all lenders in seven of the markets reviewed. Wells Fargo's housing-related loan originations to Hispanic individuals, as a percentage of its total HMDA-reportable lending, were also equal to or exceeded that of the aggregate of all lenders in five of the markets reviewed in 2002. Moreover, the HMDA data generally do not indicate that Wells Fargo is excluding any race or income segment of the population or geographic areas on a prohibited basis. (24)

The Board is concerned when HMDA data for 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. 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 Wells Fargo with fair lending laws. Examiners found no evidence of prohibited discrimination or other illegal credit practices at any of the subsidiary depository institutions controlled by Wells Fargo. Examiners identified no substantive violations of applicable fair lending laws and regulations at WF Bank. Examiners also identified no substantive violations of applicable fair lending laws and regulations at the other subsidiary banks of Wells Fargo in the performance evaluations listed in Appendix C. (25)

The record also indicates that Wells Fargo has taken steps to ensure compliance with fair lending laws. (26) Wells Fargo's corporate fair lending policy includes standards relating to advertising and marketing, pricing, underwriting, compliance with fair lending laws, and customer service. The corporate fair lending policy also requires each Wells Fargo business that extends or supports the extension of credit to adopt Wells Fargo's corporate fair lending policy and implement policies and procedures consistent with the corporate fair lending policy. Policies adopted by Wells Fargo businesses include comparative file analysis, a second review process, and self-assessment audits for fair lending compliance. (27) In addition, Wells Fargo has implemented fair lending policy training for executive management, sales management, operations management, sales staff, operations staff, and consumer contact employees with loan origination responsibilities.

The Board has also considered the HMDA data in light of the programs described above and the overall performance of Wells Fargo's subsidiary banks under the CRA. These established efforts demonstrate that the banks are active in helping to meet the credit needs of their entire communities.

D. Branch Closings

One commenter expressed concern about the possible effect of branch closings resulting from this proposal and suggested that Wells Fargo refrain from closing branches in LMI census tracts or rural areas until it has discussed the proposed branch closure with local community groups. The Board has carefully considered the comment on potential branch closings in light of all the facts of record. Wells Fargo has represented that it intends to implement its current branch activity policy at Bank. The policy includes a review of branches proposed for relocation, closure, or consolidation in low-income communities or where the distance exceeds two miles to the nearest Wells Fargo branch.

The Board also has considered that federal banking law provides a specific mechanism for addressing branch closings. (28) Federal law requires an insured depository institution to provide notice to the public and the appropriate federal supervisory agency before closing a branch. In addition, the Board notes that the OCC and FDIC, as the appropriate federal supervisors of Wells Fargo's subsidiary banks, will continue to review the branch closing records of the banks in the course of conducting CRA performance examinations.

E. Conclusion on Convenience and Needs Considerations

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 comments received and responses to the comments, evaluations of the performance of the insured depository institution subsidiaries of Wells Fargo and Pacific Northwest under the CRA, and confidential supervisory information. (29) The Board also considered information submitted by Wells Fargo concerning WF Bank's performance under the CRA and its compliance with fair lending laws since its last CRA performance evaluation and the compliance of other Wells Fargo lending subsidiaries with fair lending, HMDA, and other applicable laws.

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

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. (30) In reaching this 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. The Board's approval is specifically conditioned on compliance by Wells Fargo with all the representations and commitments made in connection with the application, commitments referred to in this order, and the receipt of all other 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 transaction shall 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 San Francisco, acting pursuant to delegated authority.

By order of the Board of Governors, effective October 16, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

ROBERT DEV. FRIERSON

Deputy Secretary of the Board

(1.) Asset, deposit, and ranking data are as of June 30, 2002. In this context, depository institutions include commercial banks, savings banks, and savings associations.

(2.) A bank holding company's home state is that state in which the total deposits of all banking subsidiaries of such company were the largest on the later of July 1, 1966, or the date on which the company became a bank holding company. 12 U.S.C. [section] 1841(o)(4)(C).

(3.) For purposes of section 3(d) of the BHC Act, the Board considers a bank to be located in the states in which the bank is chartered, headquartered, or operates a branch.

(4.) See 12 U.S.C. [subsection] 1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B). Wells Fargo is adequately capitalized and adequately managed, as defined by applicable law. In addition, on consummation of the proposal, Wells Fargo 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 deposits of insured depository institutions in each of Oregon and Washington. Washington law prohibits the interstate acquisition of a Washington bank that has existed for fewer than 5 years. This transaction would meet the minimum age requirements imposed by Washington law. See Wash. Rev. Code Ann. [section] 30.04.232 (2003).

(5.) 12 U.S.C. [section] 1842(c)(1).

(6.) These banking markets, which are defined in Appendix A, are the Bremerton, Centralia, Kittitas County, Mount Vernon, Olympia, Seattle, and Yakima markets, all in Washington, and the Portland, Oregon, market.

(7.) Market share data are as of June 30, 2003, and are based on calculations in which the deposits of thrift institutions are included at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial banks. See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Board 743 (1984). Thus, the Board regularly has included thrift deposits in the market share calculation on a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).

(8.) Under the DOJ Guidelines, 49 Federal Register 26,823 (1984), a market is considered moderately concentrated if the post-merger HHI is between 1000 and 1800 and highly concentrated if the post-merger HHI is more than 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 for anticompetitive effects implicitly recognize the competitive effects of limited-purpose lenders and other nondepository financial institutions.

(9.) With respect to this market, Wells Fargo will execute, before consummation of the proposal, a sales agreement for the proposed divestiture with a purchaser determined by the Board to be competitively suitable and to complete the divestiture within 180 days after consummation of the proposal. Wells Fargo also has committed that, if it is unsuccessful in completing any divestiture within 180 days after consummation, it will transfer the unsold branch to an independent trustee that is acceptable to the Board and will instruct the trustee to sell the branch promptly to one or more alternative purchasers acceptable to the Board. See BankAmerica Corporation, 78 Federal Reserve Bulletin 338 (1992); United New Mexico Financial Corporation, 77 Federal Reserve Bulletin 484 (1991).

(10.) These markets are the Bremerton. Centralia, Mount Vernon, Olympia, Seattle, and Yakima markets in Washington and the Portland, Oregon, market. The effects of the proposal on the concentration of banking resources in these markets are described in Appendix B.

(11.) 12 U.S.C. [section] 2901 et seq.

(12.) See Interagency Questions and Answers Regarding Community Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

(13.) The overall rating for WF Bank is a composite of its state/ multistate ratings. WF Bank's performance in California was weighted more heavily than its performance in other areas in its overall rating by examiners because more than 98 percent of its deposits and more than 87 percent of its loans were in California during the evaluation period. Examiners rated WF Bank "outstanding" in California. At the time of the 2001 performance evaluation, WF Bank had 60 assessment areas in Arizona, California, Colorado, Idaho. Minnesota, Nevada, Oregon, Utah. and Washington.

(14.) See Appendix C for the CRA ratings of the other subsidiary banks of Wells Fargo. One commenter expressed concern that the performance of Wells Fargo HSBC Trade Bank, N.A., San Francisco ("Trade Bank"), was weak because its performance under the CRA was limited to qualified investments and community development services, which examiners characterized as not being "innovative or complex." As noted in Appendix C, Trade Bank received a "satisfactory" rating at its most recent CRA evaluation. As a wholesale bank, its CRA activities are limited to community development investments and services. Examiners described the community development investments and services provided by Trade Bank as being responsive to community needs.

(15.) In California, examiners conducted full-scope reviews for the bank's Los Angeles-Long Beach, Oakland, Orange County, San Diego, San Francisco, and San Jose MSAs assessment areas. The review period for residential mortgage lending reportable under the Home Mortgage Disclosure Act ("HMDA") (12 U.S.C. [section] 2801 et seq.) and small business and small farm lending reportable under CRA was the last three quarters of 1998, calendar years 1999 and 2000, and the first three quarters of 2001.

(16.) One commenter recommended that Wells Fargo refer all qualified mortgage applicants from subprime affiliates to prime affiliates. Wells Fargo has a program for referring qualified borrowers from Wells Fargo Financial, Inc., Des Moines, Iowa ("WF Financial"), to Wells Fargo Home Mortgage, also in Des Moines ("WFHM").

(17.) Commenters alleged that Wells Fargo aggressively markets subprime loans to LMI borrowers. The Board has considered WF Bank's record of lending to borrowers in LMI areas as well as Wells Fargo's efforts to market prime and subprime loans in LMI areas.

(18.) One commenter criticized the fees charged by Wells Fargo for cashing noncustomer checks and other services and for failing to verify whether a check is valid by telephone. Wells Fargo has represented that, along with many of its competitors, the verification of individual checks by telephone was terminated because of escalating account fraud. Although the Board has recognized that banks help serve the banking needs of their communities by making basic banking services available at a nominal or no charge, the CRA does not require that banks limit the fees charged for services.

(19.) Commenters criticized Wells Fargo for not differentiating between prime and subprime loans when reporting data under HMDA. HMDA reporting requirements do not, however, distinguish between prime and subprime loans. Commenters also alleged, based on comparisons with county courthouse records, that Wells Fargo underreports loans under HMDA, in part by mischaracterizing some closed-end loans as open-end loans that do not have to be reported under HMDA. Wells Fargo asserts that it reports all mortgage lending activity in accordance with HMDA regulations, which provide a consistent disclosure format for all lenders, and acknowledges that although it occasionally uses an open-end deed of trust to secure a closed-end loan, such loans are in fact treated as closed-end loans. The Board notes that courthouse records would not necessarily correspond to reported HMDA data because not all lenders that record deeds of trust are subject to HMDA's reporting requirements, and some transactions recorded in courthouse records are not subject to HMDA reporting.

(20.) A commenter alleged that Wells Fargo failed to make enough loans to LMI individuals and minorities in California. Another commenter alleged that, based on 2001 HMDA data, WFHM denied home mortgage applications from African Americans and Hispanics more frequently than applications from whites in the Denver, Seattle, Albuquerque, Austin, and Houston MSAs.

(21.) The Board analyzed 2001 and 2002 HMDA data for Wells Fargo's lending affiliates in their assessment areas in California, Colorado, New Mexico, Texas, and Washington. The Board's review included the HMDA data for WF Bank; Wells Fargo Bank West, N.A., Denver, Colorado; Wells Fargo Bank New Mexico, N.A., Albuquerque, New Mexico; Wells Fargo Bank Texas, N.A., Houston, Texas; WFHM; Wells Fargo Funding, Minneapolis, Minnesota; and WF Financial.

(22.) For purposes of this HMDA analysis, minority census tract means a census tract with a minority population of 80 percent or more.

(23.) Several commenters expressed concern that low-income and minority communities have disproportionately high numbers of Wells Fargo subprime loans, but did not provide evidence to support this assertion. Commenters also alleged that the subprime lending subsidiaries of Wells Fargo, including WF Financial and Island Finance Credit Services, Inc., Des Moines, charge excessive interest rates. Commenters did not explain, however, how the rates charged by these entities are excessive or provide any evidence that rates charged by Wells Fargo do not reflect the customer's credit history, risk profile, or other appropriate factors. The Board has considered these allegations in light of Wells Fargo's policies and procedures for ensuring compliance with the fair lending laws.

(24.) Other commenters alleged that Wells Fargo does not explain to borrowers that credit insurance is optional. Wells Fargo stated that it does, in fact, present credit insurance to its customers as optional. One commenter expressed concern that Wells Fargo sells single-premium credit life insurance. Wells Fargo represented that it does not offer single-premium credit insurance on real-estate-secured products.

(25.) One commenter criticized the business relationship between Wells Fargo Bank Minnesota, N.A., Minneapolis, Minnesota ("WF Minnesota"), and Delta Funding Corp. ("Delta"), Woodbury, New York, a subprime lender that was subject to government actions regarding its consumer lending practices. Wells Fargo stated that with respect to Delta Funding, WF Minnesota's role is limited to that of a trustee on bond issues secured by pools of mortgage loans that Delta originated. Wells Fargo represented that WF Minnesota has no role in the initial funding of the loans that are included in the mortgage pools or in the establishment of Delta's business practices.

(26.) A commenter alleged that Wells Fargo does not accurately report information about borrowers to credit bureaus. Wells Fargo has represented that it has policies in place to ensure proper reporting to credit bureaus. In addition, in instances where an error occurs, Wells Fargo tries to work with the customer to rectify the error as quickly as possible and send correct information to the credit reporting agency.

(27.) Some commenters have alleged that Wells Fargo uses deceptive marketing tactics, such ns misleading monthly payment comparisons that do not include the costs of taxes and insurance. Commenters also alleged that Wells Fargo's practice of mailing unsolicited loan drafts is an abusive marketing tactic. Wells Fargo is required by the Federal Trade Commission Act (15 U.S.C. [section] 41 et seq.) to market products in a manner that is not unfair and deceptive. The Board has considered Wells Fargo's policies and procedures for ensuring that their marketing efforts are consistent with the law.

(28.) 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.

(29.) Commenters criticized Wells Fargo for funding unaffiliated payday lenders. Wells Fargo stated that its affiliates have provided credit facilities to payday lenders, often in conjunction with other major commercial lenders, and such lending represents an insignificant percentage of its commercial lending portfolio. Wells Fargo represented that it does not participate in the lending practices or credit review processes of payday lenders to which it extends credit. The Board notes that the OCC, as the primary federal supervisor of the subsidiary national banks of Wells Fargo engaged in providing credit to payday lenders, will continue to review the banks' lending activities in the course of conducting examinations.

(30.) Several commenters requested that the Board hold a public 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 any of the banks 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 heating 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 the 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 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 hearing or meeting is not required or warranted in this case. Accordingly, the requests for a public hearing on the proposal are denied.

Appendix A

Banking Markets in which Wells Fargo and Pacific Northwest Compete Directly

Washington Banking Markets

Bremerton

The Bremerton Ranally Metropolitan Area ("RMA"), Poulsbo, and Kingston.

Centralia

Western Lewis County, including Centralia, Chehalis, Morton, Pe Ell, Toledo, and Winlock.

Kittitas County

Kittitas County, including Cle Elum, Ellensburg, and Roslyn.

Mount Vernon

Skagit County and northern Whidbey Island, including Anacortes, Burlington, Concrete, Coupeville, La Conner, Mount Vernon, Oak Harbor, and Sedro Woolley.

Olympia

The Olympia RMA and Hoodsport.

Seattle

The Seattle RMA, Camano City, and Eatonville.

Yakima

The Yakima RMA.

Oregon Banking Market

Portland

The Portland RMA, Banks, Molalla, Mount Angel, Saint Helens, Scappoose, Vernonia, and Woodburn, Oregon; and Yacolt, Washington.

Appendix B

Certain Banking Markets Without Divestitures

Bremerton, Washington

Wells Fargo operates the eighth largest depository institution in the Bremerton banking market, controlling $55.5 million in deposits, representing 4.4 percent of market deposits. Pacific Northwest operates the sixth largest depository institution in the market, controlling $71.9 million in deposits, representing 5.7 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the fourth largest depository institution in the market, controlling deposits of $127.4 million, representing approximately 10 percent of market deposits. The HHI would increase 49 points to 1476. Fourteen competitors would remain in the market.

Centralia, Washington

Wells Fargo operates the seventh largest depository institution in the Centralia banking market, controlling $33 million in deposits, representing 5.7 percent of market deposits. Pacific Northwest operates the twelfth largest depository institution in the market, controlling $4.7 million in deposits, representing less than 1 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the seventh largest depository institution in the market, controlling deposits of $37.7 million, representing 6.6 percent of market deposits. The HHI would increase 9 points to 1732. Eleven competitors would remain in the market.

Mount Vernon, Washington

Wells Fargo operates the ninth largest depository institution in the Mount Vernon banking market, controlling $53.4 million in deposits, representing 3.2 percent of market deposits. Pacific Northwest operates the second largest depository institution in the market, controlling $313.2 million in deposits, representing 18.5 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the largest depository institution in the market, controlling deposits of $366.6 million, representing approximately 21.6 percent of market deposits. The HHI would increase 116 points to 1326. Twelve competitors would remain in the market.

Olympia, Washington

Wells Fargo operates the tenth largest depository institution in the Olympia banking market, controlling $49.2 million in deposits, representing 3 percent of market deposits. Pacific Northwest is the seventeenth largest depository institution in the market, controlling $6.9 million in deposits, representing less than 1 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the ninth largest depository institution in the market, controlling deposits of $56.1 million, representing approximately 3.4 percent of market deposits. The HHI would increase 2 points to 1042. Seventeen competitors would remain in the market.

Yakima, Washington

Wells Fargo operates the eighth largest depository institution in the Yakima banking market, controlling $52.1 million in deposits, representing 4.6 percent of market deposits. Pacific Northwest operates the seventh largest depository institution in the market, controlling $54.3 million in deposits, representing 4.8 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the fifth largest depository institution in the market, controlling deposits of $106.4 million, representing approximately 9.5 percent of market deposits. The HHI would increase 45 points to 1279. Eleven competitors would remain in the market.

Seattle, Washington

Wells Fargo operates the fifth largest depository institution in the Seattle banking market, controlling $2.4 billion in deposits, representing 6.3 percent of market deposits. Pacific Northwest operates the eighth largest depository institution in the market, controlling $784.7 million in deposits, representing 2.1 percent of market deposits. On consummation of the proposal, Wells Fargo would operate the fourth largest depository institution in the market, controlling deposits of $3.2 billion, representing approximately 8.4 percent of market deposits. The HHI would increase 26 points to 1468. Sixty-seven competitors would remain in the market.

Portland, Oregon

Wells Fargo operates the third largest depository institution in the Portland banking market, controlling $2.5 billion in deposits, representing 14.6 percent of market deposits. Pacific Northwest operates the tenth largest depository institution in the market, controlling $262.8 million in deposits, representing 1.5 percent of market deposits. On consummation of the proposal, Wells Fargo would remain the third largest depository institution in the market, controlling deposits of $2.8 billion, representing approximately 16.2 percent of market deposits. The HHI would increase 45 points to 1759. Thirty-two competitors would remain in the market.

Appendix C

CRA Performance Evaluations of Wells Fargo's Subsidiary Banks

Subsidiary Bank                         CRA Rating      Date

Wells Fargo Bank Alaska, N.A.,          Outstanding     March 8, 1999
  Anchorage, Alaska
Wells Fargo Bank Arizona, N.A.,         Satisfactory    August 2, 1999
  Phoenix, Arizona
Wells Fargo Bank Illinois, N.A.,        Satisfactory    June 12, 2000
  Galesburg, Illinois
Wells Fargo Bank Indiana, N.A.,         Outstanding     June 12, 2000
  Fort Wayne, Indiana
Wells Fargo Bank Iowa, N.A.,            Satisfactory    June 12, 2000
  Des Moines, Iowa
Wells Fargo Bank Michigan, N.A.,        Outstanding     April 19, 1999
  Marquette, Michigan
Wells Fargo Bank Minnesota, N.A.,       Outstanding     Feb. 1, 2000
  Minneapolis, Minnesota
Wells Fargo Bank Montana, N.A.,         Satisfactory    March 13, 2000
  Billings, Montana
Wells Fargo Bank Nebraska, N.A.,        Satisfactory    June 12, 2000
  Omaha, Nebraska
Wells Fargo Bank Nevada, N.A.,          Satisfactory    August 2, 1999
  Las Vegas, Nevada
Wells Fargo Bank New Mexico, N.A.,      Satisfactory    March 13, 2000
  Albuquerque, New Mexico
Wells Fargo Bank North Dakota, N.A.,    Satisfactory    March 13, 2000
  Fargo, North Dakota
Wells Fargo Bank Northwest, N.A.,       Outstanding     May 3, 1999
  Salt Lake City, Utah
Wells Fargo Bank Ohio, N.A.,            Outstanding     May 7, 2001
  Van Wert, Ohio
Wells Fargo Bank South Dakota, N.A.,    Outstanding     March 13, 2000
  Sioux Falls, South Dakota
Wells Fargo Bank Texas, N.A.,           Satisfactory    Nov. 1, 1999
  San Antonio, Texas
Wells Fargo Bank West, N.A.,            Satisfactory    Nov. l, 1999
  Denver, Colorado
Wells Fargo Bank Wisconsin, N.A.,       Satisfactory    June 12, 2000
  Milwaukee, Wisconsin
Wells Fargo Bank Wyoming, N.A.,         Satisfactory    March 13, 2000
  Casper, Wyoming
Wells Fargo Financial Bank,             Outstanding     Nov. 28, 2001
  Sioux Falls, South Dakota
Wells Fargo Financial National Bank,    Outstanding     March 21, 1997
  Des Moines, Iowa
  (previously, Dial National Bank,
  Des Moines, Iowa)
Wells Fargo HSBC Trade Bank, N.A.,      Satisfactory    August 7, 2000
  San Francisco, California

Subsidiary Bank                         Agency

Wells Fargo Bank Alaska, N.A.,          OCC
  Anchorage, Alaska
Wells Fargo Bank Arizona, N.A.,         OCC
  Phoenix, Arizona
Wells Fargo Bank Illinois, N.A.,        OCC
  Galesburg, Illinois
Wells Fargo Bank Indiana, N.A.,         OCC
  Fort Wayne, Indiana
Wells Fargo Bank Iowa, N.A.,            OCC
  Des Moines, Iowa
Wells Fargo Bank Michigan, N.A.,        OCC
  Marquette, Michigan
Wells Fargo Bank Minnesota, N.A.,       OCC
  Minneapolis, Minnesota
Wells Fargo Bank Montana, N.A.,         OCC
  Billings, Montana
Wells Fargo Bank Nebraska, N.A.,        OCC
  Omaha, Nebraska
Wells Fargo Bank Nevada, N.A.,          OCC
  Las Vegas, Nevada
Wells Fargo Bank New Mexico, N.A.,      OCC
  Albuquerque, New Mexico
Wells Fargo Bank North Dakota, N.A.,    OCC
  Fargo, North Dakota
Wells Fargo Bank Northwest, N.A.,       OCC
  Salt Lake City, Utah
Wells Fargo Bank Ohio, N.A.,            OCC
  Van Wert, Ohio
Wells Fargo Bank South Dakota, N.A.,    OCC
  Sioux Falls, South Dakota
Wells Fargo Bank Texas, N.A.,           OCC
  San Antonio, Texas
Wells Fargo Bank West, N.A.,            OCC
  Denver, Colorado
Wells Fargo Bank Wisconsin, N.A.,       OCC
  Milwaukee, Wisconsin
Wells Fargo Bank Wyoming, N.A.,         OCC
  Casper, Wyoming
Wells Fargo Financial Bank,             FDIC
  Sioux Falls, South Dakota
Wells Fargo Financial National Bank,    OCC
  Des Moines, Iowa
  (previously, Dial National Bank,
  Des Moines, Iowa)
Wells Fargo HSBC Trade Bank, N.A.,      OCC
  San Francisco, California

Wells Fargo & Company

San Francisco, California

Order Approving the Acquisition of a Bank Holding Company

Wells Fargo & Company ("Wells Fargo") has requested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act") (12 U.S.C. [section] 1842) to acquire all the voting shares of Two Rivers Corporation ("Two Rivers"), and thereby indirectly acquire Bank of Grand Junction ("GJ Bank"), both in Grand Junction, Colorado.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (66 Federal Register 38,340 (2003)). 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.

Wells Fargo, with total consolidated assets of approximately $363 billion and total insured domestic deposits of $210 billion, is the third largest commercial banking organization in the United States. Wells Fargo operates subsidiary depository institutions in Alaska, Arizona, California, Colorado, Idaho, Illinois, Iowa, Michigan, Minnesota, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oregon, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming. Wells Fargo controls approximately 5.9 percent of total assets of insured commercial banks and approximately 4.4 percent of total deposits of insured depository institutions in the United States. (1) Wells Fargo is the largest commercial banking organization in Colorado, controlling deposits of $9.9 billion, representing approximately 18 percent of total deposits in insured depository institutions in the state ("state deposits"). (2)

Two Rivers, with total consolidated assets of $72 million operates one depository institution in Colorado. Two Rivers is the 97th largest depository organization in Colorado, controlling total deposits of $57.6 million, representing less than 1 percent of state deposits. On consummation of the proposal, Wells Fargo would remain the third largest commercial banking organization in the United States and the largest commercial banking organization in Colorado.

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. (3) For purposes of the BHC Act, the home state of Wells Fargo is Minnesota, and Wells Fargo proposes to acquire a depository institution in Colorado. Based on a review of all the facts of record, including a review of relevant state statutes, the Board finds that all the conditions for an interstate acquisition enumerated in section 3(d) are met in this case. (4) 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 would he in furtherance of any attempt to monopolize the business of banking in any relevant market. The BHC Act also prohibits the Board from approving a proposed bank acquisition that would substantially lessen competition in any relevant banking market unless the anticompetitive effects of the proposal are clearly outweighed in the public interest by the probable effect of the proposal in meeting the convenience and needs of the community to be served. (5)

The subsidiary depository institutions of Wells Fargo and Two Rivers currently compete in the Grand Junction, Colorado, banking market. (6) Consummation of the proposal would be consistent with the Department of Justice Merger Guidelines ("DOJ Guidelines") and Board precedent. (7) After consummation of the proposal, the market would remain moderately concentrated, as measured by the HHI, and numerous competitors would remain in the market. (8) The Department of Justice also has advised the Board that it believes that consummation of the proposal is not likely to have a significantly adverse effect on competition in any relevant banking market. Based on all the facts of record, 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 Supervisory Factors

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 reports of examination, other confidential supervisory information received from the primary federal banking agency that supervises each institution, and information provided by Wells Fargo. Based on all the facts of record, the Board has concluded that considerations relating to the financial and managerial resources and future prospects of Wells Fargo, Two Rivers, and GJ Bank are consistent with approval, as are the other supervisory factors under the BHC Act.

Convenience and Needs Considerations

In acting on a proposal under section 3 of the BHC Act, the Board is required to consider the effects of the proposal on the convenience and needs of the communities to be served and to take into account the records of the relevant insured depository institutions under the Community Reinvestment Act ("CRA"). (9) The Board has carefully considered the convenience and needs factor and the CRA performance records of the subsidiary banks of Wells Fargo and Two Rivers in light of all the facts of record. Wells Fargo's lead bank, Wells Fargo Bank, N.A., San Francisco, California ("WF Bank"), received an "outstanding" rating at its most recent CRA performance evaluation by the Office of the Comptroller of the Currency ("OCC"), as of October 1, 2001. All other Wells Fargo subsidiary depository institutions received "outstanding" or "satisfactory" CRA ratings at their most recent CRA performance evaluations. (10) As discussed in the Board's companion order of October 16, 2003, approving the application by Wells Fargo to acquire Pacific Northwest Bancorp, Inc., Seattle, Washington, Wells Fargo has implemented many programs to help meet the convenience and needs of the communities it serves and has taken steps to ensure compliance with fair lending laws. (11) GJ Bank received a "satisfactory" rating at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation ("FDIC"), as of August 12, 2002.

One commenter expressed concern about the effect of a branch closing that may result from this proposal. The Board has carefully considered the comment on potential branch closings in light of all the facts of record. Wells Fargo has represented that the branch in question is in a middle-income census tract and next door to a Wells Fargo branch that is less than a mile from Wells Fargo's main office in Grand Junction.

The Board also has considered that federal banking law provides a specific mechanism for addressing closings of branches of insured depository institutions. (12) Federal law requires an insured depository institution to provide notice to the public and the appropriate federal supervisory agency before closing a branch. In addition, the Board notes that the OCC and FDIC, as the appropriate federal supervisors of Wells Fargo's subsidiary banks, will continue to review the branch closing records of the banks in the course of conducting CRA performance examinations. (13)

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

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. In reaching this 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. The Board's approval is specifically conditioned on compliance by Wells Fargo with all the representations and commitments made in connection with the application and the receipt of all other 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 transaction shall 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 San Francisco, acting pursuant to delegated authority.

By order of the Board of Governors, effective October 16, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.

ROBERT DE V. FRIERSON

Deputy Secretary of the Board

(1.) Asset, deposit, and national ranking data are as of December 31, 2002. In this context, depository institutions include commercial banks, savings banks, and savings associations.

(2.) State deposit and state ranking data are as of June 30, 2002.

(3.) A bank holding company's home state is that state in which the total deposits of all banking subsidiaries of such company were the largest on the later of July 1, 1966, or the date on which the company became a bank holding company. 12 U.S.C. [section] 1841(o)(4)(C).

(4.) See 12 U.S.C. [subsection] 1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B). Wells Fargo is adequately capitalized and adequately managed, as defined by applicable law. In addition, on consummation of the proposal, Wells Fargo 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 deposits of insured depository institutions in Colorado. Colorado law prohibits the interstate acquisition of a Colorado bank that has existed for fewer than than 5 years. This transaction would meet the minimum age requirements imposed by Colorado law. See Colo. Rev. Stat. [section] 11-6.4-103 (2003).

(5.) 12 U.S.C. [section] 1842(c)(1).

(6.) The Grand Junction banking market is defined as Mesa County, Colorado.

(7.) Under the DOJ Guidelines, 49 Federal Register 26,823 (1984), a market is 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 for anticompetitive effects implicitly recognize the competitive effects of limited-purpose lenders and other nondepository financial institutions.

(8.) On consummation of the proposal, Wells Fargo would remain the largest depository institution in the Grand Junction banking market, controlling deposits of $363.9 million, representing approximately 31.3 percent of total deposits in insured depository institutions in the market. The HHI would increase 261 points to 1556, and the market would remain moderately concentrated. These calculations use deposit and market share data as of June 30, 2003, and include the deposits of thrift institutions at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, significant competitors of commercial banks. See Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989); National City Corporation, 70 Federal Reserve Bulletin 743 (1984); and First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).

(9.) 12 U.S.C. [section] 2901 et seq.

(10.) The Interagency Questions and Answers Regarding Community Reinvestment provides that an institution's most recent CRA performance evaluation is an important consideration in the application process because it represents a detailed on-site evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor. 66 Federal Register 36,620 and 36,639 (2001).

(11.) See Wells Fargo & Company, 89 Federal Reserve Bulletin 497 (2003) (Order dated October 16, 2003) ("Pacific Northwest Order"). The CRA ratings of Wells Fargo's other subsidiary banks are listed in Appendix C of that order. The record of that application and the findings in the Pacific Northwest Order are incorporated into and made part of this order.

(12.) 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.

(13.) The commenter also complained that some Wells Fargo customers were required to travel to Queens, New York, after Wells Fargo closed an office of its nonbank subsidiary, Island Finance Credit Services, Inc. ("Island Finance"), a consumer finance company located in Bronx, New York. Island Finance has since ceased operations in the continental United States, Alaska, and Hawaii. However, Wells Fargo continues to offer credit products in New York City, including the Bronx, through offices of its subsidiary, Wells Fargo Home Mortgage, Inc., Des Moines, Iowa. The commenter raised other concerns about Wells Fargo that have been addressed in the Pacific Northwest Order.

Orders Issued Under Section 4 of the Bank Holding Company Act

Citigroup Inc.

New York, New York

Order Approving Notice to Engage in Activities Complementary to a Financial Activity

Citigroup Inc. ("Citigroup"), a financial holding company ("FHC") within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 4 of the BHC Act (12 U.S.C. [section] 1843) and the Board's Regulation Y (12 C.F.R. Part 225) to retain all the voting shares of Phibro, Inc., New York, New York ("Phibro"). Phibro engages in a variety of commodity-related activities, including trading in physical commodities, an activity that the Board has not previously approved under the BHC Act. Citigroup currently owns Phibro pursuant to the temporary grandfather authority provided by section 4(a)(2) of the BHC Act. (1)

Regulation Y currently authorizes bank holding companies ("BHCs") to engage as principal in forward contracts, options, futures, options on futures, swaps, and similar contracts, whether traded on exchanges or not, based on a rate, price, financial asset, nonfinancial asset, or group of assets (other than a bank-ineligible security) ("Commodity Derivatives"). Under Regulation Y, a BHC may conduct Commodity Derivatives activities subject to certain restrictions that are designed to limit the BHC's activity to trading and investing in financial instruments rather than dealing directly in physical commodities. Under these restrictions, a BHC may take and make delivery of physically settled derivatives involving commodities that a state member bank is permitted to own. (2) For all other types of physically settled derivatives, (3) a BHC must make reasonable efforts to avoid delivery on such derivatives or must take and make delivery only on an instantaneous, pass-through basis. Other than in the limited circumstances described above in connection with Commodity Derivatives, Regulation Y generally does not permit BHCs to take or make delivery of nonfinancial commodities.

The BHC Act, as amended by the Gramm-Leach-Bliley Act ("GLB Act"), permits a BHC to engage in activities that the Board had determined were closely related to banking, by regulation or order, prior to November 12, 1999. (4) The BHC Act permits a FHC to engage in a broad range of activities that are defined in the statute to be financial in nature. (5) Moreover, the BHC Act allows FHCs to engage in any activity that the Board determines, in consultation with the Secretary of the Treasury, to be financial in nature or incidental to a financial activity. (6)

In addition to these provisions, the BHC Act permits FHCs to engage in any activity that the Board (in its sole discretion) determines is complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. (7) This authority is intended to allow the Board to permit FHCs to engage on a limited basis in an activity that appears to be commercial rather than financial in nature, but that is meaningfully connected to a financial activity such that it complements the financial activity. (8)

The only limitations on this complementary authority are that, in addition to finding a connection between the nonfinancial activity and a financial activity conducted by the FHC, the Board must determine that the nonfinancial activity does not pose unacceptable risks to the safety and soundness of the FHC, its subsidiary depository institutions, or the U.S. financial system. The safety and soundness requirement was added as part of a compromise in which Congress rejected requests to allow unrestricted affiliations between depository institutions and nonfinancial companies. Moreover, the BHC Act provides that any FHC seeking to engage in a complementary activity must obtain the Board's prior approval under section 4(j) of the BHC Act. In reviewing such a proposal, the BHC Act requires the Board to consider whether performance of the activity by the FHC can reasonably be expected to produce public benefits that outweigh possible adverse effects. (9)

As noted above, Citigroup has requested that the Board expand the authority of FHCs to purchase and sell commodities in the spot market and to take and make delivery of physical commodities to settle Commodity Derivatives ("Commodity Trading Activities"). Commodity Trading Activities substantially involve the commercial activities of physically owning and disposing of assets such as oil, natural gas, agricultural products, and other nonfinancial commodities. Moreover, the risks associated with conducting these activities are commercial risks not traditionally incurred or managed to a material extent by banking organizations. Accordingly, the Board does not believe that Commodity Trading Activities may be construed at this time as incidental to a financial activity within the meaning of the GLB Act. The Board concludes, however, for the reasons set forth below, that there is a reasonable basis for construing these activities as complementary to a financial activity within the meaning of the GLB Act.

A number of considerations support a Board determination that Commodity Trading Activities are complementary to a financial activity. First, Commodity Trading Activities flow from the existing financial activities of FHCs. In particular, Commodity Trading Activities would provide FHCs with an alternative method of fulfilling their obligations under otherwise BHC-permissible Commodity Derivatives. For example, if warranted by market conditions, a FHC would be able to use Commodity Trading Activity authority to take a Commodity Derivative to physical settlement rather than terminating, assigning, offsetting, or otherwise cash-settling the contract.

The Board also notes that Citigroup contends that the existing restrictions of Regulation Y place FHCs at a significant bargaining disadvantage when operating in physically settled over-the-counter ("OTC") derivatives markets. According to Citigroup, counterparties to FHCs in these markets are aware of the regulatory impediments that inhibit FHCs from taking derivative contracts to physical settlement. As a consequence, FHCs that participate in these markets can be forced to terminate or offset their derivative contracts on uneconomic terms. In Citigroup's view, allowing FHCs to engage in Commodity Trading Activities would permit FHCs to compete in physically settled OTC derivatives markets more economically.

Moreover, authorizing Commodity Trading Activities would enhance the ability of FHCs to efficiently provide a full range of commodity-related services to their customers. Granting FHCs increased flexibility to buy and sell commodities in the spot market and to physically settle Commodity Derivatives likely would benefit customers by enabling FHCs to transact more efficiently with customers in a wider variety of commodity markets and transaction formats. Approving Commodity Trading Activities as a complementary activity also would enable FHCs to acquire more experience in the markets for physical commodities and thereby improve their understanding of commodity derivatives markets and the profitability of their existing BHC-permissible commodity derivatives businesses.

It is also important to note that a number of non-BHC participants in the commodity derivatives markets, including diversified financial companies, conduct Commodity Trading Activities in connection with their commodity derivatives business. These companies can, and regularly do, buy and sell commodities in the spot market and physically settle commodity derivative contracts. Permitting FHCs to engage in Commodity Trading Activities in connection with their commodity derivatives business would, therefore, enable FHCs to offer services that are provided by a number of other financial intermediaries.

Based on the foregoing and all other facts of record, the Board concludes that Commodity Trading Activities involving a particular commodity complement the financial activity of engaging regularly as principal in BHC-permissible Commodity Derivatives based on that commodity. (10)

As noted above, in order to authorize Citigroup to engage in Commodity Trading Activities as a complementary activity under the GLB Act, the Board also must determine that the activities do not pose a substantial risk to the safety or soundness of depository institutions or the U.S. financial system generally. (11) In addition, the Board must determine that the performance of Commodity Trading Activities by Citigroup "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices." (12)

In order to limit the potential safety and soundness risks of Commodity Trading Activities, Citigroup has proposed to engage in only a limited amount of Commodity Trading Activities. As a condition of this order, the market value of commodities held by Citigroup as a result of Commodity Trading Activities must not exceed 5 percent of Citigroup's consolidated tier 1 capital. (13) Citigroup also must notify the Federal Reserve Bank of New York if the market value of commodities held by Citigroup as a result of its Commodity Trading Activities exceeds 4 percent of its tier 1 capital.

In addition, Citigroup may take and make delivery only of physical commodities for which derivative contracts have been approved for trading on a U.S. futures exchange by the Commodity Futures Trading Commission ("CFFC") (unless specifically excluded by the Board) or which have been specifically approved by the Board. (14) This requirement is designed to prevent Citigroup from becoming involved in dealing in finished goods and other items, such as real estate, that lack the fungibility and liquidity of exchange-traded commodities.

Permitting Citigroup to engage in the limited amount and types of Commodity Trading Activities described above does not appear to pose a substantial risk to Citigroup, its subsidiary depository institutions, or the U.S. financial system generally. Through its existing authority to engage in Commodity Derivatives, Citigroup already may incur market risk associated with commodities. Permitting Citigroup to buy and sell commodities in the spot market or physically settle Commodity Derivatives would not appear to increase significantly the organization's potential exposure to commodity price risk.

Adding Commodity Trading Activities would, however, expose Citigroup to additional risks, including, but not limited to, storage risk, transportation risk, and legal and environmental risks. To minimize these risks, Citigroup would not be authorized to

(i) Own, operate, or invest in facilities for the extraction, transportation, storage, or distribution of commodities; or

(ii) Process, refine, or otherwise alter commodities. In conducting its Commodity Trading Activities, Citigroup will be expected to use appropriate storage and transportation facilities owned and operated by third parties. (15)

Citigroup has indicated that it will mandate that commodity storage facilities used by Citigroup have all required governmental permits and provide to Citigroup a certificate to that effect. Citigroup has further stated that all commodity storage facilities will be inspected by or on behalf of Citigroup before use and that Citigroup will physically inspect any commodity in storage every six months.

In addition, Citigroup has indicated that it will adopt additional standards for Commodity Trading Activities that involve environmentally sensitive products, such as oil or natural gas. For example, Citigroup will require that the owner of every vessel that carries oil on behalf of Citigroup be a member of a protection and indemnity club and carry the maximum insurance for oil pollution available from the club. Citigroup also will require every such vessel to carry substantial amounts of additional oil pollution insurance from creditworthy insurance companies. Furthermore, Citigroup will place age limitations on vessels and will require vessels to be approved by a major international oil company and have appropriate oil spill response plans and equipment. Moreover, Citigroup will have a comprehensive backup plan in the event any vessel owner fails to respond adequately to an oil spill and will hire inspectors to monitor the loading and discharging of vessels.

Citigroup also has represented that it will have in place specific policies and procedures for the storage of oil. In addition to the general policies set forth above, Citigroup will require all oil storage facilities it uses to carry a significant amount of oil pollution insurance from a creditworthy insurance company and to have appropriate spill response plans and equipment. Citigroup also will have a comprehensive backup plan in the event the storage facility owner fails to respond adequately to an oil spill.

Finally, Citigroup and its Commodity Trading Activities will remain subject to the general securities, commodities, and energy laws and the rules and regulations (including the antifraud and antimanipulation rules and regulations) of the Securities and Exchange Commission, the CFTC, and the Federal Energy Regulatory Commission.

The Board believes that Citigroup has the managerial expertise and internal control framework to manage the risks of taking and making delivery of physical commodities. In addition, Citigroup has the expertise and internal controls to integrate effectively the risk management of Commodity Trading Activities into Citigroup's overall risk management framework, including managing on a consolidated basis Citigroup's overall exposure arising from commodity-related activities.

Approval of the proposal likely would benefit Citigroup's customers by enhancing the ability of Citigroup to provide efficiently a full range of commodity-related services. Approving Commodity Trading Activities for Citigroup also would enable the company to improve its understanding of physical commodity and commodity derivatives markets and its ability to serve as an effective competitor in physical commodity and commodity derivatives markets.

For these reasons, and based on Citigroup's policies and procedures for monitoring and controlling the risks of Commodity Trading Activities, the Board concludes that consummation of the proposal does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally and can reasonably be expected to produce benefits to the public that outweigh any potential adverse effects.

Based on all the facts of record, including the representations and commitments made by Citigroup in connection with the notice, and subject to the terms and conditions set forth in this order, the Board has determined that the notice should be, and hereby is, approved. The Board's determination is subject to all the conditions set forth in Regulation Y, including those in section 225.7 (12 C.F.R. 225.7), and to the Board's authority to require modification or termination of the activities of a BHC or any of its subsidiaries as the Board finds necessary to ensure compliance with, or to prevent evasion of, the provisions and purposes of the BHC Act and the Board's regulations and orders issued thereunder. The Board's decision is specifically conditioned on compliance with all the commitments made in connection with the notice, including the commitments and conditions discussed in this order. The commitments and conditions relied on in reaching this decision 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.

By order of the Board of Governors, effective October 2, 2003.

Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, and Bernanke. Absent and not voting: Governor Kohn.

ROBERT DE V. FRIERSON

Deputy Secretary of the Board

(1.) Citigroup's grandfather fights expire on October 8, 2003. Citigroup originally acquired its interest in Phibro in October 1998 in connection with the merger between Travelers and Citicorp. See Travelers Group inc., 84 Federal Reserve Bulletin 985 (1998).

(2.) State member banks may own, for example, investment-grade corporate debt securities, U.S. government and municipal securities, foreign exchange, and certain precious metals.

(3.) These derivative contracts would include instruments based on, for example, energy-related and agricultural commodities.

(4.) 12 U.S.C. [section] 1843(c)(8).

(5.) The Board determined by regulation before November 12, 1999, that engaging as principal in Commodity Derivatives, subject to certain restrictions, was closely related to banking. Accordingly, engaging as principal in BHC-permissible Commodity Derivatives is a financial activity for purposes of the BHC Act. See 12 U.S.C. [section] 1843(k)(4)(F).

(6.) 12 U.S.C. [section] 1843(k)(1)(A).

(7.) 12 U.S.C. [section] 1843(k)(1)(B).

(8.) See 145 Cong. Rec. H11529 (daily ed. Nov. 4,1999) (Statement of Chairman Leach) ("It is expected that complementary activities would not be significant relative to the overall financial activities of the organization.").

(9.) 12 U.S.C. [section] 1843(j)(2)(A).

(10.) For example, Commodity Trading Activities involving all types of crude oil would be complementary to engaging regularly as principal in BHC-permissible Commodity Derivatives based on Brent crude oil.

(11.) 12 U.S.C. [section] 1843(k)(1)(B).

(12.) 12 U.S.C. [section] 1843(j).

(13.) Citigroup would be required to include in this 5 percent limit the market value of any commodities held by Citigroup as a result of a failure of its reasonable efforts to avoid taking delivery under section 225.28(b)(8)(ii)(B) of Regulation Y. In the past, the market value of commodities held by BHCs as a result of an inability to avoid delivery on Commodity Derivatives has not been material.

(14.) The particular commodity derivative contract that Citigroup takes to physical settlement need not be exchange-traded, but (in the absence of specific Board approval) futures or options on futures on the commodity underlying the derivative contract must have been approved for exchange trading by the CFTC.

The CFTC publishes annually a list of the CFTC-approved commodity contracts. See Commodity Futures Trading Commission, FY 2002 Annual Report to Congress 124. With respect to granularity, the Board intends this requirement to permit Commodity Trading Activities involving all types of a listed commodity. For example, Commodity Trading Activities involving any type of coal or coal derivative contract would be permitted, even though the CFTC list specifically approves only Central Appalachian coal.

(15.) Approving Commodity Trading Activities as a complementary activity, subject to limits and conditions, would not in any way restrict the existing authority of Citigroup to deal in foreign exchange, precious metals, or any other bank-eligible commodity.