Decision relative to the application of Bank of Boston Corporation, Boston, Massachusetts to acquire Baybanks, Inc., Boston, Massachusetts
By the Division of Banks
Bank of Boston Corporation ("Bank of Boston" or the "Petitioner"), Boston, Massachusetts, has petitioned the Board of Bank Incorporation (the "Board") pursuant to Massachusetts General Laws chapter 167A, sections 2 and 4 to acquire up to all of the shares of BayBanks, Inc. ("BayBanks"), Boston, Massachusetts. This action is part of a multi-step transaction whereby BayBanks' subsidiary bank in Massachusetts, BayBank, N.A. will merge with and into the Petitioner's subsidiary, The First National Bank of Boston ("FNB"). The merger, which involves two federally-chartered banks, is the subject of separate review and approval by federal agencies which must also pass upon this transaction. The transaction will also impact BayBanks' subsidiary banks in New Hampshire.
Notice of the petition was posted and published as directed by the Board thereby affording interested parties the opportunity to submit comments. The Board held a public hearing on the proposed transaction on June 5, 1996. The standard procedures of the Board informing the public of the petition were implemented. The period for submitting comments after the hearing ended on June 19, 1996. Prior to the public hearing the Board required the Petitioner and BayBanks to submit a supplementary filing with specific responses to three areas of inquiry set out in its letter of May 22, 1996. The record of this transaction reflects that the Petitioner and BayBanks responded to that requirement, submitted responses to inquires raised at the public hearing, and supplemented its filing on several occasions in response to requests of federal agencies as well as subsequent developments related to the competitive effects of the transaction.
The Board has reviewed the application, and supplementary filings, the oral and written testimony received at the public hearing and during the open comment period as well as all related documents and materials filed with or forwarded by the Federal Reserve. That review focused on the statutory and administrative criteria which includes among other things, whether competition among banking institutions will be unreasonably affected; whether public convenience and advantage will be promoted, as well as the record of performance under the Community Reinvestment Act ("CRA") by the banking subsidiaries of the Petitioner and BayBanks. The additional requirements of the Commonwealth's 1990 Nationwide Banking Act, which were added to sections 2 and 4 of said chapter 167A, were also significant factors in the Board's deliberations on this application.
One such statutory provision added in 1990 requires the Board to have received notice from the Massachusetts Housing Partnership Fund (the "MHPF") that satisfactory arrangements to it have been made by the Petitioner consistent with MHPF's various affordable housing loan programs. In the application documents and at the public hearing, the Petitioner informed the Board of its discussions and filings with the MHPF in order to meet this statutory requirement. The Board received notice from the MHPF that arrangements satisfactory to it had been made for this transaction in a letter dated July 25, 1996. The Board's receipt of that notice completes the Petitioner's required filings with the Board under the laws of the Commonwealth.
As described in the record of this application, Bank of Boston is a multi-bank holding company headquartered in Boston, Massachusetts. In addition to FNB, it has bank subsidiaries in Connecticut and Rhode Island as well as numerous non-bank subsidiaries and certain limited purpose banks. On December 31, 1995 it had assets of $47.4 billion. Through FNB, Bank of Boston controlled the second largest share of domestic deposits in the Commonwealth. Bank of Boston and its subsidiary banks provide a variety of banking services to individuals, corporations and other entities on a domestic and international basis.
BayBanks is a bank holding company and a savings and loan holding company. Its largest bank subsidiary is BayBank, N.A. which is located in Boston and has branch offices in Massachusetts and Connecticut. BayBanks currently has two bank subsidiaries in New Hampshire. As of December 31, 1995 it had total assets of $12.1 billion. Within the Commonwealth, BayBank, N.A. has the third largest share of domestic deposits. Through its subsidiaries, BayBanks offers a complete range of banking services with particular emphasis on retail consumer products often provided through the use of advanced technology.
The Petitioner has submitted extensive materials to address the issue that competition among banks will not be unreasonably affected by the proposed transaction. Much of that analysis is detailed according to various tests used by federal bank regulatory agencies. That analysis reflected that consummation of the transaction would not adversely impact banking resources in the several affected banking markets in the Commonwealth under those federal banking guidelines.
In addition to such scrutiny by bank regulators, including this Board, the proposed transaction must pass anti-trust concerns of appropriate federal and state bodies under whose jurisdiction such review is placed. To address certain concerns raised under that analysis and in furtherance of obtaining approval of the transaction, the Petitioner has entered into a divestiture commitment. That commitment will result in the acquisition of twenty branch offices within metropolitan Boston of the proposed combined institution by USTrust, Boston, a state-chartered commercial bank. Other aspects of the divestiture will be subsequently discussed herein.
The Board's analysis of whether a proposed transaction will unreasonably affect competition is two pronged. The first review recognizes the concentration limit set within the General Laws. Under section 2 of said chapter 167A, the Board may not approve an acquisition or merger if the resulting bank holding company would hold or control in excess of 25% of the total deposits of all state, federal or foreign banking offices in the Commonwealth, unless such restriction was waived by the Commissioner of Banks on the basis that economic conditions warranted such action. That deposit cap would be increased initially to 28% and in two years to 30% of the above base under legislation pending in the Massachusetts Legislature implementing the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"). Calculations of the total amount of deposits which would be held by the Petitioner upon completion of the acquisition of BayBanks, N.A. reflect that the Petitioner would hold slightly less than 25% of the deposits in the Commonwealth. These calculations reflect the $860 million in deposits which are to be divested in conjunction with the sale of twenty branch offices to USTrust. As set out in the Federal Reserve's Order on this matter issued on July 10, 1996 the Bank of Boston would now hold 24.7% of deposits in the Commonwealth. Accordingly, the transaction is within the concentration limit in the statute and the Petitioner's request for a waiver from the Commissioner of Banks is moot.
Traditionally, however, the Board has not limited its review to those previously cited federal standards or the state-wide deposit cap within the General Laws. Rather it is the position of the Board, as the second prong of its analysis, to also consider a transaction in light of its impact on the citizens, communities and banking structure within the Commonwealth on a community by community basis instead of variously grouped municipalities as banking markets. In light of the Board's review standards, the Petitioner has submitted a detailed listing of the banking offices of FNB and BayBank, N.A. in the communities in the Commonwealth and the other financial institutions located in those cities and towns. The Petitioner also provided overlays of the branch office networks of FNB and BayBank, N.A. and competing institutions. The Board has extensively analyzed that break down of banking locations in consideration of the impact on competition. That review reflects that in some communities the combined bank will control a significant share of the banking deposits. Upon review, however, the Board has determined that a sufficient number of banking alternatives are available to the public in those communities.
A positive trend recognized by the Board in the ongoing consolidation within the Commonwealth's banking industry involves branch networks. The closing of overlapping branch offices after an acquisition or as part of a divestiture related to an acquisition results in the opportunity for other competing banks to acquire turnkey banking facilities. The Board believes that this process is an effective means of mitigating certain adverse aspects of such consolidation. It is essential in the Board's view that competing institutions be able to purchase or use such banking space without being precluded by restrictive covenants, leases or other impediments. As discussed at the public hearing, this turnkey process is important to preserve competition and allow another institution to augment its branch network for the greater convenience of the banking public in the Commonwealth.
In conjunction with its review of the competitive effects of the proposed transaction, the Board raised two issues concerning the delivery of banking services within the Commonwealth. The issues concerned the delivery of banking services through the developed system of electronic fund transfers ("ATMs") and the ongoing development of supermarket branching. The Board sought and received additional information on these matters in the requested pre-hearing filing and in response to questions at the public hearing.
The Board focused on the number of ATMs to be controlled by the combined organization both in the Commonwealth and in metropolitan Boston which for this analysis was defined as being within Route 128. The facts provided were submitted as of May 1, 1996 prior to any divestiture agreement whereby twenty banking offices would be purchased by USTrust. According to the Petitioner as of that date, it and BayBanks combined owned 1,443 ATMs of which 653 are within metropolitan Boston. The total ATMs controlled equals 44.4% of all ATMs in the Commonwealth based on figures available from the Division of Banks. Thirty-five ATMs will be included in the branch office divestiture involving USTrust. In April 1996, ATM network by-laws were amended to permit the imposition of a surcharge on non-customers using another institution's ATM. Other banks have raised concerns if this surcharge practice were to become widespread in Massachusetts. They argue that it could drive their depositors to switch their accounts to larger institutions with extensive ATM systems in order to avoid such surcharges. Such a trend could jeopardize smaller community banks which were encouraged to join ATM networks instead of establishing their own ATMs. This matter was discussed at length at the Board's hearing. The Petitioner has responded in writing and at a previous hearing that neither it nor BayBanks imposes a surcharge and has no current plans to do so.
Although the Board is concerned about the impact of a surcharge on ATM transactions, it recognizes that it is not the practice within the Commonwealth at this time. It is aware that legislation to address this issue is pending both in the General Court and Congress. The Board is also aware that if access to ATM systems were blocked for other banks, the Commissioner of Banks could possibly address the issue of competitive disadvantage under the mandatory sharing authority provided for in section 3 of chapter 167B of the General Laws and the authority to impose substantive competitive and consumer safeguards to regulate other providers of electronic fund transfers under clause (e) of section 2 of said chapter 167B.
The Board's concerns expressed above extend to the ongoing trend to supermarket branch banking. According to the Petitioner's response, it and BayBanks have agreements with two large chains in Eastern Massachusetts. As national banks, FNB and BayBanks, N.A. currently operate their supermarket branch offices seven days a week totaling approximately seventy-four hours. Regular branch offices are often open fifteen to twenty hours less. The Board is also aware that up to another dozen separate banks also operate supermarket branch offices. Additionally, legislation is pending before the General Court which would allow state-chartered banks to open their banking offices, including supermarket branch offices, on Sundays. This development in competition for banking customers through this relatively new means of delivering banking services will continue to be a focus of the Board in future transactions before it.
The Board's detailed analysis of these documents as well as related internal review has led the Board to determine that the proposed transaction will not unreasonably affect competition within the Commonwealth since in the most affected areas or communities a large number of diverse banks and financial institutions will continue to provide competitive deposit and credit services to the banking public on both a consumer and commercial basis. It remains a fact, recognized under federal banking review standards, that the Commonwealth is a highly banked state. The number of state-chartered and federally-chartered banks and credit unions with their main office in Massachusetts remains at about six hundred institutions.
In acting upon an application submitted under sections 2 and 4 of said chapter 167A of the General Laws, the Board must also consider whether public convenience and advantage will be promoted by the proposed transaction. The Petitioner's application and the oral testimony at the public hearing offer reasons why this criteria would be met. Under the broadest view, the Petitioner suggests that the resulting organization will consist of the consumer banking expertise of BayBanks and the commercial lending and international banking strength of Bank of Boston. A broad array of financial services and products will become available to the customers and communities now served by each organization. The best features of each organization's product lines will be maintained and provide more choices to the customers of the combined bank. The relationship banking programs, whereby various advantages on fees, rates and waivers are available to customers with multiple banking arrangements, will also be enhanced in the continuing bank.
The record also details specific products and services which will become available to all customers in support of its belief that public convenience and needs will be met. Several of the products emphasized provide credit or related services to small businesses. The investment service of each organization through mutual funds are also noted. The telebanking service centers are also specifically mentioned as providing customers with seven days a week and twenty-four hours a day access to their accounts.
In determining whether or not to approve a petition, the Board is also required by statute to consider a showing of net new benefits related to the transaction. That term as set out in section 4 of chapter 167A includes initial capital investments; job creation plans; consumer and business services; and commitments to maintain and open branch offices among other factors which the Board may deem necessary. Information on this criteria was required by the Board in the application, in the pre-hearing filing and at the public hearing. The Petitioner has also submitted a supplemental filing on certain aspects of this criteria.
The issue of job creation plans requires analysis of the impact of the proposed transaction on employment within these two bank holding company organizations. Accordingly, unlike other regulatory agencies which must pass upon this transaction, the Board has sought and received information on this matter. From the earliest announcement of the transaction to testimony at the hearing, the Petitioner has indicated that it anticipates a reduction of two thousand positions, many of which will occur in conjunction with the systems conversion and branch consolidations currently scheduled in early 1997. Various steps to be taken to minimize the impact on jobs were also detailed. At the hearing it was announced that a reduction of six hundred positions had already been achieved as a result of a job freeze instituted by the two organizations. The Petitioner also stated that comprehensive outplacement services would be provided to displaced employees.
Subsequent to the hearing, Bank of Boston Corporation and BayBanks announced a series of enhanced separation programs or arrangements for employees of their banks. The details of these programs were submitted to the Board in a supplemental filing. It was also reported that the hiring freeze had now reduced the workforce by more than seven hundred employees. Additionally, two weeks after the hearing, the Petitioner announced an agreement whereby twenty branch offices within the Greater Boston area would be purchased by USTrust, Boston, a state-chartered commercial bank. Retention of existing branch office personnel at those location as employees of USTrust is planned.
The Board's pre-hearing supplemental filing requirement directly addressed questions on the transactions impact on employment in the Commonwealth by both organizations. The information in that filing indicates that the combined entity would be the largest bank employer in the Commonwealth. Having factored in the reduction in force anticipated, the combined entity would employ 10,739 full-time equivalents. That figure represents approximately 22% of the employees of state-chartered and federally-chartered banks in the Commonwealth, according to the Petitioner's filing. The Petitioner also cites the jobs which will result from the primary job creation role of a commercial bank, in its view, which is making loans to other businesses which in turn will generate additional employment. The Petitioner further argues that the long term improvement in the structure and profitability of the combined entity will create strong prospects for job expansion in the years ahead.
The Board's analysis of job creation plans as one of the criteria under the net new benefits tests has considered the several arguments in support of the Petitioner's contention that this criteria is met. The analysis is consistent with the Board's review in past transactions. The Board also acknowledges that in other industries, transactions resulting in immediate consolidation have subsequently generated expansion and created jobs. The Board, however, will require future applicants to submit analysis and projections which quantify such job creation plans and identify the product lines and business activities anticipated to produce such additional positions within the entity. A similar analysis will be required for lending programs which are supplemented or established as part of a transaction to justify compliance with this statutory requirement.
In addition to job creation plans and consumer and business services to be provided, the applicant has addressed in its filings the remaining aspects of the net new benefits test. On the criterion of maintaining and opening branch offices, the Petitioner acknowledges its commitment to serve its communities. It states that branch office closings and consolidations will occur where there is clear duplication of services. In testimony before the Board, the Petitioner stated that it has no plans to close any full-service stand-alone branch office in a low or moderate income census tract or to consolidate such branches with other offices more than a mile away through 1997. In other filings the Petitioner indicates that any closings or consolidations from existing overlap of branch networks will coincide with its efforts to provide ever-increasing access and alternative service options for its banking customers such as additional ATMs and supermarket branches as well as banking by telephone and personal computers.
The record of performance under CRA by the parties to the transaction or their bank subsidiaries remains a focus of the Board as evidenced in the application documents as well as in inquiries raised at its public hearings on matters before it. The Board gives significant weight to the publicly available descriptive ratings and evaluation of performance issued by a federal or state bank regulatory agency. Such ratings or evaluations are the result of examinations conducted by trained staff of those regulatory agencies which review all applicable documentation including analysis of concerns received from a bank's community and its responses to those issues fairly raised. Based on the complete record of this application, the Board is aware that the Petitioner's three principal subsidiary banks, including FNB, have all received 'Outstanding" ratings in their most recent CRA examinations. The record also reflects that BayBanks Massachusetts' subsidiary bank has received a rating of "Outstanding" in March of 1996 from the Office of the Comptroller of the Currency. That examination was subsequent to the merger of BayBanks' two bank subsidiaries in the Commonwealth. At the time of that merger, BayBank, a state-chartered bank, had an "Outstanding" rating from the Massachusetts Division of Banks. The subsidiary banks in New Hampshire controlled by BayBanks have also received CRA ratings of at least "Satisfactory."
In addition to the public rating information, the Petitioner has submitted detailed comments on the numerous lending programs both it and BayBanks offer throughout the Commonwealth. Corporate policies involving management and the Boards of Directors are also cited to reflect each organizations commitment to CRA. Identification of these varied and numerous programs and initiatives constitute an integral part of the record. In testimony at the public hearing, the Board was also informed of certain loan agreements and other commitments made by the Petitioner while this application was pending. As it has in the past, the Board again states its position that planned or future CRA related activities or loan and investment commitments do not substitute for a record of past performance in meeting the credit needs of an applicant's community or service area. It is to that record as well as available and timely performance ratings from government regulatory agencies that this Board will give the greatest weight in its deliberations on a proposed transaction. Accordingly, an applicant, regardless of size, with such an established record of performance under CRA may rely on that fact to meet this part of the Board's analysis.
All factors relative to the public convenience and advantage to be promoted by the proposed transaction reviewed by the Board are consistent with approval of this application.
The Board has also reviewed and considered the financial and managerial aspects of the proposed transaction. As stated by the Petitioner, it has been structured as a pooling of interests and intended to constitute a tax free transaction. No cash will be paid by the Petitioner for the acquisition except for fractional shares and for dissenting shareholders since the transaction is an exchange of shares of BayBanks common stock for shares of the Petitioner. The combined bank will remain well capitalized and Bank of Boston Corporation would remain a source of strength to its bank subsidiaries should that be necessary. The proposed transaction will support that position by creating a more diversified organization with both global and retail bases. The combined organization will realize annualized cost savings of approximately $190 million within eighteen months. The breakdown of such savings were as required by the Board, set out in a supplementing filing. Managerial considerations were also reviewed and discussed at the public hearing, particularly the integration of the separate business cultures of two long standing independent organizations. The Board's inquiries on the management of the combined organization were adequately responded to by the Petitioner. The requirement for a resident of the Commonwealth to be an executive officer of the continuing bank was also addressed and committed to. The Board's analysis of these financial and managerial factors are supportive of the transaction.
Based on the extensive record on this matter considered in light of all relevant statutory and administrative requirements, the Board finds that competition among banking institutions will not be unreasonably affected, that public convenience and advantage will be promoted by consummation of the proposed acquisition, and that the performance under CRA by the bank subsidiaries involved in this transaction are significant. Therefore, in accordance with its findings and pursuant to the statutes cited herein, the Board approves the application of Bank of Boston Corporation to acquire BayBanks, Inc.
This approval is subject to the following conditions.
- That Bank of Boston will not enforce any condition(s) that would preclude, for any duration, the use by a depository institution of any FNB or BayBank, N.A. branch offices located in the Commonwealth at which the continuing bank ceases to provide banking services; provided, however, that this undertaking will not be applicable where any such condition presently exists for the benefit of a party leasing such office to whom Bank of Boston could not, in good faith, obtain the elimination of such condition.
- That this transaction shall be consummated within one year from the date of this approval.
| Thomas J. Curry Commissioner of Banks | |
| Frederick A. Laskey Senior Deputy Commissioner of Revenue | Board |
| Joseph D. Malone Treasurer and Receiver-General | |
| July 24, 1996 Date |