Mid-Nebraska Bancshares, Inc. v. Board of Governors of Federal Reserve System
| Decision Date | 06 March 1980 |
| Docket Number | No. 78-1658,MID-NEBRASKA,78-1658 |
| Parties | BANCSHARES, INC., Petitioner, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Lawrence F. Noble, Washington, D. C., with whom John V. Austin and Robert J. Routh, Washington, D. C., were on brief, for petitioner.
James V. Mattingly, Atty., Board of Governors of the Federal Reserve System, Washington, D. C., with whom Barbara Allen Babcock, Asst. Atty. Gen., Ronald R. Glancz, and Robert Kaplan, Attys., U. S. Dept. of Justice, and Neal L. Petersen, Gen. Counsel, Board of Governors of the Federal Reserve System, Washington, D. C., were on brief, for respondent.
Before WRIGHT, Chief Judge, TAMM, Circuit Judge, and JOYCE HENS
GREEN, * U.S. District Judge for the District of Columbia.
Opinion for the court filed by Circuit Judge TAMM.
This case involves the authority of the Federal Reserve Board to deny an application by the owner of two local banks to form a one-bank holding company 1 under the Bank Holding Company Act of 1956, 12 U.S.C. §§ 1841-1850 (1976), where the Board finds the affiliation of the two banks has anticompetitive effects that predate the application. Petitioner Mid-Nebraska Bancshares, Inc. argues that the Board may deny such an application only if the formation of the holding company itself will create or exacerbate adverse competitive conditions in a banking market. We reject this contention and affirm the Board's decision as supported by substantial evidence.
Dale Stine is president and a director of the North Loup Valley Bank (North Loup Bank), the only bank for the small town of North Loup in the cornbelt of Nebraska. In 1972, Stine obtained control of the Nebraska State Bank of Ord, Nebraska (NSB), the second largest bank in the Valley County area, which includes both Ord and North Loup. Both banks prospered under Stine. In 1977 he formed Mid-Nebraska Bancshares, Inc. (Bancshares) to become a one-bank holding company of NSB and applied to the Federal Reserve Board for approval. 2
Under the Bank Holding Company Act (the Act), the Federal Reserve Board must approve all proposed acquisitions of a bank by a "company." 3 12 U.S.C. § 1842(a)(1) (1976). The applicant files its request with its regional Federal Reserve Bank, which reviews the application and recommends approval or disapproval to the Board of Governors. 12 C.F.R. § 262.3(c) (1979). Once the Board itself has the application, it publishes a notice in the Federal Register, id. § 262.3(g)(1), and sends notice of the proposed transaction to state banking authorities where state banks are involved. 4 12 U.S.C. § 1842(b) (1976).
By statute, the Board must review a variety of information in judging an application. "In every case, the Board shall take into consideration the financial and managerial resources and future prospects of the company . . . and the banks concerned, and the convenience and needs of the community to be served." Id. § 1842(c). The Act requires the Board to reject:
(1) any acquisition or merger or consolidation under this section which would result in a monopoly, or which would be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any part of the United States, or
(2) any other proposed acquisition or merger or consolidation under this section whose effect in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other manner would be in restraint o(f) trade, unless it 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.
Id.
In this case, Bancshares submitted its application to the Federal Reserve Bank of Kansas City (FRB-Kansas City). FRB-Kansas City reported favorably on the financial and managerial resources of the applicant. See Memorandum from Federal Reserve Bank of Kansas City to Clearing Unit, Division of Banking Supervision and Regulation, Board of Governors of Federal Reserve System (Jan. 9, 1978) (hereinafter cited as FRB-KC Report), reprinted in part in Appendix (A.) at 55-73. The FRB-Kansas City staff also concluded that North Loup Bank and NSB were located in the same "Valley County banking market"; moreover, the association of the two banks, consummated by Stine in 1972, had reduced competition between the banks, and "this adverse competitive situation would continue with approval of this application." FRB-KC Report at 13, reprinted in A. at 67. Despite this finding, the FRB-Kansas City staff recommended approval of the application because "there is little likelihood that denial of the application would result in the disaffiliation of (NSB) and deconcentration of the market." Id. at 15, reprinted in A. at 69.
The Board's staff agreed that North Loup Bank and NSB were part of the same market. Report of Division of Research and Statistics to Board of Governors of Federal Reserve System at 3 (June 2, 1978), reprinted in A. at 142, 144. The staff disagreed, however, with the recommendation by FRB-Kansas City that the application should be approved: "(E)ven if the Reserve Bank's conclusion is valid the affiliation was anticompetitive in its inception and should not be sanctioned through approval of the . . . application." Report of Division of Banking and Supervision to Board of Governors of Federal Reserve System at 2 (June 1, 1978), reprinted in A. at 131, 132.
The Board of Governors in a 3-2 vote followed its staff's recommendation and denied the application. It considered the effect of Stine's purchase of NSB and found that the 1972 transaction
eliminated significant competition that existed at that time between (NSB) and North Loup Bank, increased the concentration of banking resources within the Valley County banking market, and eliminated an independent banking competitor in the market. In the Board's judgment, that acquisition had an adverse effect on competition.
. . . On the basis of all facts of record, including the sizes of the organizations involved, their collective position in the relevant market (together the two banks hold 43.3 per cent of the market's total commercial bank deposits) and the limited number of banking alternatives in the market, the Board concludes that approval of this proposal would have significant adverse competitive effects.
Mid-Nebraska Bancshares, Inc. at 3-4 (FRB June 16, 1978) (), reprinted in A. at 151-52. (footnotes omitted). The Board concluded that other factors of convenience and need did not outweigh this adverse competitive impact, and thus it rejected the application. Bancshares sought review in this court pursuant to 12 U.S.C. § 1848 (1976).
Bancshares first challenges the Board's power to consider anticompetitive effects arising not from the proposed transaction itself but from the earlier association of NSB and North Loup Bank under Stine. Bancshares asserts that the only possible effects on competition occurred in 1972, when Stine purchased NSB in a transaction outside the Board's jurisdiction. 5 The application, argues Bancshares, must be judged on the anticompetitive effect that it alone creates. The formation of a bank holding company would have no incremental effect in Ord and North Loup but simply would continue the status quo in a different form. There being no anticompetitive effects created by the application, Bancshares believes that Board approval is required.
Even though the formation of the holding company may not change the competitive situation in the Valley County area, the Board may consider the anticompetitive effects caused by the 1972 purchase of NSB by Stine. As the provisions of the Act make clear, congressional regulations have applied to the "field of banking and bank holding companies the general purposes of the antitrust laws to promote competition and to prevent monopoly . . .." S.Rep. No. 1179, 89th Cong., 2d Sess. 2 (1966), U.S.Code Cong. & Admin.News 1966, pp. 2385, 2386. The regulation of holding companies "is designed to bring under control those types of entities that may be used as media for acquiring and maintaining in perpetuity management and control of bank shares or assets." S.Rep. No. 1095, 84th Cong., 1st Sess. 7 (1956), U.S.Code Cong. & Admin.News 1956, pp. 2482, 2488. Congress thus has prohibited the formation of holding companies when they generate anticompetitive effects. 12 U.S.C. § 1842(c). In this case, Stine is attempting to change his control over one of the banks from direct, individual ownership, which Congress has permitted, to indirect, corporate control, which Congress has subjected to regulation by the Federal Reserve Board. In so doing, he has crossed the line that separates a safe harbor from stormy seas. Permitting the Board to consider only the effects arising from an application itself would defeat Congress's specific purpose; it would allow an individual to aggregate significant banking assets and to circumvent congressional policies regarding competition simply by taking two steps buying a bank and then applying for holding-company status instead of one. Congress did not intend to restrict the Board's consideration of factors and thus allow such a simple means of evading the antitrust provisions of the banking laws.
This conclusion finds support in the Supreme Court's recent decision in Board of Governors of the Federal Reserve System v. First Lincolnwood Corp., 439 U.S. 234, 99 S.Ct. 505, 58 L.Ed.2d 484 (1978). The Board had rejected an application by an undercapitalized bank to form a holding company even though the transaction itself would not further injure the bank's...
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