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Salem Five Bancorp ("Salem Five Bancorp" or the "Petitioner"), Salem, Massachusetts has petitioned the Board of Bank Incorporation (the "Board") to acquire Stoneham Bancorp, MHC (in formation) ("Stoneham Bancorp") and its subsidiary bank, Stoneham Savings Bank, both of which are located in Stoneham, Massachusetts under the provisions of General Laws chapter 167A, sections 2 and 4.
The merger of the two mutual holding companies (the "MHC Merger") is authorized under General Laws chapter 167H, section 7, clause (3). Salem Five Bancorp is the mutual holding company for Salem Five Cents Savings Bank, a state-chartered stock savings bank, headquartered in Salem, Massachusetts. Stoneham Bancorp, MHC’s subsidiary bank, Stoneham Savings Bank, is also a Massachusetts-chartered savings bank. The proposed acquisition is part of a multi-step transaction involving a petition before the Board for approval for reorganization into a mutual holding company, Stoneham Bancorp, MHC pursuant to Massachusetts General Laws chapter 167H, section 2 by Stoneham Savings Bank. Stoneham Bancorp, MHC would be formed for the sole purpose of merging with Salem Five Bancorp. As a result of the MHC merger, Salem Five Cents Savings Bank and Stoneham Savings Bank would exist as separate bank subsidiaries of Salem Five Bancorp, as Stoneham Bancorp would cease to exist after the MHC merger.
Notice of the petition by Salem Five Bancorp was published as directed by the Board thereby affording opportunity for interested parties to submit comments. A public hearing relative to this application was held by the Board on September 13, 2011 and the period for filing comments expired on September 20, 2011. The Board reviewed the application, testimony received at the public hearing, supplemental filings, and all related documents in accordance with the statutory criteria of whether competition among banking institutions will be unreasonably affected and whether any net new benefits as well as public convenience and advantage would be promoted by approval of the proposed transaction. The record of performance under the Commonwealth's Community Reinvestment Act ("CRA"), General Laws chapter 167, section 14 and its implementing regulations 209 CMR 46.00 et seq., by the banks involved in the transaction was also a factor considered by the Board. During the pendency of this application the Board has received several additional filings made to federal bank regulatory agencies for various parts of this multi-step transaction.
One provision of law requires the Board to have received notice from the Massachusetts Housing Partnership Fund (the "MHPF") that satisfactory MHPF arrangements for the proposed transaction have been made by the Petitioner pursuant to section 4 of chapter 167A of the General Laws and guidelines adopted by the MHPF. The Board has received notice from the MHPF, in a letter dated October 21, 2011.
Salem Five Bancorp is a mutual bank holding company organized under General Laws chapter 167H and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve") and the Massachusetts Division of Banks. Salem Five Bancorp has its corporate offices in Salem, Massachusetts. Salem Five Bancorp has one direct subsidiary, Salem Five Cents Savings Bank, and thirteen indirect subsidiaries.
Salem Five Cents Savings Bank was chartered as a mutual savings bank in 1855 and was reorganized under Massachusetts law as a stock savings bank in 2006 when Salem Five Bancorp was formed in the mutual holding company reorganization. Salem Five Cents Savings Bank has twenty-two locations in Essex, Middlesex, and Suffolk counties. Salem Five Cents Savings Bank also plans to open a new branch office in Burlington as well as in Waltham, Massachusetts. Salem Five Cents Savings Bank’s main office is located in Salem, Massachusetts.
Salem Five Cents Savings Bank accepts deposits and provides a broad range of retail and commercial banking services for its customers. These include telephone and internet banking products, internet bill pay, and remote deposit capture products for commercial accounts. Through its subsidiaries, it also offers insurance products, non-deposit investment products, aviation finance and competitive residential mortgage products. The deposits of Salem Five Cents Savings Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law, and the Depositors Insurance Fund ("DIF") for deposits in excess of FDIC coverage limits.
As of September 30, 2011, Salem Five Cents Savings Bank had assets of approximately $2.9 billion. As of the same date, its tier one risk-based capital, total risk based capital and leverage ratios were significantly above all requirements and Salem Five Cents Savings Bank is a "well capitalized" institution pursuant to applicable bank regulatory guidelines.
Stoneham Bancorp, MHC is a mutual holding company being formed under Massachusetts law for the sole purpose of facilitating the transaction with Salem Five Bancorp. Applications for the reorganization of Stoneham Savings Bank into a mutual holding company are before the Board and the Massachusetts Division of Banks.
Stoneham Savings Bank is a mutual savings bank chartered in 1855. Stoneham Savings Bank has six (6) locations in Essex and Middlesex Counties. The main office is located in Stoneham, Massachusetts. Stoneham Savings Bank accepts deposits and provides residential mortgages and certain other retail and commercial banking products to its consumer and commercial customers. The deposits of Stoneham Savings Bank are insured by the FDIC to the maximum extent permitted by law, and by the DIF for deposits in excess of FDIC coverage limits. As of September 30, 2011, Stoneham Savings Bank had assets of approximately $337 million. It was heavily impacted by the downturn in the economy, which adversely affected its loan portfolio, straining its earnings and capital levels. Stoneham Savings Bank is currently categorized as an "undercapitalized" institution pursuant to bank regulatory guidelines.
As indicated above, Stoneham Savings Bank is currently facing significant financial pressures. Stoneham Savings Bank has been operating under a Consent Order (the "Consent Order") dated January 26, 2010 issued to the Stoneham Savings Bank by the Massachusetts Division of Banks and the FDIC and is in need of an infusion of capital in order to restore its financial condition. The transaction addresses such concerns by providing Stoneham Savings Bank with both immediate capital and long-term financial stability. As a merger of two mutual institutions, there is no purchase price associated with the MHC Merger. Pursuant to the terms of the transaction, Salem Five Cents Savings Bank will pay the purchase price for all outstanding capital stock of New England Heritage Insurance Agency Group, Inc. ("NEHI"), a Massachusetts corporation engaging in insurance activities, and a wholly-owned subsidiary of Stoneham Savings Bank at the fair market value of such stock, such payment to be paid directly to Stoneham Savings Bank. In the related filings, Salem Five Cents Savings Bank has sought, simultaneously, and has received the permission of the Commissioner of Banks to acquire NEHI. Also, pursuant to the terms of the transaction, Salem Five Cents Savings Bank will establish an entity referred to in the filings as "the Workout Subsidiary," in an amount sufficient to finance the acquisition of a portfolio of specified nonperforming and other assets from Stoneham Savings Bank at the fair market value of such assets and to capitalize the Workout Subsidiary. Thereafter, Salem Five Cents Savings Bank will pay a dividend to Salem Five Bancorp in such amount as is sufficient to allow Salem Five Bancorp to make a capital contribution to Stoneham Savings Bank as well as to fund the Workout Subsidiary. The contributions to Stoneham Savings Bank will be in such amount as to qualify it as "well capitalized" under applicable bank regulatory guidelines and to meet the capital requirements set forth in the Consent Order, i.e., tier one leverage ratio of 7% or greater, tier one risk-based capital ratio of 9% or greater, and total risk-based capital ratio of 11% or greater. As part of the transaction Salem Five Bancorp will take such other actions as will be necessary to assure Stoneham Savings Bank’s financial strength and viability. The Board is aware that subsequent to the public hearing, the composition of the assets to be held by the Workout Subsidiary has been restructured. Such financial contractual arrangements, under strict regulatory review, will inure to the public interest resulting in Stoneham Savings Bank remaining a viable financial institution. The affiliation addresses Stoneham Savings Bank’s financial needs in a number of ways. The requirement that Stoneham Savings Bank transfer a specified portfolio of its nonperforming, substandard and other assets to a subsidiary of Salem Five Bancorp in exchange for the fair market value of such assets enables Salem Five Cents Savings Bank to utilize staff members on hand, in contrast to Stoneham Savings Bank’s utilization of third parties, to work out such loans ensuring a more efficient resolution. The parties reasonably expect to achieve a better outcome with respect to such assets at a lower cost. The financial ramifications of such a transfer, including the related tax consequences, were questioned and discussed at the Board’s public hearing.
The Board has also considered whether public convenience and advantage will be promoted by this transaction. As discussed above, the most significant public benefit of the transaction would be the restoration of the financial strength of Stoneham Savings Bank. The capital provided to Stoneham Savings Bank will, among other things, allow it to complete deferred projects as well as upgrade and improve its facilities and operations. Customers will also have access to Salem Five Cents Savings Bank’s branch office and automated teller machine networks. Expanded products and services, such as improved internet banking, would also result from the financially stronger Stoneham Savings Bank operating as a subsidiary of Salem Five Bancorp. The statutory test of net new benefits is also addressed in the application.
The Petitioner has addressed the issue of whether competition among banks will be unreasonably affected by the proposed transaction. Part of that analysis is typically detailed according to various tests used by federal agencies. That analysis demonstrates that consummation of the transaction will not result in undue concentration of banking resources in the Commonwealth. Petitioner has filed information with its application indicating that the MHC merger will not have a significant adverse effect on competition in either the Boston Banking Market, as it is defined by the Federal Reserve Bank of Boston or in the combined Middlesex County and Essex County market, where both Salem Five Cents Savings Bank and Stoneham Savings Bank maintain banking offices. No significant adverse effect on competition will take place in any relevant market as a result of the MHC merger, regardless of the analysis employed. The Federal Reserve has stated that a bank merger or acquisition will not be challenged, in the absence of other factors indicating anticompetitive effects, unless the post-merger Herfindahl-Hirschman Index ("HHI") is at least 1,800 and the merger increases the HHI by more than 200 points. An analysis of each of the relevant markets utilizing both the Federal Reserve’s banking market analysis and the FDIC’s county-based market analysis were also provided by Petitioner. Those analyses reflect only a de minimis impact on competition in any market. The Board's review, however, is not limited to such federal standards. In addition to the above analysis, the Division considers the competitive impact of the proposed transaction on a community-by-community basis, as well as on the overall banking structure of the Commonwealth. The Board has considered the fact that both Salem Five Cents Savings Bank and Stoneham Savings Bank have branch offices in the municipalities of Malden, North Andover, and Stoneham. On review, the Board finds that the transaction will not unreasonably affect competition for the reasons cited as well as the fact that a number of diverse financial institutions will continue to provide competitive deposit and credit services throughout the affected areas and the banking markets served by both banks, which will continue to operate separately although under the control of the same mutual holding company. Accordingly, the Board’s independent analysis of the competitive impact of the acquisition also weighs in favor of the proposed transaction.
The Board has considered that after the MHC Merger, the Board of Directors of Stoneham Savings Bank would consist of those twelve individuals who are trustees of the Stoneham Savings Bank prior to the MHC Merger and two individuals to be designated by Salem Five Bancorp, each to hold office in accordance with the Articles of Organization and Bylaws of Stoneham Savings Bank. The Board has also considered as well that after the consummation of the MHC Merger, all current employees of Stoneham Savings Bank will continue to be employees of the bank with the same salaries and benefits.
The record of performance under CRA by the subsidiary banks in a bank holding company transaction is also a consideration by the Board. Such review for state-chartered banks such as the subsidiary banks involved in this transaction, includes examination by personnel of the Division as well as analysis of concerns received from a bank's community and a bank's response to those concerns fairly raised. The Board has noted that Salem Five Cents Savings Bank had a "High Satisfactory" rating and Stoneham Savings Bank had a "Satisfactory" rating in their most recent examination of performance. Based on the information presented and available to the Board, the Board's view of this factor is consistent with approval.
Upon review the Board has determined that after the acquisition, the resulting entities will remain sufficiently capitalized under all regulatory standards. Management factors reviewed were also found supportive of approval. Additionally, all other requirements of statute relating to a bank holding company transaction have been met. These factors considered by the Board weigh in favor of the transaction.
Based on the record on 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 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 hereby approves the application and authorizes Salem Five Bancorp to acquire Stoneham Bancorp, MHC, and own and control Stoneham Savings Bank pursuant to the provisions of section 2 of chapter 167A of the General Laws. The Petitioner will also continue to be subject to the provisions of chapter 167H of the General Laws and other applicable statutes. All approvals related to the multi-step organization of the mutual holding company, Stoneham Bancorp MHC, before this Board have also been granted as of this same date.
The approvals herein are subject to the condition that all related transactions are completed within one year of the date of this Decision.
David J. Cotney
Commissioner of Banks
Commissioner of Revenue
Treasurer and Receiver-General
January 13, 2012