In re: Application of Michigan National Corporation, Farmington Hills, Michigan for permission to engage in interstate banking activities through the acquisition of Lockwood Banc Group, Houston, Texas.

ORDER of the Commissioner of the Financial Institutions Bureau

Dated: May 10, 1991

ORDER

Background and Applicable Statutes

On August 30, 1990 the Financial Institutions Bureau (Bureau) received from Michigan National Corporation, Farmington Hills, Michigan (Applicant) an application for permission to engage in interstate banking activities through the acquisition of Lockwood Banc Group, Inc., Houston, Texas. The application was submitted pursuant to section 130b of the Michigan Banking Code of 1969, as amended, MCLA 487.301 et. seq.: MSA 23,710(1) et. seq. (banking code). The application was accepted for filing by the Bureau on September 7, 1990.

Following its acceptance for filing, the application was determined to be incomplete. Applicant was requested to submit the additional information necessary to complete the application for review and consideration pursuant to the requirements of section 130b. The requests for additional information were made on or about November 26, 1990 and February 4, 1991. Applicant's responses to the requests were received by the Bureau on or about January 15, 1991 and March 22, 1991, respectively. The additional information received March 22, 1991 completed the application.

Section 30 of the banking code provides that Applicant shall cause notice of filing of an application to be published in a newspaper(s) of general circulation in the community where Applicant is located and in the community where the organization to be acquired is located. Publication of the notice shall be one (1) time per week for two (2) consecutive weeks, with the first notice of publication occurring within ten (10) days of the date the application was accepted for filing by the Bureau. Pursuant to the statute, notice of the filing of the application was published in The Detroit News, Detroit, Michigan and The Houston Chronicle, Houston, Texas. Publication occurred on September 13 and September 20, 1990. Affidavits of publication were received by the Bureau in a timely fashion.

In addition to requiring Applicant to publish notice of the filing of its application, the Bureau notified sixty-nine (69) individuals and organizations, which are located throughout Applicant's Michigan market areas, that an application was on file and that interested parties could submit comments as would relate to the record of Applicant's bank subsidiaries in meeting the credit needs of their respective communities.

On September 26, 1990 the Bureau received a written notice of protest from State Representative Floyd Clack, of the 80th District, who is Chairperson of the Community Coalition for Fair Banking Practices, Flint, Michigan (Protestant). The notice of protest cited the basis for the protest. Subsequently, in a letter dated October 17, 1990, Protestant asked the Bureau to consider the letter received on September 26 to be the written statement as well as the written notice of protest. The Bureau considered the letter received September 26 to be sufficiently detailed to meet the requirements of section 30(4) of the banking code regarding the content of a written statement. Therefore, the Bureau deemed the written notice of protest and the written statement to be filed in compliance with the provisions of section 30(4) of the banking code. In its letter of October 31, 1990, Applicant stated that it did not intend to respond to Protestant's comments.

In its written notice of protest and statement, Protestant requested a formal hearing. The Bureau considered this to be a request for an oral argument as provided by section 30(4) of the banking code. On November 7, 1990 the oral argument was held at the State Office Building, Flint, Michigan.

Section 130b(6) of the banking code states:

"With the approval of the commissioner, a bank holding company located in this state may acquire, directly or indirectly, ownership or control of any or all of the voting shares of the capital stock of a banking institution located outside this state. A bank holding company desiring to make an acquisition pursuant to this subsection shall file an application with the commissioner. The commissioner shall approve the application if the bank holding company meets the requirements of subsection (11) and (12)."

Section 130b(11) requires Applicant to sign an agreement which states that consumer credit, except unsecured open end credit, extended by Applicant's bank subsidiaries to Michigan residents who do not travel outside the State of Michigan to obtain such credit, will be extended in accordance with Michigan usury laws. Applicant has submitted a written agreement regarding the extension of consumer credit which is substantially in the same form as outlined by the statute. The agreement is signed by Peter K. Thomsen, Executive Vice President of Michigan National Corporation.

Section 130b(12) provides, in part:

"...the commissioner shall assess the composite record of the bank subsidiaries of the bank holding company in meeting the credit needs of the communities in the state in which the bank subsidiaries are located, including low and moderate income neighborhoods, consistent with the safe and sound operation of the bank subsidiaries of the bank holding company. In assessing the record of the bank subsidiaries of the applicant, the commissioner shall consider the factors considered by the appropriate federal financial supervisory agency pursuant to regulations promulgated under the community reinvestment act of 1977, 12 USC 2901. The commissioner shall request the applicant to supply the commissioner with information and disclosures prepared by the applicant in compliance with the community reinvestment act of 1977, 12 USC 2901 and regulations promulgated thereunder, and a copy of the most recent assessment of the bank subsidiaries of the applicant conducted by the appropriate federal financial supervisory agency pursuant to the community reinvestment act."

In conclusion, this section states:

"This subsection shall not authorize the commissioner to make an on- site examination of a national banking association, and shall not authorize the commissioner to make an on-site examination of a state-chartered bank for the purpose of assessing the record of the bank subsidiaries of the applicant."

In an effort to satisfy the statutory requirement of section 130b(12), the Bureau's interstate acquisition application incorporates a series of questions which closely parallel the criteria used by the Federal agencies when assessing a bank's record of performance. In responding to these questions, Applicant is obliged to perform a self-assessment of the record of each of its bank subsidiaries in meeting the credit needs of the respective communities as delineated for purposes of the Community Reinvestment Act. The self-assessment includes discussion of:

• the efforts made to determine the credit needs of each community

• any public action plan or commitment

• the marketing and special credit related programs utilized

• the geographic distribution of credit applications, extensions and denials

• the participation in community development and redevelopment programs

• the origination of loans for residential mortgage, housing rehabilitation, home improvement and small business

• the participation in government insured, guaranteed or subsidized programs for housing and small business

Finally, the Commissioner acknowledges the difference between a bank holding company and a bank subsidiary of that holding company; however, within the context of this Order, the term "Applicant" shall be understood to mean the bank holding company and/or any of its bank subsidiaries, unless specifically identified otherwise.

Issues Raised by Protestant

In its written statement and testimony Protestant contends that Applicant is not fulfilling its obligation to meet the credit needs of the low income and minority residents of the City of Flint and Genesee County. Protestant bases its assertions largely on its analysis of the mortgage and home improvement lending data available from the years of 1986 and 1987. Protestant makes several assertions regarding Applicant's CRA performance, which Protestant desires to be addressed and resolved before the Commissioner would act to approve the application. The assertions include:

1. failure to assess the credit needs of the community

2. failure to meet the needs of the low income community

3. failure to meet the needs of the minority community

4. failure to invest in the business community.

Regarding its assertion of failure to meet the needs of the low income community, Protestant indicates MNC has exhibited minimal activity in the low income communities of Genesee County, based on its review of data provided outside of the computer generated reports of the State Financial Institutions Bureau. As support for this claim Protestant states in its notice of protest:

"The major method of home mortgage for low income persons is through the subsidized or insured mortgage plans provided by FHA, VA, or FMHA programs. In 1986, MNC did not grant a single mortgage to any individual under any of the programs offered by any of these agencies."

Protestant notes the 1987 performance of Applicant to be similar to that of 1986.

Regarding its assertion of failure to meet the needs of the minority community of Genesee County, Protestant notes Applicant's record to be marginally better than its record of lending in the low income community, but it is still considered to be "abysmal".

Finally, regarding the assertion of failure to invest in the business community, Protestant "...believes that MNC is not meeting the needs of small business owners in low income and minority areas." Protestant bases this assertion on its observations and knowledge of the community and its perception of a general trend of disinvestment in the Flint area.

Protestant has asked that the application be denied due to Applicant's "abysmal" record of performance in meeting the credit needs of the community of Genesee County.

Applicant's Response

As noted in the preceding discussion, Applicant chose not to respond in writing to Protestant's notice of protest and comments. Applicant's letter of October 31, 1990 states, "Michigan National Corporation is committed to complying with the intent of the Community Reinvestment Act and views community reinvestment as a continuing process and responsibility." Applicant responded to Protestant's concerns at the oral argument which was held November 7, 1990.

During the oral argument, Applicant again stated that it is committed to complying with the spirit and intent of the Community Reinvestment Act. By means of evidencing that commitment Applicant explained the development of its organizational structure which is intended to oversee the CRA compliance program of its lead bank in Michigan. The CRA Policy Committee is responsible for the program which is implemented in the various communities through designated community reinvestment officers. Activity reports are regularly completed by the community reinvestment officers and are submitted for review and consideration by management. This report and review process includes the consideration of product development to meet identified needs or markets. Thus, the report process complements the bank's marketing program, which Applicant believes to be comprehensive and to include low and moderate income communities in its delineated community.

Applicant states in the application materials and in its testimony that it traditionally has been a consumer and small-to-medium business lender and not a residential lender. However, since 1988 Applicant claims to have been meeting with community groups on a regular basis, first with groups in the Detroit area and more recently with those groups in the outstate communities such as Grand Rapids and Flint.

One result of these meetings has been the development and expansion of its mortgage and home improvement loan offerings. Also, Applicant claims its lead bank to be active in government insured loan programs and the small business loan program; participation in these programs is said to have increased since 1988. This claim was supported by Applicant's testimony that it has ben a leading Small Business Administration lender in the Flint area during the last five years.

Applicant states it is committed to providing the services and credit products which are beneficial to customers, consistent with safe and sound business practices. Further, Applicant testified there is no evidence of unreasonable denials of loan applicants, based on its internal review of denials. Applicant notes that in October, 1990, it signed a letter of understanding with a community group in the City of Grand Rapids, Michigan and it is in the process of completing an agreement in principle with the Protestant. Applicant believes these actions are indicative of its stated commitment to comply with the intent of the CRA.

Findings

Protestant has raised concerns about Applicant's performances, or lack thereof, in meeting the credit needs of low and moderate income community of Genesee County. Protestant has asked the Commissioner to deny this application based on Applicant's performance in meeting the credit needs of that community.

Section 130b(12) of the banking code establishes the criteria to be considered when assessing Applicant's performance in meeting the credit needs of the communities in which the bank subsidiaries are located.

Section 130b(12) of the banking code states:

"...the commissioner shall assess the composite record of the bank subsidiaries of the bank holding company in meeting the credit needs of the communities in the state in which the bank subsidiaries are located, including low and moderate income neighborhoods, consistent with the safe and sound operation of the bank subsidiaries..." (emphasis added)

The Commissioner has weighed the arguments presented by Protestant and by Applicant in the written statement, oral argument and application materials. The Commissioner must consider those arguments within the context of the statutory requirements of section 130b(12).

Protestant has asked the Commissioner to assess Applicant's record in meeting the credit needs of the minority community. The statute provides the Commissioner shall assess the record of Applicant's bank subsidiaries in meeting the credit needs of the communities which it serves, "...including low and moderate income neighborhoods..." The Commissioner's authority does not extend to the level ascribed by Protestant. Therefore, the Commissioner has considered those issues which relate to low and moderate income neighborhoods. The Commissioner recognizes many of the low and moderate income neighborhoods in the City of Flint to be high minority.

Further, that statute directs the Commissioner to consider Applicant's performance in terms of the communities which it serves. The Commissioner looks to the Applicant for an indication of the communities to be considered. The Community Reinvestment Act Statement of Applicant's lead bank, which serves the City of Flint and a large portion of Genesee County, states:

"The delineation of our local communities [sic] has been established by conducting a review of the geographic areas served by each of the Bank's branch facilities. In general, the primary area served by a branch represents that area which is within a three to five mile radius for branches located in Southeastern Michigan (Wayne, Oakland, Macomb and St. Clair Counties), and within a ten mile radius for branches located in the central and western sections of the southern portion of the lower peninsula of Michigan."

The statement lists 21 counties in the lower half of the peninsula of the State of Michigan, portions of which are included in its community delineation. Genesee County is one of the listed counties.

Applicant's community delineation encompasses several local communities, including the City of Flint and a large portion of Genesee County which is of concern to Protestant. Additionally, most of the population which is served in the community delineation is beyond the community of concern to Protestant; and many communities designated low and moderate income are within Applicant's community delineation, but they are not part of Protestant's community of concern.

The statute directs the Commissioner to "...assess the composite record of the bank subsidiaries..." Thus, the Commissioner cannot base his decision on Applicant's performance in a single local community, as requested by Protestant. However, the Commissioner views the statutory issues raised by Protestant as being indicative of a potential systemic problem. For this reason, the Bureau closely reviewed those concerns raised by Protestant regarding Applicant's performance in the City of Flint and Genesee County. The remaining communities were reviewed to determine the composite record of Applicant's bank subsidiaries.

The statute provides that the Commissioner shall assess Applicant's record in meeting the credit needs of the communities which it serves. To assist the Commissioner in making this assessment, the Bureau reviewed the noted materials as well as information provided to the Bureau pursuant to Public Act 135 of 1977 (PA 135). Bank Bulletin No. 34 "Assessment of Community Reinvestment Activities", which was issued in June, 1989, serves as a guide for an Applicant's efforts to meet the credit needs of the communities it serves. The bulletin outlines three general steps to be considered in assessing the performance of an institution:

1. identification of needs

2. selection of identified needs to be addressed by services and products

3. delivery of services and products to meet identified needs.

The Bureau notes that Protestant stated in its testimony that much, if not all, of its analysis of Applicant's lending record was based on data provided other than the reports of the Bureau. The Bureau does not deny that other data sources or types of analysis might provide informative results. However, in its decision making process, the Bureau utilizes the most comprehensive source of uniform mortgage and home improvement lending activity data. That source is available for use by individuals, community groups and bankers, as well as other parties. Such is the data provided pursuant to PA 135. Further, the data was analyzed by using the conventional definitions and parameters which are established by the federal regulations applicable to the CRA.

Also, the Bureau notes that Protestant's concerns are largely based on data from 1986 and 1987, even though data for 1988 and 1989 was available for review by Protestant. While a review of earlier years' lending activity can be informative, it is at least as important to review the most recent available data, for that data is likely to be indicative of the current efforts being made by Applicant to meet the credit needs in the community of concern.

The Bureau's review of 1988 and 1989 lending activity as provided pursuant to PA 135 shows Applicant to be an active lender in the City of Flint and Genesee County, which is the Flint Metropolitan Statistical Area (MSA). In 1989 Applicant generated 57 mortgage loans and 25 home improvement loans in the City of Flint; of these loans, 10 mortgage loans and 8 home improvement loans were in low income tracts (LIT's). The average LIT mortgage loan was $28,000, while the average LIT home improvement loan was $2,000. In the remainder of the Flint MSA, Applicant generated 119 mortgage loans and 58 home improvement loans; of these loans, 3 mortgage loans and zero home improvement loans were in LIT's. In this instance, the average LIT mortgage loan was $36,000. Included in the total mortgage loans were 63 loans reported to be done through a federal government insured loan program (i.e. FHA/VA/FMHA).

For 1988 the figures show Applicant to have generated 51 mortgage loans and 63 home improvement loans in the City of Flint; of these loans, 12 each and 36 each, respectively, were in LIT's. In the remainder of the Flint MSA, 94 mortgage loans and 68 home improvement loans were generated; of these loans, 6 each and 2 each, respectively, were in LIT's.

The 1987 figures were reviewed, also. Those figures indicate Applicant was active in the Flint MSA, at substantially the same levels as in 1988. However, as Applicant stated in its testimony, the figures are inaccurate because the corporate consolidation process which Applicant was undergoing at that time created problems in producing accurate data. In its testimony, Applicant stated the data collection and reporting problems to be significantly resolved since 1987; therefore, the 1988 and 1989 figures are more reliable than earlier year figures.

In addition to closely assessing Applicant's performance in the Flint MSA, the Bureau reviewed the performance of Applicant in various other Michigan communities which it serves. This was accomplished by reviewing the application materials, the results of examinations by federal supervisory agencies and Bureau records. This review generally indicated Applicant to be an active mortgage and home improvement lender.

The Commissioner recognizes the credit needs of a community to be more diverse than the need for mortgage and home improvement lending. In order to assess the record of Applicant, the Commissioner considered Applicant's performance in meeting other credit needs, in addition to mortgage and home improvement credit needs, in the community served by the bank subsidiaries. The instant application contains information which supports Applicant's statements that it is a consumer credit and small business lender in the 14 markets areas which it serves in Michigan, which includes the Flint market. The application materials also present several examples of Applicant's participation in community development and redevelopment programs.

In summary, a review of the record and Bureau data indicates Applicant to be active in meeting the credit needs of the City of Flint and the Flint MSA. While Applicant's lending activity record does not indicate it to be the leading lender in that community, the record does not indicate indifference or ignorance of the credit needs of the community. In the remainder of the market delineated in Michigan, the review of the record and Bureau data indicates Applicant to be active in trying to meet credit needs. Finally, the record of Applicant's other two bank subsidiaries resulted in no concerns being raised with respect to the statutory requirements of this application. Therefore, the Commissioner finds the record of Applicant in meeting the credit needs of the communities which it serves to be acceptable.

Additional Findings

Applicant and Protestant, each, have indicated that the Commissioner should consider the existence of an agreement between a bank and a community group, or discussions which might result in an agreement, or the lack thereof, to be evidence of Applicant's commitment to comply with the intent of the CRA. The Commissioner considers an agreement between a bank and community group to be indicative of attempts to increase the level of communication and understanding which exists between a bank and its community. While an agreement between a bank and a community group can enhance the potential for success in meeting the credit needs of a community, an agreement does not equate with meeting the credit needs, nor is the existence of any such agreement determinative of the issue.

In its testimony, Protestant stated that Applicant made little effort to meet to discuss Protestant's concerns prior to submission of this application. Whether or not this statement is a completely accurate representation of the situation, it does indicate a lack of communication and understanding between the parties. The Commissioner is aware that it is not always possible to achieve a complementary level of communication between various parties; however, the Commissioner believes it is incumbent on Applicant to initiate and to pursue the communication. This responsibility exists irrespective of any application process, and this responsibility is ongoing.

Section 130b of the Michigan Banking Code was passed to enable bank holding companies to be active in interstate acquisitions. Since the acquisition and application process is initiated at the pleasure of Applicant, Applicant is advantaged by its ability to anticipate the review of its record of CRA compliance. Applicant can utilize this advantage by making additional effort to be aware of and to address such concerns prior to initiating the application process. Also, Applicant can utilize this advantage to ensure that its application to the Bureau is responsive to the application questions and is complete. In reflecting on the eight months plus taken to process this application, the Commissioner observes that the application processing period could have been shortened substantially by better planning on the part of Applicant.

Protestant, in its testimony, criticized Applicant's efforts to determine needs in the City of Flint as not being a systematic approach. There is no required method to be used in determining credit needs of a community. Bankers are encouraged to develop their own methods for assessing the credit needs. Such methods might be more or less expansive based on the internal and/or external resources available to a bank. Bankers are encouraged to communicate with members of the community while performing the assessment of needs in order to increase the likelihood that the results of the assessment will represent the needs of that community. In any event, needs identification should be an ongoing process which requires sincere, constructive input by the bankers and members of the community for the process to be effective.

Finally, section 130b(12) states the assessment of Applicant's record of meeting the needs of a community shall include "...low and moderate income neighborhoods, consistent with safe and sound operation of the bank subsidiaries..." The Commissioner wants to emphasize that the safe and sound operation of the bank subsidiaries is consistent with issues which relate to the determination of credit-worthy borrowers, an ever present concern in the business of banking.

Conclusion

Based on the review of the application, written statement, testimony and related materials, the Commissioner concludes the composite record of Applicant's bank subsidiaries in meeting the credit needs of the communities in which its bank subsidiaries are located to be acceptable. Also, Applicant has provided the agreement required by section 130b(11) of the banking code.

Therefore, the application by Michigan National Corporation, Farmington Hills, Michigan to engage in interstate banking activity through the acquisition of Lockwood Banc Group, Inc., Houston, Texas hereby is APPROVED subject to the following:

A. Applicant shall furnish to this office evidence that approval has been issued by the Federal Reserve System and the State of Texas;

B. Applicant shall furnish to this office written notification of the effective date of the acquisition.

DEPARTMENT OF COMMERCE
Financial Institutions Bureau
Russell S. Kropschot, Acting Commissioner
Dated: May 10, 1991