Decision relative to the petition of Fleet Financial Group, Inc. to acquire BankBoston Corporation
By the Division of Banks
Fleet Financial Group, Inc., (the "Petitioner" or "Fleet"), a Rhode Island bank holding company, headquartered in Boston, Massachusetts, has petitioned the Board of Bank Incorporation (the "Board") under sections 2 and 4 of chapter 167A of the General Laws, for permission to acquire BankBoston Corporation ("BankBoston"), a Massachusetts bank holding company, headquartered in Boston, Massachusetts. (The July 13, 1999, written testimony of Fleet's General Counsel, however, reserves the right to challenge the Board's jurisdiction over this matter. Fleet claims that the federal Bank Holding Company Act of 1956 (the "BHCA"), 12 U.S.C. §§ 1842,1849, preempts the Massachusetts Bank Holding Company Act. The Board rejects this jurisdictional challenge.)
Notice of the petition, which was filed on May 17, 1999, was posted and published as directed by the Board thereby affording interested parties an opportunity to submit comments. A public hearing on the petition was held on July 13, 1999, in Boston, Massachusetts. The period for submitting comments after the hearing expired at 5 o'clock P.M. on July 27, 1999.
The Board has reviewed the application and other submissions of the Petitioner, the extensive oral and written testimony received at the public hearing, and the open comment period, as well as all documents and materials filed with, or forwarded to, the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Numerous comments and lengthy testimony on the petition were received from state and federal public officials, community organizations and individuals. Fleet also submitted a supplementary filing on July 27, 1999, addressing questions posed by Board members and those commenting on the petition.
Facts
The Petitioner is a bank holding company whose primary banking subsidiary is Fleet National Bank, of Rhode Island ("Fleet Bank"), a federally-chartered bank subject to the supervision of the Comptroller of the Currency (the "OCC"). Fleet Bank and its affiliated banks operate in the states of Connecticut, Florida, Maine, Massachusetts, New Hampshire, New Jersey, New York and Rhode Island. At March 31, 1999, Fleet had total assets of $106.2 billion and total deposits of $67.6 billion. BankBoston Corporation is a bank holding company whose primary banking subsidiary is BankBoston, N. A., a national bank with its principal place of business in Boston, Massachusetts. BankBoston had total assets of $75.7 billion as of March 31, 1999 and total deposits of $48.5 billion. BankBoston operates branches in Connecticut, Massachusetts, New Hampshire, Maine and Latin America. On a combined basis, Fleet and BankBoston would control in excess of 30% of the deposits in the Commonwealth, absent the Petitioner's proposed branch divestitures. (Bank holding company acquisitions, which would result in a 30% deposit concentration, are prohibited with limited exceptions, by G. L. c.167A, §2, as amended by St. 1996, c. 238, §§16A and 41.) Both Fleet and BankBoston are "well capitalized" institutions under applicable capital standards. The resulting entity will remain well capitalized.
Board approval is required under section 2 of chapter 167A of the General Laws in order for a bank holding company or out of state bank holding company "... to merge or consolidate with any other bank holding company ... ." (G. L.c.167A, §2 cl. (4). Fleet also seeks approval to acquire up to 19.9% of BankBoston stock upon the occurrence of certain events. This latter petition also would require Board approval under G. L.c.167A, §2. This latter petition will not be required if the Board approves Fleet's primary petition.)
In reviewing petitions under section 2 of chapter 167A of the General Laws, the Board is required to apply the review standards found in section 4 of said chapter 167A. This section provides in pertinent part: "In determining whether or not to approve said petition [under section 2], the decision of the board shall be based on a finding whether or not competition among banking institutions will be unreasonably affected and whether public convenience and advantage will be promoted. In making such determination, the board shall consider, but not be limited to a showing of net new benefits." (Emphasis supplied.) The statute then proceeds to define the term 'net new benefits' ("Net new benefits" is defined to mean "... initial capital investments, job creation plans, consumer and business services, commitments to maintain and open branches within the bank's delineated local community as such term is defined within section fourteen of chapter one hundred sixty-seven, and such other matters as the board may deem necessary or advisable." G. L. c. 167A, §4.) and to prescribe additional requirements relative to reciprocity; the affordable housing loan programs of the Massachusetts Housing Partnership Fund; deposit concentration limitations; executive officer residency requirements; and, a two-year asset retention requirement.
Consequently, the Board initially is required to consider (a) the competitive impacts of the proposed acquisition; and, (b) whether public convenience and advantage will be promoted.
A. Competition
In reviewing the record, the Board has examined the potentially negative competitive effects of this petition. The Petitioner essentially seeks to merge the Commonwealth's two largest banking organizations. The combined organization would rank as the nation's eighth largest bank holding company with approximately $170 billion to $178 billion in assets. Even after the proposed branch divestiture, Fleet would be the region's dominant commercial lending and retail banking institution. During the July 13 th public hearing, the Board and several commenters expressed reservations about the impact of this proposed transaction upon competition in various markets, product lines and its potentially adverse impact on consumer banking options and fees.
Although this transaction is the largest bank holding company merger ever proposed within the Commonwealth, it is not without precedent. Similar competitive issues were present when the Board considered the earlier petitions of Fleet to acquire Shawmut National Corporation and BankBoston to acquire BayBanks, Inc. (See Decision Relative to the Application of Fleet Financial Group, Inc., Providence Rhode Island to Acquire Shawmut National Association Boston, Massachusetts and Hartford, Connecticut (November 27, 1995) (the "Shawmut Decision"); Decision Relative to the Application of Bank of Boston Corporation, Boston, Massachusetts to Acquire BayBanks, Inc., Boston, Massachusetts (July 24, 1996) (the "BayBanks Decision").) These earlier transactions resulted in the Commonwealth's four largest banking institutions consolidating into two organizations. Each acquisition necessitated branch divestitures in certain Massachusetts banking markets. Deposit concentration cap issues also were raised in the case of the acquisition of BayBanks, Inc., by BankBoston.
The Petitioner proposes to address the anti-competitive effects of the proposed acquisition through an extensive branch divestiture process. Fleet has publicly billed it as the largest divestiture in United States banking history. The Petitioner's supplemental filing proposed to divest approximately 196 branches in Massachusetts having deposits of approximately $8.2 billion. The divested branches roughly represents Fleet Bank's entire Massachusetts banking franchise. (Four BankBoston branches in Hampden County also will be divested.) The resulting entity's Massachusetts deposits would be 35% less than Fleet Bank and BankBoston, N. A. on a combined basis. The divestiture also includes Fleet Bank's 266 in-branch ATMs and 116 offsite or stand alone ATMs in Massachusetts. These Massachusetts divestitures are part of a larger 300 branch divestiture entailing $12.5 billion in deposits and approximately $5 billion in loans, which also encompasses branches in Connecticut, New Hampshire and Rhode Island.
Fleet essentially argues that the Board should review this petition on a post divestiture basis. The Petitioner further asserts that the Massachusetts divestiture adequately addresses all relevant anti-competitive and deposit concentration cap concerns. The Board believes that it would be inappropriate to assess this petition without considering the mitigating impact of Fleet's Massachusetts branch and ATM divestitures. (See Shawmut Decision at 4-6; BayBanks Decision at 3-5 (Anti-competitive effects assessed in light of the Petitioners' branch divestitures.))
Fleet's September 7, 1999 announcement that it entered into a definitive agreement to sell 176 Massachusetts branches, along with certain small business and middle market commercial banking lines of business, to a multi-state competitor substantially lessens the anti-competitive impact of this petition. (Sovereign Bancorp Press Release, Sovereign Bancorp to Acquire 278 Branches from Fleet and BankBoston (September 7, 1999).) The still pending sale of an additional 28 branches to local community banks also will enhance the competitiveness of these institutions. Competition in commercial and retail consumer banking will be maintained by the branch divestiture to an out of state banking organization and local community banks. Significant competition from national non-bank financial services companies particularly in the areas of small business and consumer lending will also remain. Upon consummation of the sale of the divested branches and other assets, there will be at least 3 major banking organizations with assets over $25 billion competing in the Massachusetts banking market. Moreover, there will be adequate levels of competition, particularly in consumer and small business lines, from the Commonwealth's independent or community banks. (There were 234 FDIC insured banks within the Commonwealth as of December 31,1998. Massachusetts has a significantly larger number of banks than neighboring New England states. As of the same date, Connecticut had 77 banks, Maine had 45 banks, New Hampshire had 39 banks, and Rhode Island had 13 banks. Moreover, there were approximately 300 state and federally chartered credit unions operating in the Commonwealth as of June 30, 1999.) The Board notes that the existence of a significant number of banking alternatives supports a conclusion that competition among banking institutions would not be adversely affected by the proposed transaction. (Shawmut Decision at 5-6; BayBanks Decision at 5.)
The Board also has considered the competitive impact of the proposed transaction upon ATM access and availability in the Commonwealth. Absent Fleet's divestiture plan, the combined entity would otherwise control approximately 46% of all bank-owned ATMs in Massachusetts. The Board also notes that both Fleet and BankBoston, respectively, surcharge non-customers $.75 and $1.00 to access their electronic branches. (Fleet has committed to freeze its "ATM convenience fee" at $.75 for one year. It also committed to waive all inter-company ATM surcharges between Fleet and BankBoston after legal consummation and prior to its full systems integration. Fleet Supplemental Filing (July 27, 1999) at 3.) Neither institution belongs to a local ATM surcharge free network. ATMs are an increasingly important banking delivery system that has a significant impact upon the ability of smaller competitors to compete, particularly in the Greater Boston area. The Board continues to recognize ATM ownership concentrations as an area for competitive analysis. (BayBanks Decision at 6-7.) The divestiture of substantially all of Fleet's Massachusetts in-branch and stand alone ATMs to a competitor offsets the Board's concerns.
The Board also notes that Fleet has received federal antitrust approval of its divestiture plan by the United States Department of Justice. As part of its divestiture plan, Fleet must eliminate or release restrictive lease or deed covenants on divested branches. (Fleet's Application for Acquisition of a Bank Holding Company by a Bank Holding Company to the Board of Bank Incorporation, (the "Fleet Application") (May 17, 1999) at 33 and Exhibit 8) The Board strongly believes that restrictive covenants are anti-competitive. It is also noted that the Federal Reserve approved the proposed transaction on September 7, 1999. (The Federal BHCA requires the Federal Reserve to determine that competitive considerations do not preclude approval.)
Based upon the foregoing analysis, the Board concludes that competition among banking institutions in Massachusetts will not be adversely affected by this petition.
B. Public Convenience and Advantage
Under section 4 of chapter 167A of the General Laws, the Board must also determine that the "... public convenience and advantage will be promoted." This requirement applies to "... any authority to act under the provisions of section two..." and governs this petition by Fleet. The burden of proof is placed squarely upon the applicant to satisfy this test. (See, Massachusetts Co-operative Bank League v. Board of Bank Incorporation, 348 Mass. 134, 137 (1964).)
The Petitioner's application and supplementary materials filed with the Board assert that it has complied with all applicable statutory requirements including the "net new benefits" statutory language. At the Board's July 13 th public hearing, the Petitioner was specifically asked how the public convenience and advantage and net new benefits statutory standard was satisfied. The Petitioner's July 27 th supplemental filing seeks to address the "net new benefits" criteria in greater detail. (Fleet Supplemental Filing at 1-6.)
The public convenience and advantage standard found in section 4 of chapter 167A of the General Laws, clearly requires the Board to make a specific determination that "... public convenience and advantage will be promoted." (Emphasis supplied.) It is not simply a factor or consideration to be balanced but rather a required finding by the Board. (See, Chicopee Co-operative Bank v. Board of Bank Incorporation, 347 Mass. 744, 753 (1964) (Interpreting the statutory phrase 'public convenience and advantage' found in the then General Laws chapter 170, section 49.)) Public convenience and advantage requires an affirmative showing that a proposed transaction will better serve the community and the public interest and not just benefit the applicant and its shareholders. (Id.) Since 1990, the Board also is required to consider and assess whether "net new benefits" will or are likely to be derived from a particular proposed transaction. (The requirement that a public benefit be demonstrated was further reinforced by the 1990 amendments to section 4 of chapter 167A of the General Laws. See, St. 1990, c.102, s.16.) "Net new benefits" requires an applicant to identify tangible, immediate or prospective benefits in the areas of capital investment, employment, credit, banking services and other matters the Board deems necessary or advisable. (Decision Relative to the Petition of Bank of New York Company, Inc. to Acquire 9.99 Percent of the Stock of State Street Boston Corporation, (March 14, 1997) at 8-9.)
This language is essentially a partial statutory listing of relevant considerations for the Board to consider when assessing whether a particular petition satisfies the public convenience and advantage test. "Net new benefits," however, is not a mathematical exercise of addition and subtraction. The Board is empowered to weigh each "net new benefits" criterion and determine on balance whether the broader public convenience and advantage standard is met based upon the totality of circumstances, including other unenumurated factors deemed relevant by the Board. Consequently, while "public convenience and advantage" encompasses a mandatory "net new benefits" analysis, it is a much broader standard.
The Board has carefully considered the Petitioner's articulation of "net new benefits" that would be derived from its proposed merger and consolidation with BankBoston. (Fleet Application, at 21-32.) Fleet's supplemental filing with the Board addresses this issue in additional detail. The Petitioner contends its existing and proposed products, new educational programs and new services are tangible benefits that meet statutory requirements. The Board has examined each of these claimed benefits, the employment impacts of this proposed in-market consolidation, Fleet's five year, $14.6 billion Community Reinvestment Commitment, and other relevant considerations.
Fleet has identified several new products, services and initiatives that the combined entity will provide that will be in addition to its current business lines. (Id., at12, Exhibit 6. (Schedule of products offered by Petitioner and to be offered by the combined entity).) Those new products and services include expanded internet delivery of banking, brokerage and other financial products; expansion of its Basic Banking account products, including discounted pricing and an effort to target seniors, minorities and foreign language speaking individuals participation (Fleet also commits to making a $250,000 grant support a statewide basic banking services program. Fleet Supplemental Filing, at 3.); various educational and outreach efforts to promote consumer technology fluency and acceptance among the elderly, minorities and urban populations; and, a pilot program to develop check cashing technology as an alternative to nontraditional banking outlets. (Fleet Application, at 12-15; Fleet Supplemental Filing, at 3-4.) The Petitioner also makes several limited commitments regarding the proposed transaction's impact upon consumers. These post merger commitments address several areas of Board concern. The limited commitments include: advance 60 day notifications, if permitted by law, regarding changes in consumer account features and fees; a temporary freeze on Fleet's current ATM surcharge or convenience fee pricing until year end 2000; a waiver of inter-company ATM surcharges after the corporate merger and prior to full systems integration; expansion of ATM multilingual capabilities; and, an effort to identify and deploy ATMs in under-served areas. (Fleet Supplemental Filing, at 3-4.)
The Board closely scrutinized the proposed transaction's employment ramifications. In-market mergers unfortunately entail the elimination of overlapping or redundant positions occupied by working men and women. At the Board's public hearing, Fleet projected that up to 5,000 positions at the combined entity throughout the Northeast will be eliminated in order to achieve efficiency and cost reduction targets. A literal reading of the "job creation plans" component of "net new benefits" would seemingly preclude bank holding companies from achieving merger related economies of scale. Past Board precedent, however, suggests that this component can be met by demonstrating prospective direct and indirect employment gains. (Shawmut Decision at 9-10 (citing future gains from relocating Fleet's corporate headquarters to Boston and indirect job creation through funds loaned under its CRA commitments); BayBanks Decision at 9-10 (citing projected job growth from commercial lending operations and future internal job growth from new or more profitable existing business lines).) The Board notes that it is difficult to monitor employment growth at Fleet since 1995 and at BankBoston since 1996, due to branch divestitures, asset sales and merger related hiring freezes. In assessing the Petitioner's claims of future direct and indirect job growth, the Board notes that aggregate compensation levels have remained the same or increased at Fleet and BankBoston despite earlier merger related and other workforce reductions. (Fleet Supplemental Filing, at 5-6.) The Board further notes that Fleet and BankBoston instituted a post merger announcement hiring freeze and a relatively generous severance package for displaced employees. (Id., at Exhibit D,) They also are providing outplacement and other human resource services.
The Commonwealth's relatively strong economy and favorable employment outlook should assist displaced employees seeking new employment. The Board notes that actual job losses may be less than Fleet's initial projections due to the recently announced branch divestiture sale. The acquiror has stated that it intends to purchase BankBoston's Dorchester operations center and that it will maintain a Boston headquarters for its New England banking operations. The new entrant also will retain 3,500 branch-affiliated employees working throughout the region. These factors tend to mitigate projected merger related employment losses and may generate additional banking related employment as the acquiror enters New England and expands its banking presence.
Fleet's written and oral submissions also emphasized the economic and social policy importance of having a major banking organization headquartered in Boston, Massachusetts. (Other witnesses also echoed this theme. E.g., Board of Bank Incorporation July 13, 1999 Public Hearing Transcript, at 83-90.) The cited benefits included having local management that are accessible, committed and knowledgeable of the Commonwealth's economic, community and social conditions. The Petitioner asserts that Fleet's larger asset size would enable it to continue to serve the credit and financial services needs of New England's consumers and businesses into the future. It also claims that the proposed consolidation with BankBoston will enable it to better compete in a highly competitive financial services industry that includes securities firms, insurance companies and large foreign competitors. A more competitive resulting entity presumably would have a greater ability to compete, grow, and make future bank, as well as, non-bank financial services firm acquisitions. This potential for future growth would in turn generate direct and indirect economic and employment opportunities within the Commonwealth.
The Board is well aware of the ongoing and relentless consolidation within the banking industry and larger financial services sector. Despite some misgivings about where consolidation will lead and how individual consumers may fare, the Board believes that there are potential future economic and employment benefits in having one of the Nation's 10 largest bank holding companies located in the Commonwealth.
Fleet's five year, $14.6 billion "Community Investment Commitment" (the "Fleet CIC Plan") also was considered in connection with the Board's review of the public convenience and advantage standard as well as it "net new benefits" analysis. The Fleet CIC Plan, which contains mortgage lending, community development lending and small business lending components generated the most oral and written comments on this application. (See generally, Board of Bank Incorporation July 13, 1999 Public Hearing Transcript, at 66-233.) Community representatives, in particular, questioned the methodology and substantive provisions of the Fleet CIC Plan, as well as its unilateral rather than bilateral form. Consequently, the Board conducted an independent evaluation of the Fleet CIC Plan focusing on its impact upon the Commonwealth and its communities. Considerable time and critical analysis was devoted to this evaluation.
The Board assessed Fleet's projections using outside data and sources where available, and analyzed the entities' historical performance, as well as the Fleet CIC Plan's underlying assumptions. The Board concludes that Fleet's projected investments are consistent with past or historical investment levels of the combined entities after taking into account Fleet's branch divestiture. (The Fleet CIC Plan estimates a $4.4 billion to $5.8 billion total Massachusetts investment out of a total commitment of $14.6 billion over 5 years. The Board's analysis of Fleet's annualized Massachusetts investment would be $880 million to $1.2 billion a year. The Massachusetts investments fall into three major categories. They are: LMI mortgage lending with a total Massachusetts commitment of $1.6 billion to $1.9 billion; community development lending with a total Massachusetts commitment of $580 -$770 million; and small business lending with a total Massachusetts commitment of $1.8 billion to $2.5 billion.) After the proposed branch divestiture, Fleet's remaining Massachusetts branch presence will represent only 28% of the proposed resulting entity. The Fleet CIC Plan, which encompasses several other Northeast states, however, commits 30 to 40% of Fleet's total investment plan to Massachusetts activities. As a result, the Commonwealth would receive a proportionately larger portion of Fleet's overall community investment.
In summary, the Fleet CIC Plan appears to be reasonable. The goals set out in the Plan are reasonably consistent with the combined entities' historical performance levels. It is noted, however, that the Fleet CIC Plan incorporates little growth in its projections. Fleet's future performance could remain fairly static over the next five years. Importantly, however, there is no discernable reduction in Fleet's level of community investments within the Commonwealth after consummation despite the combined entity's reduced size on a post divestiture basis.
The Board also notes that the acquiror of Fleet's divested Massachusetts branches will have an independent and affirmative obligation under the CRA to meet the credit needs of the Commonwealth's communities, including low to moderate-income neighborhoods. Moreover, the acquiror's CRA activities and investments, by law, are expected to be commensurate with that expected of a $8.2 billion institution, the Commonwealth's third largest bank.
The Board, therefore, concludes that Fleet's community reinvestment commitments are adequate and represent a proportionally increased level in low to moderate-income ("LMI") mortgage lending, and at a minimum, a maintenance of existing levels of community development and small business lending by the combined entities.
Based upon the extensive factual record before it, the Board finds and concludes that the Petitioner, on balance, has sufficiently met its burden to demonstrate that "net new benefits" will accrue and that the public convenience and advantage will be promoted within the meaning of section 4 of chapter 167A of the General Laws, by its proposed acquisition of BankBoston.
C. Other Statutory Requirements
Related to the issue of public convenience and advantage is the record of performance under the Community Reinvestment Act ("CRA") by Fleet and BankBoston and their subsidiaries. For financial institutions not directly under the jurisdiction of the Commonwealth, the Board initially looks to the publicly available descriptive rating and evaluation by a federal or another state's banking regulatory agency. The CRA activities of Fleet's bank subsidiaries were specifically discussed at the public hearing. The Board is aware that all such banks have a CRA rating of "Satisfactory". (Fleet National Bank, Rhode Island, received an overall "Satisfactory" rating from the OCC in 1998. This CRA rating covered 6 Multistate Metropolitan Statistical areas ("MSA"). This CRA examination included a separate CRA evaluation covering the Commonwealth of Massachusetts. Fleet's Massachusetts CRA activities were accorded an "Outstanding" rating. All other MSAs covered by the 1998 OCC CRA examination report, however, were rated "Satisfactory.") The CRA rating for BankBoston, is "Outstanding". The Board urges Fleet to pursue the highest CRA rating by taking advantage of the commitment, effort and innovation consistently displayed by BankBoston. Additionally, the Board's consideration of financial and managerial factors related to the proposed transaction weigh in favor of its approval.
By law, the Board must receive notice from the Massachusetts Housing Partnership Fund (the "MHPF") that Fleet satisfactory arrangements for the proposed transaction have been made pursuant to section 4 of said chapter 167A. The Board has received notice from the MHPF, in a letter dated September 13, 1999 that satisfactory arrangements regarding Fleet's affordable housing loan call obligations stemming from this transaction.
As an interstate transaction, the reciprocity of the laws of Fleet's home state must be considered. Under Massachusetts law, the determination of reciprocity of the laws of another state rests solely with the Commissioner of Banks. The Commissioner has previously ruled, in transactions involving Fleet, that Rhode Island law is reciprocal and does expressly authorize a similar transaction by a Massachusetts holding company under conditions no more restrictive than those imposed by chapter 167A. That ruling remains in effect. Accordingly, the proposed transaction is permissible under the Commonwealth's 1996 Interstate Banking Act and, therefore, the Board will proceed to consider whether the remaining statutory requirements are met by this application.
Fleet has stated that its bank holding company headquarters will remain in Boston, Massachusetts. Therefore, Fleet readily meets the statutory requirement regarding executive officer residency. Deposit concentration limitations also are not at issue due to Fleet's extensive branch divestitures in Massachusetts. The branch divestitures also necessitate Fleet's request for a waiver of the two year asset retention statutory requirement. The Commissioner has informed the Board that his office will grant the requested waiver separately.
Conclusion
Based on the record of this matter including the testimony received at the public hearing 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 transaction, and that the records of performance under CRA by the banks involved in this transaction are consistent with its approval. Therefore, in accordance with these findings and pursuant to the statutory authority cited herein the Board approves the application and authorizes Fleet to directly acquire up to 100% of the stock of BankBoston.
The approvals granted herein are subject to the condition that all related transactions are completed within one year of the date of this Decision and that Fleet adhere to the commitments and representations it made to the Board during the application process and other regulatory agencies, including but not limited to, those relative to branch divestiture terms and timeframes; the elimination of branch restrictive covenants; and the "net new benefits" related initiatives described in is supplemental submission.
Therefore, in accordance with its findings above and pursuant to sections 2 and 4 of chapter 167A of the General Laws, the Board hereby approves the Petitioner's application to merge and consolidate with BankBoston Corporation.
| Thomas J. Curry Commissioner of Banks | |
| Frederick A. Laskey Commissioner of Revenue | Board |
| Shannon P. O'Brien Treasurer and Receiver-General | |
| September 30, 1999 Date |