Petition of Sovereign Bank, Wyomissing, Pennsylvania to acquire Seacoast Financial Services Corporation, New Bedford, Massachusetts
By the Division of Banks
Sovereign Bancorp, Inc. ("Sovereign" or the "Petitioner"), Wyomissing, Pennsylvania, has petitioned the Board of Bank Incorporation (the "Board") pursuant to Massachusetts General Laws chapter 167A, sections 2 and 4 to acquire Seacoast Financial Services Corporation ("Seacoast"), New Bedford, Massachusetts, and its Massachusetts-chartered subsidiary savings banks, Compass Bank for Savings ("Compass Bank"), New Bedford, Massachusetts and Nantucket Bank ("Nantucket Bank"), Nantucket, Massachusetts. This multi-step transaction will result in Compass Bank and Nantucket Bank merging with and into Sovereign Bank, Wyomissing, Pennsylvania, Petitioner's subsidiary federal savings bank. The merger transactions have been filed with the Massachusetts Division of Banks.
As directed by the Board, notice of the application was published and posted and a public hearing was held on June 8, 2004 in New Bedford, Massachusetts, thereby affording an opportunity for interested parties to attend or submit comments. The Board separately notified federal, state and municipal officials of the hearing. Other standard procedures informing the public of this matter before the Board were implemented. The members of the Board convened the public hearing at the New Bedford Campus College of Visual and Performing Arts, Star Store Building of the University of Massachusetts, Dartmouth. That location was within one block of Seacoast's headquarters. The Board held its hearing in New Bedford due to its impact on jobs in that area and in response to a request of Representative John F. Quinn, the House Chairman of the Legislature's Joint Committee on Banks and Banking. More than fifty people attended the two hour hearing. Officials representing federal and state government, and the City of New Bedford testified as well as individuals and community group representatives. The Board received testimony in favor of, in opposition, and neutral to the proposed transaction. The testimony addressed numerous matters from past actions of Compass Bank, the impact of mergers and acquisitions, as well as challenges to Sovereign Bank, ATM fees, issues addressed herein and other matters.
At the hearing, representatives of the Petitioner and Seacoast offered oral and written testimony and responded to numerous 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. The Board received and reviewed additional written comments from public officials and individuals. Subsequent to the public hearing the Board required Sovereign to submit a supplementary filing with specific responses to matters raised at the hearing or as a result of answers contained in the original application. On June 28, 2004, Seacoast shareholders approved the transaction with the holders of more than 80% of Seacoast's common stock outstanding voting in favor of the proposed transaction. The comment period closed on June 30, 2004.
Petitioner is a savings and loan holding company headquartered in Wyomissing, Pennsylvania, with total consolidated assets of $43.5 billion as of December 31, 2003. Its principal asset is all of the capital stock of Sovereign Bank. Sovereign Bank operates approximately 581 branch offices located throughout Pennsylvania, New Jersey, Connecticut, New Hampshire, New York, Rhode Island, and Massachusetts. As a federal savings bank, Sovereign Bank is subject to the jurisdiction of the Office of Thrift Supervision ("OTS"). The principal business of Sovereign Bank consists of attracting deposits and originating small business and middle market commercial and asset-based loans, residential mortgage loans, home equity lines of credit, and auto and other consumer loans. The deposits of Sovereign Bank are insured solely by the Federal Deposit Insurance Corporation ("FDIC"). In February of this year the Petitioner, with the Board's approval, acquired First Essex Bancorp, Inc., Andover, Massachusetts and its subsidiary bank, First Essex Bank, Lawrence, Massachusetts, which subsequently merged with and into Sovereign Bank.
Based in New Bedford, Massachusetts, Seacoast is a bank holding company with $4.4 billion in total consolidated assets as of December 31, 2003, and is the holding company for Compass Bank and Nantucket Bank. Compass Bank maintains approximately fifty-one branch offices located throughout eastern Massachusetts, and Nantucket Bank operates three banking offices on the island of Nantucket. Like Sovereign Bank, the deposits of these banks are insured by the FDIC. Additionally, as Massachusetts chartered savings banks, their deposits in excess of the FDIC coverage limits are insured through the Depositors Insurance Fund (the "DIF"), established by Chapter 43 of the Acts of 1934. The Board is aware that in April it approved Seacoast's acquisition of Abington Bancorp, Inc., Weymouth, Massachusetts, and its subsidiary bank, Abington Savings Bank. That multi-step transaction was consummated on April 29, 2004 and resulted with Abington Savings Bank merging with and into Compass Bank.
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 the statute and MHPF's various affordable housing loan programs. On June 23, 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 record of performance under the Community Reinvestment Act ("CRA") of subsidiary banks involved in the transaction 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.) 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 Petitioner submitted significant analyses that the proposed transaction will have no significant adverse effect on competition. Information was provided under analyses used by the FDIC for the four impacted counties in Massachusetts. Additional analysis on the three banking markets effected under the review procedures of the Federal Reserve Board was presented. In this case, the HHI calculations do not indicate that the proposed transaction will result in an undue concentration of banking resources in any of the involved banking markets, including New Bedford or in any of the impacted counties including Bristol County. On June 1, 2004, Sovereign updated its initial filing with the Board to, among other things, identify the branch office overlap in the subsidiary banks' networks. That filing listed twelve banking offices that would be closed due to consolidation with a nearby branch office. The twelve banking offices are located in twelve separate municipalities and range from New Bedford to Boston. However, the Board has determined that the affected communities 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. Accordingly, the Board finds that the proposed transaction will not unreasonably interfere with competition.
Petitioner submitted information relating to the public convenience and advantage that will result from the proposed transaction. First, the Petitioner points out that customers of the merged banks will have access to Sovereign Bank's significantly larger and multi-state branch and ATM network. The Petitioner further asserts that, as a larger financial institution, Sovereign Bank is able to offer a greater variety of products and services than either Compass Bank or Nantucket Bank, a number of which are not currently available to Compass Bank and Nantucket Bank customers. Among the products and services offered by Sovereign Bank, but not currently offered by either Compass Bank or Nantucket Bank, that would be available to customers of the combined institution are: 1) capital markets products (money market investments, interest rate swaps, foreign exchange services); 2) miscellaneous personal and commercial banking products offered through alliances with other companies (insurance, benefits management, merchant services, payroll services); 3) cash management services for corporate and institutional customers; and 4) international trade services. The Petitioner has also presented information relative to which charitable commitments. Among other such commitments and pursuant to the merger agreement, Sovereign has specifically agreed that, for five calendar years beginning January 1, 2005, Sovereign will make or cause to be made charitable contributions, up to a maximum of $450,000 per year (not to exceed $2.25 million in the aggregate), to charitable organizations operating in the communities Seacoast served as of the date of the merger agreement.
The Board's consideration of this application and testimony at the public hearing drew attention to an issue of public convenience and advantage related to the twelve identified overlapping branch offices to be closed if the transaction is approved. Sovereign clearly stated that all branch personnel in those offices will be retained to support other branch operations and to replace tellers through attrition. The focus of the Board's questions and from others testifying was the fate of those twelve fully functional banking offices. One public official testified that allowing other financial institutions to take over those offices would address issues of competition and public convenience while providing new job opportunities for the staffing of those locations.
Past decisions have established the Board's support for turnkey operations for closed banking facilities. Subsequent to the hearing the Board asked the Petitioner to state definitively as to whether it would give financial institutions preference in the ability to purchase or use the branch offices targeted for closing. In its supplemental filing, Sovereign provided the Board with information on how many of the twelve offices were owned and how many were leased. In that filing Sovereign agreed to give preference, assuming comparable economic terms are offered, to local community banks or credit unions to purchase a branch office to be closed which is owned by Sovereign directly or indirectly. Moreover, Sovereign stated it would encourage its landlords to give the same preference on leased premises and Sovereign agreed to give the same preference for any office space which it subleases as a result of this transaction. The Board requires that the Petitioner notify it in writing of the disposition as it occurs of each of the twelve branch offices to be closed. Such notice is to include the name of the purchaser, lessee or sub-lessee as applicable, and the business of such entity.
As the record demonstrates that the customers of Compass Bank and Nantucket 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, consistent with a finding that the public convenience and advantage will be promoted.
In determining whether or not to approve a bank holding company transaction under the statutory criteria, the Board is also required to assess the applicant's arguments and submissions that the acquisition will or likely will result in net new benefits. As set out previously herein, that term includes a showing of initial capital investments, job creation plans, consumer business services as well as commitments to maintain and open branch offices. The statute also allows the Board to consider such other matters as it may deem necessary or advisable. Net new benefits is a subset of the public convenience and advantage test. The Board's past consideration of this statutory criteria makes clear that such benefits may be immediate or prospective. Moreover, the Board's review is not a mathematical exercise of addition and subtraction. "The Board is empowered to weigh each net new benefits criterion and determine on balance within the broader public convenience and advantage standard is met based upon the totality of the circumstances, including other unenumerated factors deemed relevant by the Board." The Petitioner has addressed this statutory provision in its application, in oral testimony as well as in response to questions from the Board at the public hearing and within its supplemental filings on certain factors.
In all bank holding company acquisitions a significant concern of the Board is the proposed transaction's impact on employment. A petitioner's job creation plans is a factor required to be considered under net new benefits. Since Seacoast's headquarters are in New Bedford the impact on jobs would be greater in that city and was one of reasons the public hearing was held there. Sovereign has significant operations in Massachusetts from its acquisition of the divested branch offices of Fleet Bank and the deposits and loans associated therewith in 2000.
At the public hearing the Petitioner immediately addressed this issue in detail. In response to the Board's requirement for supplemental information, Sovereign slightly decreased its projections on job loss. As set out in that filing approximately 26% of Seacoast's 1,200 employees would not be retained upon consummation of the acquisition. In response to questions from the Board, the Petitioner stated that the jobs lost would come from backroom operations and management positions. All customer service personnel would be retained including those personnel at the twelve branch offices proposed for closure. The Petitioner also stated that all personnel at Nantucket Bank would be retained. At each opportunity Sovereign detailed the opportunities affected personnel would be given for positions that would become available in the combined entity and benefits and services to be provided to employees not retained. Sovereign and Seacoast emphasized a job retraining program that Seacoast had previously embarked on with Bristol Community College. A few hundred employees have availed themselves of this training in computer sciences.
The Petitioner argues that the number and percentage of anticipated lay-offs from the proposed transaction is not unusual for such an acquisition and is not unlike other transactions approved by the Board. It believes that the combined entity will continue to grow in the future which will create jobs in the Commonwealth. To support this position, Sovereign tracked its yearly increase in employee payroll in Massachusetts since entering the Commonwealth in 2000. At the public hearing Sovereign emphasized the yearly increases. That payroll amount at the end of 2003 was approximately $106 million and almost double the amount from its first year. Sovereign stated that this significant increase was the result of job creation and the establishment of new operating units in Massachusetts. Past decisions of the Board have accepted that the job creation plans component of net new benefits can be met by a prospective direct and indirect increase in employment.
The Petitioner has also addressed the other considerations under net new benefits. In its supplemental filing, Sovereign provided additional information on the initial capital investment in Massachusetts from the proposed transaction. In addition to other customer oriented capital improvements, Sovereign will initially make a number of improvements to certain branch offices, including not but limited to adding drive up ATMs, improving parking lots and building internal offices. According to the filing Sovereign expects to spend approximately $2.4 million on these branch improvements.
Sovereign will maintain the branch offices of Compass Bank and Nantucket Bank but for the twelve overlapping offices specifically identified. Additional branch offices will result from Sovereign's continued growth in the Commonwealth. As addressed previously herein, the Petitioner has provided information on the consumer and business services which will be extended to the customers of Seacoast's subsidiary banks from this transaction. For all these reasons, the Petitioner believes it has met the statutory criteria of net new benefits.
The Board has carefully considered and scrutinized all of the information provided to it on the criteria of public convenience and advantage as well as net new benefits. All of the documents submitted by the Petitioner and all other interested parties have been read and all oral testimony presented at the public hearing has been considered and reviewed by the Board. The Board's consideration of these materials weighs in favor that these prongs of the statutory criteria have been met.
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. The most recent examination of Compass Bank, performed by the FDIC, resulted in a "Satisfactory" rating as of May 28, 2002. The FDIC also performed the most recent examination of Nantucket Bank, and the examination resulted in a "Satisfactory" rating as of December 3, 2001. 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. The Board has reviewed the consolidated financial statements of the parties and the details of the proposed transaction, and it is satisfied with the Petitioner's capital ratios and projections. Management factors reviewed in consideration of the proposed transaction are also supportive of its approval. The Petitioner has also stated and the Board is aware that the executive officer residency requirement of section 4 of chapter 167A of the General Laws will be met.
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 Compass Bank and Nantucket 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 Seacoast Financial Services Corporation and its subsidiary banks.
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 | |
| July 22, 2004 _____________________ Date |