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Release Date: July 28, 1999

For immediate release

The Federal Reserve Board today announced its approval of the application of Security Pecos Bancshares, Inc., Pecos, Texas, and Security Delaware Pecos Bancshares, Inc., Dover, Delaware, to acquire Security State Bank of Pecos, Pecos, Texas.

Attached is the Board's Order relating to this action.

Security Pecos Bancshares, Inc.
Pecos, Texas

Security Delaware Pecos Bancshares, Inc.
Dover, Delaware

Order Approving the Formation of Bank Holding Companies

Security Pecos Bancshares, Inc. ("Security Pecos") and Security Delaware Pecos Bancshares, Inc. ("Security Delaware") (collectively, "Applicants") have requested the Board's approval under section 3 of the Bank Holding Company Act ("BHC Act") (12 U.S.C. § 1842) to become bank holding companies by acquiring up to 100 percent of the outstanding voting shares of Security State Bank of Pecos, Pecos, Texas ("Bank").1

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 9512 (1999)). 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.

Applicants are nonoperating companies formed to acquire Bank. Bank is the 382d largest depository institution in Texas, controlling $59.5 million in deposits, representing less than 1 percent of total deposits in depository institutions in the state.2 The proposal would not result in the acquisition of any additional banking assets. Based on all the facts of record, the Board concludes that the proposal would not have any significantly adverse effects on competition or on the concentration of banking resources in any relevant banking market.

The BHC Act also requires the Board to consider the financial and managerial resources and future prospects of the companies and banks involved in a proposal, the convenience and needs of the community to be served, and certain other supervisory factors. The Board has carefully considered these factors in light of all the facts of record, including comments from a bank holding company that objects to the proposal ("Protestant").

Protestant contends that Applicants have significantly underestimated the probable cost of acquiring Bank and, consequently, the financial resources needed to acquire and support Bank. Protestant argues that Applicants have failed to demonstrate that they possess adequate financial resources to consummate the proposal.

The Board has carefully reviewed all the financial and managerial information provided by Applicants and Protestant regarding the proposal and the assessment of the financial resources of Bank made in confidential reports of examination by the Federal Reserve Bank of Dallas. The Board notes that Bank currently is well capitalized. In addition, under the proposal submitted by Applicants, the projected financial condition of Applicants and Bank and the projected debt-service obligation of Applicants are reasonable and consistent with the Board's guidelines. The Board also has considered several commitments made by Applicants, including a commitment not to incur or assume any indebtedness in connection with the proposal if, immediately thereafter, Bank would be less than well capitalized.3

The Board also has reviewed relevant reports of examination of Bank, and the managerial resources of Applicants' organizers, all of whom currently are officers and directors of Bank. Based on these and all the other facts of record, including the commitments made by Applicants, the Board concludes that financial and managerial considerations as well as the future prospects of Applicants and Bank are consistent with approval.4

Considerations relating to the convenience and needs of the community, including the performance record of Bank under the Community Reinvestment Act, and other supervisory factors also are consistent with approval.5

Protestant also contends that Applicants are effectively prohibited from acquiring Security Pecos under the Texas Business Combination Law ("Combination Law"), which is designed to impede hostile takeovers of Texas companies.6 Protestant argues that it is unlikely that Applicants will obtain approval of the share exchange agreement by two-thirds of all shareholders eligible to vote on the proposal, as required by Texas law.

The Board may not approve the acquisition of a bank by a bank holding company if the acquisition is prohibited by state law.7 The Texas Banking Commissioner has reviewed the proposal and indicated that the Combination Law applies to the proposal as structured because it includes an exchange agreement between Bank and Applicants.

Applicants intend to proceed with the proposed transaction and to comply with the requirements of the Combination Law. However, to address the possibility that Applicants may not be able to obtain the required shareholder approval under the Combination Law, Applicants have proposed alternative methods to acquire Bank that, Applicants assert, would not be subject to the Combination Law.8

Applicants have determined not to proceed with the transaction unless they obtain at least 85 percent of Bank's voting shares. Applicants also have made several financial commitments intended to ensure that Applicants' financial resources and condition would not be impaired by a voluntary exchange and that Applicants' organizational structure would be substantially identical whether the proposal was consummated under an exchange agreement or on a voluntary basis.

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 is specifically conditioned on compliance by Applicants with all the commitments made in connection with the application. For the purposes of this action, the commitments and conditions relied on by the Board in reaching its decision 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 proposed acquisition shall not be consummated before the fifteenth calendar day after 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 by the Federal Reserve Bank of Dallas, acting pursuant to delegated authority.

By order of the Board of Governors,9 effective July 28, 1999.

(signed) Robert deV. Frierson

Robert deV. Frierson

Associate Secretary of the Board


1 Applicants also would acquire all the voting shares of Security Safety Deposit Box Corporation, Pecos, Texas ("Security Box"), which provides safe deposit box services to customers of Bank. Shares of Security Box are held in trust for the benefit of shareholders of Bank on a pro rata basis and are only transferrable with Bank shares. Under section 225.22(c) of the Board's Regulation Y (12 C.F.R. 225.22(c)), Applicants may acquire Security Box without the Board's prior approval.

2 Deposit data are as of December 31, 1998. In this context, depository institutions include commercial banks, savings associations, and savings banks.

3 Protestant also contends that the debt that Security Pecos would assume from its organizers would unfairly burden minority shareholders of Security Pecos, who would not contribute any debt. The Board notes that the courts have concluded that the Board's limited jurisdiction to review applications under the BHC Act does not authorize it to consider matters relating only to shareholder relations and their proper compensation. See Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th Cir. 1973). These are matters of state corporate law and may be raised before a court with the authority to provide Protestant with adequate relief, if deemed appropriate.

4 Protestant maintains that actions by Applicants in connection with the presentation of the proposal to the Board raise adverse managerial considerations. For example, Protestant alleges that Applicants did not disclose to the Board the appointment by Bank's board of directors of an independent committee to evaluate offers to acquire Bank, the independent committee's recommendation to Bank's shareholders, and the fact that Applicants' organizers raised their tender offer price after Applicants filed their application. In response, Applicants assert that the application has been amended to describe fully Applicants' current tender offer, and the record of the application includes substantially all facts regarding Protestant's dispute with Applicants and the role of the independent committee. Moreover, as noted above, all of Applicants' organizers are officers or directors of Bank, and the Board has considered Protestant's allegations in light of the most recent examination report and other supervisory information concerning the managerial resources of Bank.

5 The Board also received a comment from an individual objecting that the proposed ownership of Bank by Security Delaware, a Delaware chartered company, is intended solely to authorize Bank to engage in transactions not otherwise permitted in Texas. The proposal would not have this effect.

6 Tex. Bus. Corp. Act Ann. art. 13.01 et seq. (West 1999). Protestant argues that, under the Combination Law, Applicants' organizers are "affiliated shareholders" of Bank, and, as affiliated shareholders, the organizers may not cause Bank and Security Pecos to enter into an exchange agreement unless the proposal either has been approved by a majority of the board of directors of Bank before the organizers became affiliated shareholders or is subsequently ratified by two-thirds of the shareholders of Bank (other than the organizers). An affiliated shareholder is any shareholder or group of shareholders that controls more than 20 percent of the shares of a Texas company.

7 See Whitney National Bank of Jefferson Parish v. Bank of New Orleans and Trust Company, 379 U.S. 411 (1965).

8 Under one alternative, Applicants' organizers and any other willing shareholders of Bank would make a voluntary exchange of Bank shares for shares to be issued by Security Pecos. By making the exchange voluntarily, an exchange agreement involving Bank would not be required, and the proposed acquisition could proceed without a "business combination" as defined in the Combination Law. Based on a review of the relevant provisions of state law, and after consultation with the Texas Banking Commissioner, it appears that this alternative would comply with applicable state law.

9 This action was taken pursuant to the Board's Rules Regarding Delegation of Authority (12 C.F.R. 265.4(b)(1)) by a committee of Board members. Voting for this action: Chairman Greenspan and Governors Kelley and Ferguson. Absent and not voting: Governors Meyer and Gramlich.

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Last update: July 28, 1999