First National Bank Group, Inc. Edinburg, Texas.

Order Approving Application to Acquire Control of a Bank

First National Bank Group, Inc. ("First National"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 3 of the BHC Act (12 U.S.C. [sections] 1842) to acquire up to 51 percent of the voting shares of Nueces National Bank, Corpus Christi, Texas ("Nueces Bank").(1)

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 37,883 (1998)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3 of the BHC Act.

First National, with total consolidated assets of approximately $310 million, owns First National Bank, Edinburg, Texas. First National is the 66th largest banking organization in Texas, controlling deposits of approximately $294 million, representing less than 1 percent of total deposits in depository institutions in the state ("state deposits").(2) Nueces Bank is the 521st largest banking organization in Texas, controlling deposits of approximately $33 million, representing less than 1 percent of state deposits. On consummation of the proposal, First National would become the 58th largest banking organization in Texas, controlling deposits of approximately $327 million, representing less than 1 percent of state deposits.

Competitive Considerations

Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly, or that may substantially lessen competition in any relevant banking market, if the anticompetitive effects of the proposal are not 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.(3) First National and Nueces Bank compete directly in the Corpus Christi, Texas, banking market.(4) After consummation of the proposal, First National would become the 16th largest depository institution in the market, controlling deposits of approximately $34.1 million, representing 1.4 percent of total deposits in depository institutions in the market ("market deposits").(5) Concentration in the Corpus Christi banking market, as measured by the Herfindahl-Hirschman Index ("HHI"), would not increase, and the market would remain moderately concentrated.(6) In addition, 23 other competitors would remain in the banking market after consummation. Based on these and the other 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 the Corpus Christi banking market or any other relevant banking market.

Financial, Managerial, and Other Supervisory Factors

The Board also has carefully considered the financial and managerial resources and future prospects of First National, First National Bank, and Nueces Bank in light of all the facts of record, including the terms of the proposed acquisition, supervisory reports of examination assessing the financial and managerial resources of the organizations, and financial information provided by First National. Based on all the facts of record, the Board concludes that the financial and managerial resources and future prospects of First National, First National Bank, and Nueces Bank are consistent with approval, as are the other supervisory factors the Board must consider under section 3 of the BHC Act.

Convenience and Needs Considerations

The Board also has carefully considered the effect of the proposal on the convenience and needs of the communities to be served in light of all the facts of record, including comments received regarding the effect the proposal would have on the communities to be served by First National. Some commenters commended Nueces Bank for serving well the Corpus Christi community, especially Hispanic consumers, small businesses, and low-income persons. Commenters also expressed concern that an institution based outside of Corpus Christi would not be able to meet the needs of the local community and that the local identity and orientation of Nueces Bank would be lost if the transaction were to be consummated. Several of these commenters expressed further concern that the transaction would harm the local Hispanic community if Nueces Bank, Corpus Christi's only minority-owned bank, would not remain a minority-owned institution.(7)

The Board has long held that consideration of the convenience and needs factor includes a review of the records of performance of the relevant depository institutions under the Community Reinvestment Act (12 U.S.C. [sections] 2901 et seq.) ("CRA").(8) As provided in the CRA, the Board evaluates the record of performance of an institution in light of examinations by the appropriate federal supervisor of the institution's CRA performance record. 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.(9)

First National Bank received an overall rating of "outstanding" from its appropriate federal supervisor, the Office of the Comptroller of the Currency ("OCC"), at its most recent evaluation for CRA performance, as of December 19, 1996 ("1996 Examination"). Nueces Bank received a "satisfactory" CRA performance rating from the OCC at its most recent evaluation for CRA performance, as of April 1, 1997.

The 1996 Examination concluded that First National Bank was responsive to its community's credit needs, including the credit needs of low- and moderate-income individuals and areas. Examiners found that the bank had "more than reasonable" loan-to-deposit ratios in light of the economic and financial condition of, and lending opportunities available in, the bank's assessment area. Examiners also determined that the bank extended a substantial majority of its loans within its assessment area and that the bank's credit was well distributed to borrowers of different income levels and businesses of different sizes.(10)

In weighing the concerns expressed by commenters, the Board also has considered First National's statement that it intends to maintain Nueces Bank as a separately chartered national bank serving the Corpus Christi community. First National also indicated that it does not propose to make any changes in the senior management of Nueces Bank as a result of the proposal. In addition, First National asserted that it does not plan to discontinue, or materially change the terms of, any banking services currently being offered or provided by Nueces Bank, including the bank's policies and procedures designed to meet the credit needs of the local community. First National stated, moreover, that it is well-equipped to address the banking needs of Corpus Christi's Hispanic community and noted that its service area includes 12 predominately Hispanic communities in southern Texas, that a substantial majority of its employees are Hispanic, and that its employees own a substantial majority of First National Bank.

The Board has carefully considered all the facts of record, including comments received on the proposal and responses to the comments, in reviewing the convenience and needs factor under the BHC Act. Based on a review of the entire record, and for the reasons discussed above, the Board concludes that considerations relating to convenience and needs, including the CRA performance records of First National Bank and Nueces Bank, are consistent with approval of the proposal.

Conclusion

Based on the foregoing and all the facts of record, the Board has determined that the application should be, and hereby is, approved. The Board's approval of the proposal is specifically conditioned on compliance by First National with all the commitments made in connection with the proposal. The commitments and conditions relied on by the Board 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.

This transaction shall not be consummated before the fifteenth calendar day following the effective date of this order, or later than three months after the effective date of this order, unless such period is extended for good cause by the Board or the Federal Reserve Bank of Dallas, acting pursuant to delegated authority.

By order of the Board of Governors, effective September 8, 1998.

Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Meyer, Ferguson, and Gramlich. Absent and not voting: Governor Kelley.

(1.) First National owns 4.85 percent of the voting shares of Nueces Bank and has contracted to purchase additional shares amounting to approximately 46 percent of the bank's outstanding voting shares. First National has indicated that it has no present intention of owning more than 51 percent of Nueces Bank's voting shares.

(2.) Asset data are as of December 31, 1997, and deposit data are as of June 30, 1997. In this context, depository institutions include commercial banks, savings banks, and savings associations.

(3.) 12 U.S.C. [sections] 1842(c)(1).

(4.) The Corpus Christi banking market comprises Nueces and San Patricio Counties, the area encompassing Alice and Orange Grove in Jim Wells County, and the community of San Diego in Duval County, all in Texas.

(5.) Market share data for Nueces Bank are as of June 30, 1997. First National Bank entered the market by establishing a de novo branch in February 1998. The branch currently controls less than $1 million of market deposits.

In this context, depository institutions include commercial banks, savings banks, and savings associations. Market concentration calculations include 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). Thus, the Board has regularly included thrift deposits in the calculation of market share on a 50-percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).

(6.) The HHI in the Corpus Christi banking market would remain unchanged at 1585 as a result of the proposal. Under the revised Department of Justice Guidelines (49 Federal Register 26,823 (June 29, 1984)), a market in which the post-merger HHI is between 1000 and 1800 is considered moderately concentrated. The Department of Justice has informed the Board that a bank merger or acquisition generally will not be challenged (in the absence of other factors indicating anticompetitive effects) unless the post-merger HHI is at least 1800 and the merger 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 effect of limited-purpose lenders and other non-depository financial entities.

(7.) Several commenters objected to the partial nature of First National's tender offer and either expressed concern regarding the proposal's consequences on the remaining shareholders in Nueces Bank or requested that the Board require First National to tender for all the shares of Nueces Bank. These matters are addressed by specific laws other than the BHC Act. The Federal and state securities laws establish rules that govern the manner in which a tender offer for securities must be made, and state law and the National Bank Act establish the rights of owners of a minority interest in a bank. Moreover, the Board and the courts have generally found that these matters are not among the factors the Board is entitled to consider under the BHC Act. See Western Bancshares, Inc. v. Board of Governors, 480 F. 2d 749 (10th Cir. 1973).

(8.) See, e.g., Banc One Corporation, 83 Federal Reserve Bulletin 602 (1997).

(9.) The Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act provides that a CRA examination is an important and often controlling factor in the consideration of an institution's CRA record and that reports of these examinations will be given great weight in the applications process. 54 Federal Register 13,742 and 13,745 (1989).

(10.) The 1996 Examination further noted that First National Bank made extensive use of innovative, flexible lending practices and participated in special assistance programs to serve the credit needs of its assessment area.

ROBERT DEV. FRIERSON

Associate Secretary of the Board