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Lehman Brothers Bank, FSB, Wilmington, Delaware ("Lehman Brothers" or the "Petitioner") and certain related parties, have petitioned the Board of Bank Incorporation (the "Board") pursuant to the provisions of Massachusetts General Laws chapter 167A, sections 2 and 4 to acquire Capital Crossing Bank ("Capital Crossing"), Boston, Massachusetts. The application before the Board is part of a multi-step transaction involving the merger of Capital Crossing with and into Lehman Brothers. The merger application is before the Commissioner of Banks. Following the merger, the sole banking office of Capital Crossing will become a branch office of Lehman Brothers.
Notice of the application was published and posted as directed by the Board, thereby affording opportunity for interested parties to submit comments. Other standard procedures informing the public of this matter before the Board were implemented. The Board held a public hearing on the petition on January 22, 2007. At the hearing several representatives of Lehman Brothers and Capital Crossing made presentations and responded to questions from the Board. In addition, testimony was given by two opponents to the transaction. On January 24, 2007, the Board received additional information by the proponents to the transaction as requested by the Board as well as additional filings from the opponents who testified at the public hearing as well as another letter in opposition to the acquisition by Lehman Brothers. Three letters in support of Capital Crossing's community activities were received during the comment period. The comment period on the proposed transaction ended January 25, 2007. It is the policy of the Board that subsequent to the closing of a public comment period and prior to a decision by the Board, it will review any subsequent comments received and determine what weight, if any, will be given to such comments received after the public record is closed. On this application, the Board received significant post comment period filings. On January 26, 2007, the Board directed that the Petitioner respond directly to the issues raised in the three letters in opposition received during the comment period. The Petitioner's lengthy response was dated and received on February 1, 2007. Included with that filing was another letter in support of the Petitioner. Comments were also subsequently received from the Petitioner as well as a governmental agency in support of Lehman Brothers. Additionally, one group of five protestants withdrew, in writing, their timely filed opposition and stated they were now in support of the transaction. All such filings were received and reviewed by the Board.
Issues raised in the oral and subsequent written testimony in opposition to the proposed transaction centered on the Petitioner's Community Reinvestment Act ("CRA") record of performance; whether net new benefits would result from the transaction; the role of the Petitioner, including its parent and affiliates, in securitizing subprime loans; and the Petitioner's unfamiliarity with local community groups. Comments were also raised on the sufficiency of the submitted application. The Board has reviewed all issues raised and the supplemental filings of the Petitioner to address them. Consistent with past practice of the Board, issues related to CRA and fair lending are analyzed for the Board by Compliance Examination staff of the Commonwealth's Division of Banks. That review has also been considered by the Board.
The Board has reviewed the application and oral testimony received at the public hearing and received in supplemental filings. 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 would be promoted; and the record of performance under CRA by the two involved banks. The additional statutory requirements set out in sections 2 and 4 of said chapter 167A were also significant factors in the Board's deliberations on the matter before it. All such requirements are specifically addressed in the record of this transaction.
One such statutory provision requires the Board to have received notice from the Massachusetts Housing Partnership Fund (the "MHPF") that satisfactory arrangements have been made by Lehman Brothers consistent with statute and the MHPF's various affordable housing loan programs. The Board received notice from the MHPF that arrangements satisfactory to it had been made for this transaction in a letter dated January 11, 2007.
As an interstate transaction, the reciprocity of the laws of Lehman Brothers home state must be reviewed. Under Massachusetts law, the determination of reciprocity of the laws of another state rests solely with the Commissioner of Banks. The Commissioner has found that Delaware law is reciprocal and does expressly authorize a similar transaction by a Massachusetts bank holding company under conditions no more restrictive than those imposed by Chapter 167A. Additionally, all aspects of this multi-step transaction including the subsequent merger of Capital Crossing with and into an out-of-state federal bank, Lehman Brothers, and that out-of-state bank's retention of a branch office were also found by the Commissioner to be reciprocal. Accordingly, the proposed transaction is permissible under the Commonwealth's Interstate Banking Act and therefore, the Board will proceed to consider whether the other statutory requirements are met by this application.
Lehman Brothers is a federally-chartered savings bank subject to supervision by the Office of Thrift Supervision ("OTS"). Lehman Brothers has its main office in Wilmington, Delaware and a branch office in Jersey City, New Jersey. It also has an Executive Office located in New York, New York. It had total assets on a consolidated basis of approximately $21 billion at September 30, 2006. Lehman Brothers offers general deposit services and some credit products which are comprised of both the origination and purchase of first and second residential mortgage loans, commercial loans and student loans. However, it purchases more loans than it originates. Lehman Brothers also, as a part of its banking business, acquires discounted commercial loans. Other financial services include debit and credit as well as ATM cards and money transfer services. Its deposits are mostly brokered deposits. Deposits in Lehman Brothers are insured by the Federal Deposit Insurance Corporation ("FDIC"). Lehman Brothers Bank is a direct subsidiary of Lehman Brothers Bancorp and an indirect subsidiary of Lehman Brothers Holdings, Inc.
Capital Crossing Bank is a state-chartered trust company with its main office in Boston. It has no branch offices. Capital Crossing had assets of approximately $1.1 billion as of June 30, 2006. Similarly to Lehman Brothers, its operations are limited. Capital Crossing specializes in the acquisition of loans secured by commercial real estate, multi-family and one-to-four family residential real estate, other business assets, and originating and purchasing leases that finance the business activities of small companies. Capital Crossing does not make consumer or commercial loans. Also like Lehman Brothers, the vast majority of its deposits are brokered deposits which are also insured by the FDIC. Capital Crossing's sole banking office will be retained as a branch office of Lehman Brothers.
The Board has reviewed the transaction to determine that competition among banks will not be unreasonably affected by the proposed acquisition. It is the position of the Board to consider a transaction in light of its impact on the citizens, communities and banking structure in the Commonwealth on a community by community basis. As set out in the application, there is no overlap in the banking offices of Lehman Brothers and Capital Crossing since they conduct business in different states. However, the Board notes that the banking business operations of Capital Crossing and Lehman Brothers are different from many other banks. As stated herein, both banks rely on brokered deposits and purchase discounted loans. Such operations are not conducted on a limited geographical areas. The Board recognizes that there may be some overlap in the deposits and loans both banks seek. The size of the institutions reflects that they operate at different levels. Upon review the Board does not find that the transaction will unreasonably affect competition.
The Board has also considered the record of this application to determine whether public convenience and advantage will be promoted by this transaction. In the filed application, public testimony and supplemental filings, the Petitioner details how it believes the public will benefit by the proposed transaction. As described previously, both Capital Crossing and Lehman Brothers have a unique business plan. Capital Crossing specializes in the acquisition and servicing of small balanced discounted commercial mortgage loans. As stated in the application, the proposed transaction will enable Capital Crossing, as a branch office of Lehman Brothers, to become a larger and more competitive player in the discounted commercial loan market. Moreover, loans previously held in portfolio by Capital Crossing will be included in a securitization development strategy of Lehman Brothers. As set out in the application, the business strategy of Capital Crossing will be significantly enhanced through its acquisition by Lehman Brothers.
In determining whether or not to approve a transaction under the statutory criteria the Board is also required to determine that the transaction will result in net new benefits. As set out herein that term includes a showing of initial capital investments, job creation plans, consumer and business services as well as commitments to maintain and open branch offices. In the Board's analysis 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.
In its application and supplemental filing of January 24, 2007, the Petitioner addresses each of the provisions under the net new benefits test. The Petitioner's projections for growth in the acquired business of Capital Crossing will result in a capital investment of several million dollars in the infrastructure and technology needed to supplement and update Capital Crossing's current systems. The filings also project significant growth in employment in Massachusetts resulting from its acquisition of Capital Crossing. As stated at the public hearing, there will be no jobs eliminated as a result of the proposed transaction. Although both Lehman Brothers and Capital Crossing provided limited retail banking services, Lehman Brothers offers the most such services and particularly consumer and commercial credit products, all of which will become available to customers of Capital Crossings as a branch office of Lehman Brothers. Moreover, as noted above, the sole office of Capital Crossing will be maintained as a branch office of Lehman Brothers.
The Board has considered the unique operations of the Petitioner and Capital Crossing and all documents and testimony related thereto and finds that consideration of public convenience and advantage including net new benefits weigh in favor of approving the proposed transaction.
Related to the issue of public convenience and advantage is the record of performance under CRA by the banks which are parties to this transaction. Such review for a Massachusetts state-chartered bank includes examination by personnel of the Division of Banks as well as analysis of concerns received from the bank's community and its response to those concerns fairly raised. Capital Crossing operates under an approved Strategic Plan for compliance with CRA. For other institutions, the Board looks to a publicly available descriptive rating and evaluation by a federal or state bank regulatory agency. Lehman Brothers is a federally chartered bank examined for compliance with federal CRA provisions by the OTS. The Board has noted that Lehman Brothers received an "Outstanding" rating in its last examination of performance under CRA by the OTS, while Capital Crossing received a "Satisfactory" rating at its most recent examinations conducted by the Commonwealth's Division of Banks as well as the FDIC. This matter was specifically addressed at the public hearing. Oral and subsequent written testimony criticized Lehman Brothers' understanding of the CRA law and regulations as well as what was considered by the opponent as a very poor record of performance. The written comments acknowledged that those observations were based on the 2004 CRA examination by the OTS. At the pubic hearing, Lehman Brothers commented on its August 2006 examination in which it was given an "Outstanding" rating by the OTS.
As noted above, Compliance Examination staff of the Division of Banks have reviewed the comments by the opposition and the public portion of the 2006 OTS examination which was included as an exhibit with Lehman Brothers supplemental filing of January 24, 2007. Although some examination findings may be weighted differently from one regulator to another, Compliance Examination staff found that the 2006 OTS findings were justified in accordance with CRA regulations. Upon review, the Board retains its longstanding policy of accepting the public rating and evaluation of a federal regulatory agency. The Board notes that the record of the application reflects that the OTS in 2004 gave Lehman Brothers a "Satisfactory" rating and in 2006 and "Outstanding" rating. Each on their own would weigh in support of Board approval of this transaction.
The CRA examinations also review an institution's Fair Lending practices and violations of antidiscrimination laws. Under OTS procedures it would adversely adjust an institution's CRA rating on the basis of evidence of discriminatory or other illegal credit practices. No such adjustment was made in the 2006 CRA examination of Lehman Brothers by the OTS. The Petitioner addressed these issues in its January 24, 2007 supplemental filing, and more directly in its February 1, 2007 response for additional comment by the Board. Those filings also address the issues raised on the Petitioner and related parties roles in the securitization of mortgage loans including subprime loans. The Petitioner's responses detailed its role, the policies and principles it operates under, the due diligence it conducts and the quality control reviews it initiates. The Petitioner further states that it does not originate, purchase, finance or securitize "high cost" loans as defined under applicable federal or state law or use any federal preemption to do so. The Board finds the Petitioner's filings responsive to the issues raised and that such issues do not preclude approval of this transaction.
The financial aspects and tax consequences from the structure of the transaction were also considered by the Board. Management factors reviewed were also found supportive of approval. In compliance with section 4 of chapter 167A, executive officers who are residents of the Commonwealth will be retained by Lehman Brothers. Additionally, all other requirements of statute relating to a bank holding company transaction have been met.
As with its review of any proposed transaction, the Board determines the sufficiency of an application by the totality of the information provided. That information should be well documented in the application to the Board. The Board however does consider and include in its analysis information contained in somewhat similar applications submitted to one or more federal bank regulators. The Board also gives significant weight to the oral presentations made at the public hearing as well as the response to the numerous questions asked by the Board during the hearing. Moreover, the Board also considers any supplemental filing made by a petitioner or required to be filed by the Board. In this pending matter, the Board has determined that the totality of the information provided by the Petitioner gives the Board substantial information on which to determine that all statutory criteria has been met and appropriate comments addressed.
The application and supporting documents and the comments received at the public hearing have established an extensive record on this petition, which has been reviewed consistent with statutory provisions and the policies of the Board. Based on the record of this matter considered in light of all relevant statutory and administrative requirements, the Board finds that public convenience and advantage will be promoted and that competition among banking institutions will not be unreasonably affected and that record of performance under CRA by the banks involved in this transaction are consistent with its approval. Having considered the record established on this application, the Board has found that the applicable statutory and administrative criteria have been met and hereby approves the acquisition of Capital Crossing by Lehman Brothers and related parties.
The approval herein is subject to the condition that all related transactions are completed within one year of date of this Decision.
February 13, 2007
Steven L. Antonakes
Commissioner of Banks
Alan L. LeBovidge
Commissioner of Revenue
Timothy P. Cahill
Treasurer and Receiver General