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Release Date: August 23, 1999


For immediate release

The Federal Reserve Board today announced its approval of the proposal of Texas Regional Bancshares, McAllen, Texas ("Texas Regional"), to merge with Harlingen Bancshares, Inc., and thereby to acquire Harlingen's wholly owned subsidiary, HN Bancshares of Delaware, Inc., which in turn owns Harlingen National Bank, all in Harlingen, Texas. The Board also approved the applications of Texas Regional's lead bank, Texas State Bank, McAllen, Texas, to merge with Harlingen National Bank, and to establish branch offices at the six current offices of Harlingen National Bank.

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


FEDERAL RESERVE SYSTEM
Texas Regional Bancshares, Inc.
McAllen, Texas

Texas State Bank
McAllen, Texas

Order Approving Merger of Bank Holding Companies, Merger of Banks and
Establishment of Branches

Texas Regional Bancshares, Inc. ("Texas Regional"), 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. 1842) to merge with Harlingen Bancshares, Inc. ("Harlingen"), and thereby to acquire Harlingen's wholly owned subsidiary, HN Bancshares of Delaware, Inc., which in turn owns Harlingen National Bank ("Harlingen National"), all in Harlingen, Texas. Texas Regional's lead bank, Texas State Bank, McAllen, Texas, also has requested the Board's approval under section 18(c) of the Federal Deposit Insurance Act (the "Bank Merger Act") (12 U.S.C. 1828(c)) to merge with Harlingen National, and approval under section 9 of the Federal Reserve Act ("FRA") (12 U.S.C. 321) to establish branches at the six current offices of Harlingen National, all in Texas, listed in the Appendix.

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 36,017 (1999)) in accordance with the Board's Rules of Procedure (12 C.F.R. 262.3(b)). As required by the Bank Merger Act, notice of the proposal also has been published in relevant newspapers, and reports on the competitive effects of the bank mergers have been requested from the United States Attorney General, the Office of the Comptroller of the Currency ("OCC"), and the Federal Deposit Insurance Corporation ("FDIC"). The time for filing comments has expired and the Board has considered the proposal and all comments received in light of the factors set forth in the BHC Act, the Bank Merger Act, and the FRA.

Texas Regional is the 12th largest banking organization in Texas, controlling $1.5 billion in deposits, representing less than 1 percent of total deposits in insured depository institutions in the state ("state deposits").1 Harlingen Bancshares is the 95th largest banking organization in Texas, controlling $194 million in deposits representing less than 1 percent of state deposits. On consummation of the proposal, Texas Regional would become the 10th largest banking organization in Texas, controlling deposits of $1.7 billion, representing less than 1 percent of state deposits. Competitive Considerations

The BHC Act and the Bank Merger Act prohibit the Board from approving a proposal if it would result in, or be in the furtherance of a monopoly. These acts also prohibit the Board from approving a proposal if the effect of the proposal may be substantially to lessen competition in any relevant market unless the Board finds that the anticompetitive effects of the proposed transaction are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served.2

Texas Regional and Harlingen Bancshares compete directly in two Texas banking markets, the McAllen-Edinburg-Mission banking market (the "McAllen banking market") and the Brownsville-Harlingen-San Benito banking market (the "Brownsville banking market"). 3 Consummation of the proposal would be consistent with the Department of Justice Merger Guidelines ("DOJ Guidelines")4 and prior Board precedent in the McAllen banking market. On consummation of the proposal, Texas Regional would remain the largest banking organization in the McAllen banking market and control $1.1 billion in deposits, representing 27.4 percent of total deposits in depository institutions in the market ("market deposits"). The HHI would increase 17 points to 1441.5

In the Brownsville banking market, consummation of the proposal would increase the level of market concentration, as measured by the HHI, to levels that exceed the DOJ Guidelines. Texas Regional is the fourth largest of 12 banking organizations in the Brownsville banking market, and controls deposits of $287.6 million, representing approximately 13.8 percent of market deposits. Harlingen Bancshares is the sixth largest banking organization in the market, and controls deposits of $180.8 million, representing approximately 8.6 percent of market deposits. On consummation of the proposal, Texas Regional would become the second largest banking organization in the market with deposits of $468 million, representing approximately 22.4 percent of market deposits. The HHI would increase 238 points to 1940.

In reviewing the competitive effects of this proposal, the Board has considered that several factors appear to mitigate the likely effect of the proposal on competition in the Brownsville banking market. In particular, one thrift operating in the Brownsville banking market has been an active commercial lender.6 In addition, 11 competitors would remain in the Brownsville banking market following the merger, and five of those competitors would each have market shares of more than 5 percent.7 The Brownsville banking market is attractive for entry. The Brownsville banking market recently had the tenth largest increase in population for Metropolitan Statistical Areas in the United States. Since June 1996, four banking organizations have entered the market de novo.

The Justice Department reviewed the proposal and advised the Board that consummation of the proposal would not likely have any significantly adverse competitive effects in the Brownsville banking market or any other relevant banking market. The FDIC and OCC have not objected to the proposal.

Based on all the facts of record, and for the reasons discussed in this order, the Board concludes that consummation of the proposal is not likely to result in any significantly adverse effects on competition or on the concentration of banking resources in the McAllen and Brownsville banking markets or any other relevant market. On this basis, the competitive factors are consistent with approval of this proposal.

Other Considerations

The BHC Act and the Bank Merger Act require the Board, in acting on an application, to consider the financial and managerial resources and future prospects of the companies and banks involved, the convenience and needs of the communities to be served, and certain supervisory factors. The Board has reviewed these factors in light of the record, including supervisory reports of examination assessing the financial and managerial resources of the organizations and financial information provided by Texas Regional. Based on all the facts of record, the Board concludes that the financial and managerial resources and the future prospects of Texas Regional, Harlingen Bancshares, and their respective subsidiary banks are consistent with approval, as are the other supervisory factors the Board must consider under section 3 of the BHC Act. In addition, considerations related to the convenience and needs of the communities to be served, including the records of performance of the institutions under the Community Reinvestment Act, are consistent with approval of the proposal.

The Board also has considered the factors it is required to consider when reviewing applications for establishment of branches under section 9 of the FRA, including the permissibility of the branch locations under state law.8 Based on all the facts of record, the Board concludes that these factors are consistent with approval of Texas State Bank's application to establish branches listed in the Appendix.

Conclusion

Based on the foregoing, and in light of all the facts of record, the Board has determined that the applications and notices in this case should be, and hereby are, approved. The Board's approval is specifically conditioned on compliance by Texas Regional with all the commitments made in connection with these applications and notices. For the purpose of this action, the commitments and conditions relied on by the Board in reaching its decisions are deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

The acquisition of the bank shall not be consummated before the fifteenth calendar day following the effective date of this order, or 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 August 23, 1999.

(signed)

Robert deV. Frierson

Associate Secretary of the Board


Footnotes

1 State deposit data are as of June 30, 1998. In this context, depository institutions include commercial banks, savings banks, and savings associations.

2 12 U.S.C. 1842(c)(1)(B) and 1828(c)(5)(B).

3 The McAllen banking market is defined as Hidalgo, Starr, and Willacy Counties, all in Texas. The Brownsville banking market is defined as Cameron County, Texas.

4 Under the revised DOJ Guidelines, 49 Federal Register 26,823 (June 29, 1984), a market in which the post-merger Herfindahl-Hirschman Index ("HHI") is above 1800 is considered highly 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 nondepository financial entities.

5 Market share data are as of June 30, 1998. These data 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 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 thrift, Coastal Banc, has 5.9 percent of its total loan portfolio in nonmortgage commercial loans, and provides a variety of consumer and mortgage loans and other banking products and services. Accordingly, competition from Coastal Banc more closely approximates competition from a commercial bank. The Board previously has indicated that it may consider the competitiveness of a thrift institution at a level greater than 50 percent of the thrift's deposits when appropriate. See Banknorth Group, Inc., 75 Federal Reserve Bulletin 703 (1989). Accounting for the deposits of the thrift at 100 percent, consummation of the proposal would increase the HHI in the Brownsville banking market by 211 points to 1822, and Texas Regional would have a post-merger market share of approximately 21.1 percent.

7 Three competitors, excluding Texas Regional, would have market shares of 30, 16 and 15 percent, respectively.

8 See Tex. Fin. Code Ann. 32.203 (West 1997).

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

Appendix

Branches of Texas State Bank to be established at Harlingen National's current offices in Texas.

1. 115 East Van Buren Street, Harlingen.
2. 2302 South 77 Sunshine Strip, Harlingen.
3. 1902 West Tyler Street, Harlingen.
4. 1200 North Stuart Place Road, Harlingen.
5. 101 North Main Street, La Feria.
6. 201 Starr Street, Mercedes.

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1999 Orders on banking applications


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