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  • Division of Banks

Decision  Decision of July 31, 2012

Date: 07/31/2012
Organization: Division of Banks
  • Petitioner: Commerce Bank & Trust Company
  • Respondent: Division of Banks

Table of Contents

Decision relative to the merger of Mercantile Bank and Trust Company, Boston, Massachusetts with and into Commerce Bank & Trust Company, Worcester, Massachusetts

Commerce Bank & Trust Company ("Commerce"), Worcester, Massachusetts has applied to the Division of Banks (the "Division") for authority to merge with Mercantile Bank and Trust Company ("Mercantile"), Boston, Massachusetts pursuant to the provisions of Massachusetts General Laws chapter 172, section 36, and under the terms of a Consolidation Agreement dated March 21, 2012 ("the Agreement"). The Agreement provides for the merger of Mercantile with and into Commerce, under the name, charter and by-laws of Commerce. The main office of Commerce would remain the main office of the continuing institution and Commerce will retain all the banking offices of Mercantile as branch offices.

Notice of the application was posted as directed by the Division thereby affording opportunity for interested parties to submit comments. The period for filing comments has expired. The Division reviewed the application and all related documents in accordance with the statutory criteria of whether competition among banking institutions will be unreasonably affected and whether public convenience and advantage and net new benefits would be promoted by approval of the proposed transaction. The record of performance under the Commonwealth's Community Reinvestment Act ("CRA"), Massachusetts General Laws chapter 167, section 14 and its implementing regulation, 209 CMR 46.00 et seq. also were factors considered by the Division.

Commerce is a Massachusetts chartered trust company established in 1955. Its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted by law. In addition to its main office in Worcester, Commerce, a full service commercial bank, operates twelve branch offices located throughout Central Massachusetts, in Holden, Leominster, Marlborough, Milford, Shrewsbury, Webster, West Boylston, Westborough and has four offices in Worcester. As of March 31, 2012, Commerce had consolidated assets of approximately $1.5 billion. As of the same date its Tier 1 risk based capital ratio was 14.06%, total risk based capital ratio was 15.02% and Tier 1 leverage capital ratio was 9.64%. Accordingly, Commerce Bank is a "well-capitalized" institution pursuant to applicable regulatory guidelines and upon consummation of the transaction will remain well-capitalized.

Mercantile is a Massachusetts chartered trust company that was established in 1988. Mercantile’s deposits are insured by the FDIC to the maximum extent permitted by law. In addition to its main office, Mercantile operates two branch offices. All three offices are in the City of Boston. Mercantile Bank had total assets of approximately $197 million as of March 31, 2012. As of the same date, Mercantile Bank's Tier 1 risk-based capital ratio was 12.31%, total risk-based capital ratio was 13.35% and Tier 1 leverage capital ratio was 10.73%. Accordingly, Mercantile is a "well-capitalized" institution pursuant to applicable regulatory guidelines.

In analyzing the impact of a proposed transaction on banking competition, the Division 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. According to United States Department of Justice Merger Guidelines, a bank merger is considered to adversely affect competition if it would cause an increase of 200 points or more in the HHI and result in a highly concentrated market. In this case, the merger application will not unreasonably affect competition under that analysis. Neither Commerce’s banking offices, all of which are located exclusively in Worcester County, nor Mercantile’s banking offices, all of which are located in Suffolk County, have any overlap within their respective branch networks. Since Commerce does not currently maintain bank branches in the City of Boston, the HHI for Mercantile’s relevant geographic market would not increase as a result of the merger and the combined institution’s total share of deposits would remain unchanged at 0.14% based on deposit data collected by the FDIC.

In addition to that 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 merger will not have an adverse effect upon existing competition nor will it contribute to significant concentration of banking in the relevant market for the further reason that competition in the City of Boston, the relevant geographic market, is intense. The Division has noted that there are numerous banks with banking offices located in the primary service area of the merging banks. In its application, Commerce has provided maps and lists of the competing financial institutions located in the municipalities where Commerce and Mercantile maintain banking offices. In addition to nonbank depository institutions, numerous nonbank lenders, mutual fund providers and broker dealers provide financial services to consumers and businesses throughout the relevant geographic market. The nonbank lenders include national and regional mortgage lenders. Therefore, customers of Commerce and Mercantile will continue to be able to choose from a variety of banking options. Accordingly, the Division's analysis of the competitive impact of the merger does not preclude approval of the proposed transaction.

As a result of the merger, Commerce indicates that the banking public will benefit in several ways. Commerce states that the proposed transaction will create a more formidable competitor than either Commerce or Mercantile would be standing alone. In that regard, Commerce states that consolidation in the New England banking sector and the growing dominance of large multi-state banking organizations has made growth particularly important. The greater size of the combined organization, Commerce represents, will allow economies of scale in such areas as operations and technology, which will result in greater efficiencies and superior service.

Each of the banks has determined that it will need to grow and to offer a wider array of products and services in order to compete in the extremely competitive banking market in which it is located. The consolidation is a means, Commerce indicates, of accomplishing such an objective. The consolidation would allow the banks to pool their resources, increasing the financial strength, marketing visibility and capacity of the continuing institution. The same factors would allow the continuing institution to better serve its depositors and the community at large. Both banks view the consolidation as a transaction through which their respective borrowers, depositors, customers and employees would all benefit from a larger, stronger institution that will draw on the historical strengths of each constituent institution. Customers of both banks will benefit from an expanded branch office and ATM network and a wider array of banking products and services. The combined resources, expertise and market knowledge of both banks will produce greater product diversification. Product and geographic diversification should have the added benefit of reducing the vulnerability of the combined institution to local economic cycles, thereby permitting more consistent service levels in any given market. The merger will enable Mercantile’s retail and commercial customers to benefit from the higher legal lending limits of Commerce and to receive a broader array of products and services than Mercantile presently offers, including working capital lines of credit and asset-based lending products. Commerce has been listed by the Small Business Administration ("SBA") as the largest small business lender in Central Massachusetts and it offers Small Business Express and Patriot Express SBA loan products for the small business owner. The applicant believes that expanded lending availability should facilitate job creation and capital investment, particularly with respect to small business. Furthermore, customers of Mercantile will benefit from a wider variety of products and services offered by Commerce and not by Mercantile. These products and services include Student Checking, Overdraft Privilege Service for both consumers and businesses and other products and services.

The Division considered these reasons and others cited in the submitted documents in determining that public convenience and advantage will be promoted by approval of this transaction.

In determining whether or not to approve a petition under the statutory criteria, the Commissioner is also required to consider a showing of "net new benefits" related to the transaction. That term as set out in section 36 of said chapter 172 includes initial capital investments, job creation plans, consumer and business services and commitments to maintain and open branch offices, among other factors, which the Commissioner may deem necessary. In the application the Petitioner has addressed this requirement of statute including capital investments. As indicated above, Commerce is committed to maintaining all the current Mercantile banking offices as branches. Commerce represents in its filings that the retention of Mercantile’s offices is consistent with Commerce’s business strategy to expand and deepen its geographic footprint. Although Commerce has no formal plan to open de novo branches in Mercantile’s market area, Commerce represents it continually considers potential new branch sites and has the financial strength to take advantage of additional branching opportunities. Both Commerce and its parent holding company, Commerce Bancshares, Corp., Worcester, Massachusetts represent that their strong capital position and liquidity resources will enable existing branches of the continuing institution to provide expanded banking services to the community on a safe and sound basis. Both Commerce and Mercantile’s regulatory capital ratios exceeded the FDIC’s criteria for classification as "well capitalized" institutions as of December 31, 2011, and Commerce represents it will remain well capitalized following the merger. Commerce represents that while there would be some immediate reduction of staff levels, it is anticipated that there will be future growth resulting from the proposed transaction, if approved. Commerce represents both that it has a good history of job growth, and that the continuing institution will be more competitive, resulting in a greater probability that jobs will be created in the future. These and other factors are also cited as support for meeting the statutory criteria of net new benefits.

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 state-chartered bank includes examination by personnel of the Division as well as analysis of concerns received from the bank's community and its response to those concerns fairly raised. A publicly available descriptive rating and evaluation by a federal bank regulatory agency will also be considered. The Division has noted that Commerce received a "Satisfactory" rating on its most recent CRA performance evaluation, which was conducted jointly by the Division and the FDIC on May 2, 2011. Mercantile received an "Outstanding" rating at its most recent examination conducted by the Division on February 14, 2011.

The application states that, in connection with the Merger that the Directors and Senior Executive Officers of Commerce immediately prior to the closing of the Merger will continue to serve in those positions after the Merger. Upon consummation of the Merger, one member of the current Mercantile Capital Corporation board of directors will become a member of the boards of directors of Commerce Bancshares Corp. and Commerce Bank pursuant to Section 5.12 of the Agreement. The management of the combined bank is also detailed in the application documents. Economies and service capabilities which would result from the transaction are set out in the submitted documents. In conjunction with this multi-step transaction, Commerce Bank has requested authority to pay a dividend of up to $33 million to Commerce Bancshares Corp. to fund the cash considerations and expenses of the transaction and other specified payments. Upon consolidation, the continuing bank, even after payment of the requested dividend, will meet all required capital standards. Overall, financial and managerial considerations support the application.

Upon review of the application with reference to the relevant statutory and regulatory requirements, the Division has concluded that the consummation of the proposed consolidation would be in the public interest. On the basis of these considerations, approval is granted to merge Mercantile Bank and Trust Company with and into Commerce Bank & Trust Company under the name, charter and by-laws of Commerce Bank & Trust Company pursuant to the provisions of said Massachusetts General Laws chapter 172, section 36. I also hereby approve the above specified dividend pursuant to section 28 of chapter 172 of the General Laws.

The approval granted herein is subject to the following conditions:

  1. that the proposed merger shall not become effective until a Certificate signed by the Presidents and Clerks or other duly authorized officers of each bank indicating that each institution has complied with the provisions of Massachusetts General Laws chapter 172, section 36 or other applicable statute has been returned with my endorsement thereon;
  2. that the proposed merger shall not become effective until Articles of Merger with my endorsement thereon are submitted to the Secretary of State; and
  3. that the proposed merger shall be consummated within one year of the date of this Decision.

July 31, 2012

David J. Cotney
Commissioner of Banks

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