DECISION
RELATIVE TO THE PETITION OF
SOVEREIGN BANCORP, INC., PHILADELPHIA, PENNSYLVANIA
TO ACQUIRE
FIRST ESSEX BANCORP, ANDOVER, MASSACHUSETTS
By the Division of Banks
Sovereign Bancorp, Inc. ("Sovereign" or the "Petitioner"), Philadelphia, Pennsylvania, has petitioned the Board of Bank Incorporation (the "Board") pursuant to Massachusetts General Laws chapter 167A, sections 2 and 4 to acquire First Essex Bancorp, Inc. ("First Essex") Andover, Massachusetts, and its subsidiary bank, First Essex Bank, Lawrence, Massachusetts. Sovereign's application before the Board is part of a multi-step transaction in which it is contemplated that following this acquisition, First Essex Bank will merge with and into Sovereign's banking subsidiary, Sovereign Bank, a federal savings bank with its main office in Wyomissing, Pennsylvania, pursuant to an Agreement and Plan of Merger dated June 12, 2003.
As directed by the Board, notice of the application was published and posted and a public hearing was held on December 8, 2003, thereby affording an opportunity for interested parties to attend or submit comments. Other standard procedures informing the public of this matter before the Board were implemented. Representatives of Sovereign and First Essex offered testimony and responded to questions from the members of the Board. Following the hearing, the public comment period remained open so that interested parties could submit any additional comments. No further public comments were received. On December 10, 2003, First Essex shareholders approved the transaction. The comment period closed on December 15, 2003.
Petitioner is a savings and loan holding company headquartered in Philadelphia, Pennsylvania, with total consolidated assets of $41.3 billion as of June 30, 2003. Sovereign is the parent company of Sovereign Bank, a federal savings bank with 525 branch offices in Pennsylvania, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, Delaware and Massachusetts. Sovereign Bank operates 173 branches in the Commonwealth. In addition, Sovereign Bank operates 315 free-standing ATMs, 170 of which are located in New England.
First Essex is a Delaware corporation regulated by the Office of Thrift Supervision and based in Andover, Massachusetts. Its banking subsidiary, First Essex Bank, a Massachusetts-chartered savings bank, has its main office in Lawrence, Massachusetts. First Essex Bank has 20 full-service banking offices in Massachusetts and New Hampshire. In addition to Lawrence, its branches are located in Haverhill, North Andover, Andover, Methuen and Lowell. Nine branches are located in New Hampshire. First Essex's total consolidated assets were $1.8 billion at June 30, 2003. First Essex Bank's deposits are insured by the FDIC and, as a Massachusetts savings bank, deposits in excess of FDIC coverage are insured through the Depositors Insurance Fund ("DIF").
As an interstate transaction and pursuant to requirements of chapter 167A, the reciprocity laws of Petitioner's home state are subject to the review of the Commissioner of Banks. Specifically, the Commissioner must determine whether the proposed transaction is authorized under the laws of Pennsylvania for a Massachusetts-based company, under conditions no more restrictive than those imposed by Massachusetts. Based on a review of the applicable law, and consistent with previous rulings regarding Pennsylvania's reciprocity laws, the Commissioner has concluded that the proposed transaction is permissible under the Commonwealth's Interstate Bank Act.
Prior to approving an application under chapter 167A, the Board must have received notice from the Massachusetts Housing Partnership Fund (the "MHPF") that satisfactory arrangements have been made by the Petitioner consistent with statute and MHPF's various affordable housing loan programs. On January 20, 2004, the Board received notice from the MHPF that arrangements satisfactory to it had been made for this transaction.
The Board's review of this transaction focuses on the applicable statutory and administrative criteria which include, among other things, whether competition among banking institutions will be unreasonably affected and whether public convenience and advantage will be promoted. In determining whether the public convenience and advantage are promoted by the proposed transaction, the Board considers, among other things, whether there has been a showing of "net new benefits." Net new benefits are defined as initial capital investments, job creation plans, consumer and business services, commitment to maintain and open branch offices within a bank's delineated local community, and such other matters as the Board may deem necessary or advisable. The Board also considers the bank's record of performance under the Community Reinvestment Act ("CRA") and any relevant public testimony or commentary submitted into the record.
On the issue of whether banking competition will be unreasonably affected by the proposed transaction, the Board considers, but does not rely exclusively on, the guidelines used by federal authorities to review bank mergers. Essentially, these guidelines define relevant markets and measure concentration, which is considered an important indicator of competitiveness. The starting point in the federal analysis is the Herfindahl-Hirschman Index ("HHI"), an arithmetic measure of market concentration that synthesizes the distribution of market shares and the number of banks in an affected market into a single value. (The HHI is the sum of the squared market shares of all banks in the market.) Pursuant to this approach and consistent with the relatively small market share of the involved banks, the HHI calculations do not indicate that the proposed transaction will result in an undue concentration of banking resources. However, the Board's analysis of a transaction is not confined to the consideration of concentration ratios to evaluate competitive conditions; it also considers the competitive impact on a community by community basis, as well as on the overall banking structure of the Commonwealth. The only overlap in banking markets in which Sovereign Bank and First Essex Bank operate, as those markets are defined by the Federal Reserve Bank of Boston, is the Boston Banking Market. Based on deposit summary information as of June 30, 2002, Sovereign Bank ranks 4 th in this Market, with a market share of 5.38% and Fist Essex Bank ranks 12 th, with a market share of .88%, out of 171 banks and thrifts. In this regard, the Board concludes that the proposed transaction is unlikely to have a significant impact on the Boston Banking Market. Accordingly, based upon the small market share of the involved banks and the number of remaining competitors in the affected market, the Board finds that the transaction will not unreasonably interfere with competition. Rather, the First Essex community will continue to have access to competitive products and services offered by a diverse number of commercial banks, savings banks, cooperative banks, credit unions and non-bank providers.
Petitioner submitted information relating to the public convenience and advantage that will result from the proposed transaction. It asserts that as a larger financial institution, Sovereign Bank offers a wider range of consumer and business services than does First Essex Bank such as cash management services for corporate and institutional customers, international trade services, alliances products, capital markets products and scored small business credit products. In addition, Sovereign Bank will be able to offer higher lending limits to its commercial customers. These products and services are detailed in the application and in the oral testimony at the public hearing and include net banking, trust and wealth management and insurance services. Petitioner states that it plans to consolidate six branch offices in Massachusetts following consummation of the merger of First Essex Bank with and into Sovereign Bank. This determination was made based on the close proximity of certain of the existing branch offices of each bank. Five of the six branches closed will be Sovereign Bank branch locations with the First Essex Bank locations to remain open. The First Essex Bank branch in Methuen will be closed and consolidated with the Sovereign Bank Methuen location. The Petitioner states that the consolidations will not compromise its high level of customer service. As the record demonstrates that the customers of First Essex Bank will have access to a variety of new financial products, and will have the opportunity to conduct their banking business in a greater number of traditional and non-traditional forums, the Board's review weighs in favor of the finding that the public convenience and advantage will be promoted. The Board further concludes that the criteria for net new benefits has been established.
The Board's review of this transaction includes an assessment of the subsidiary banks' performance under the Community Reinvestment Act ("CRA"). Such assessment for a state-chartered bank includes examination by Division of Bank personnel, as well as an analysis of the legitimate concerns raised by the community and the bank's response to those concerns. For other institutions, the Board reviews the descriptive rating and evaluation by the applicable federal or state bank regulatory agency. In its most recent CRA examination as of October 28, 2002, performed by The Office of Thrift Supervision, Sovereign Bank received an "Outstanding" rating. On February 3, 2002, First Essex Bank received a "Satisfactory" rating at its examination conducted by the Massachusetts Division of Banks. Based on its review of these ratings, the Board concludes that the banks involved in this transaction were adequately meeting the credit needs of their respective communities at the time of their most recent CRA examinations.
Finally, the Board reviews the financial structure, tax consequences, and operational aspects of the transaction. It has reviewed the consolidated financial statements of the parties and the details of the proposed transaction, and is satisfied with the Petitioner's capital ratios and projections.
Conclusion
Based on the record of this matter and considered in light of all relevant statutory and administrative requirements, the Board concludes that competition among banking institutions in the Commonwealth will not be unreasonably affected and that the transaction will promote the public convenience and advantage. Specifically, the Board finds the transaction will benefit the customers of First Essex Bank, and further finds that the banks involved in this transaction have a satisfactory record of performance under the CRA. In accordance with these findings and pursuant to the statutory authority cited herein, the Board approves the application and authorizes Sovereign to acquire 100% of the stock of First Essex and First Essex Bank.
The approval granted herein is subject to the condition that all related transactions are completed within one year of the date of this Decision.
| Steven L. Antonakes ___________________________ Commissioner of Banks | |
| Alan L. LeBovidge ___________________________ Commissioner of Revenue | Board |
| Timothy P. Cahill ___________________________ Treasurer and Receiver General | |
| February 2, 2004 _____________________ Date |