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Commerce Bancshares Corp. ("the "Petitioner"), Worcester, Massachusetts has petitioned the Board of Bank Incorporation (the "Board") pursuant to Massachusetts General Laws chapter 167A, sections 2 and 4 for approval to acquire ownership and control of Mercantile Capital Corporation ("Mercantile Capital"), Boston, Massachusetts and its subsidiary bank, Mercantile Bank and Trust Company ("Mercantile Bank"), Boston, Massachusetts. The Petitioner is the bank holding company for Commerce Bank & Trust Company, Worcester, Massachusetts. The Petitioner’s application before the Board is part of a multi-step transaction in which Mercantile Capital Corporation will merge with and into the Petitioner. An application has also been filed for the subsequent merger of the subsidiary banks, Mercantile Bank with and into Commerce Bank & Trust Company ("Commerce Bank"). That part of the proposed transaction is, by statute, subject to approval of the Division of Banks.
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 May 30, 2012. The comment period on the proposed transaction ended on June 8, 2012. Prior to the public hearing, Mercantile Capital held its stockholders' vote on this proposed transaction, and the stockholders voted in favor of the transaction. No stockholder or other person or entity submitted a comment to the Board at the public hearing or during the subsequent public comment period.
The Board has reviewed the application, the oral testimony received at the public hearing. That review focused on the statutory and administrative criteria applicable to such transactions which include, 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 the Community Reinvestment Act ("CRA") by the subsidiary banks of the holding companies. As in any transaction, consideration is also given to the financial and management components of a proposed acquisition. 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. Those requirements were addressed in the application documents and at the hearing.
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 the Petitioner 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 June 25, 2012.
The Petitioner is a Massachusetts bank holding company, headquartered in Worcester, MA and formed in 1996. The Petitioner’s primary federal regulator is the Federal Reserve System (the "Federal Reserve"). As of March 31, 2012, the Petitioner had total assets of approximately $1.5 billion. As a bank holding company, one of the Petitioner’s primary purposes is to serve as a source of strength for its subsidiaries and affiliates.
One of Petitioner's principal assets is 100% ownership of Commerce Bank, a Massachusetts chartered trust company chartered in 1955. Commerce Bank’s deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). Commerce Bank, a full service commercial bank, has twelve branch offices located in the following Central Massachusetts communities: Holden, Leominster, Marlborough, Milford, Shrewsbury, Webster, West Boylston, Westborough, and Worcester (4). As of March 31, 2012, Commerce Bank 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 09.64%. Accordingly, Commerce Bank is a "well-capitalized" institution pursuant to applicable regulatory guidelines, and upon consummation of the transaction, Commerce Bank will remain well capitalized under applicable bank regulatory guidelines.
Mercantile Capital, a Massachusetts bank holding company, was organized in 1986. In 1999 the name of the institution was changed from "Mercantile Capital Corp." to "Mercantile Capital Corporation." Mercantile Capital’s primary federal regulator is the Federal Reserve System. Mercantile Capital conducts business principally through its wholly-owned bank subsidiary, Mercantile Bank, a Massachusetts-chartered trust company established in 1988, and a member of the Federal Reserve. Mercantile Bank has three offices, all in Boston. Mercantile Bank accepts deposits, makes loans and provides a broad range of retail and commercial banking services to its customers. 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 %.
The financial aspects of any transaction are a significant consideration of the Board as they may affect the continuing holding company's ability to serve the banking public and to actively compete with other financial institutions as well as to maintain its capital ratio standards for a safe and sound institution. This is a cash transaction whereby each outstanding share of Mercantile Capital common stock will be exchanged for $9.05 in cash. The total estimated value of the transaction is approximately $26.5 million. Upon consummation of the transaction, the Petitioner will remain a well capitalized holding company under applicable bank regulatory guidelines.
The Petitioner has submitted materials to address the issue that competition among banks will not be unreasonably affected by the proposed transaction. The application contained an analysis utilizing the various tests used by federal agencies. The analysis demonstrates that consummation of the transaction will not result in undue concentration of banking resources in the specified banking markets in Massachusetts. Traditionally, however, this Board has not limited its review to those previously cited federal standards in its consideration of whether competition will be unreasonably affected. Rather it is the position of this 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 instead of by variously grouped markets. The Board has considered that there is no geographic overlap between the subsidiary banks. Commerce Bank operates all of its branches in Worcester and Middlesex Counties. Mercantile Bank operates all of its branches in Boston. Accordingly, Commerce Bank and Mercantile Bank do not overlap in any municipality. The separate and distinct markets served by the subsidiary banks were discussed at the public hearing. Upon review, the Board does not believe the transaction will 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 banking markets served by the continuing institution.
The Board has considered whether public convenience and advantage will be promoted by the proposed transaction. The Petitioner states that the enhanced financial strength of the combined holding companies will ensure that the continuing bank will be able to offer financial products and services at competitive rates. The transaction will permit the pooling of their financial resources, to reduce costs and to diversify risk. In connection with the transaction, the Petitioner has no current plans to close any branch office of Mercantile Bank. Therefore, customers of both banks will be able to conduct their banking business at a greater number of locations over a much larger geographic area footprint. In addition to a full range of deposit and commercial products and services, the transaction will result in a number of new products and services being offered at all three of the acquired Mercantile Bank branch offices. These products include: Student Checking, Zero Balance Commercial Checking, Overdraft Privilege Service for consumers and businesses as well as other loan products and other services indentified in the application.
At the hearing the applicant commented upon the favorable aspects of the niche lending specialties possessed by both of the subsidiary banks, but also upon the concentration of Mercantile Bank’s lending portfolio which would be subject to greater diversification after the consummation of the transaction. The niche lending specialties of each subsidiary bank were discussed and questioned at length by the Board at the hearing not only as to the expertise and due diligence on such loans but also how they would continue particularly as to the taxi medallion lending of Mercantile should the multi-step transaction be approved and the subsidiary banks consolidated.
The Board has considered the Petitioner's analysis of "net new benefits" related to the transaction with respect to the statutory criteria. The term includes initial capital investments, job creation plans, consumer and business services, and commitments to maintain and open branch offices, among other factors. The application and testimony addressed the capital investment component of the statutory requirement. Testimony by the Petitioner and in response to questions by the Board indicated that while there would be some immediate reduction of staff levels, it was anticipated that there would be future growth resulting from the proposed transaction if approved. The Board specifically considered the future employment of Mercantile Bank staff and questioned the applicant in detail concerning the transaction’s implications with respect to jobs.
The Board has considered the application and testimony submitted by the Petitioner and finds that consideration of public convenience and advantage including net new benefits weighs in favor of approving the proposed transaction.
Related to the issue of public convenience and advantage is the record of performance under the CRA by the subsidiary banks which are the parties to this transaction. Such a review for a state-chartered bank includes examination by personnel of the Division of Banks as well as analysis of concerns received by the bank's community and its response to those concerns fairly raised. For other institutions, the Board looks to a publicly available descriptive rating and evaluation by a federal or state bank regulatory agency. The Board has noted that the Petitioner's subsidiary bank, Commerce Bank, has a "Satisfactory" rating in its most recent examination of performance under CRA by the Division and the FDIC on May 2, 2011. Mercantile Bank received an "Outstanding" rating at its most recent examination conducted by the Division on February 14, 2011.
The financial and managerial aspects of any transaction are also a significant consideration of the Board. The acquisition is being accomplished by the merger of the two holding companies in a transaction financed by an exchange of cash. The cash consideration payable to eligible stockholders is being paid by the Petitioner from cash on hand although the Board is aware of a related dividend from its subsidiary bank. The cost of the transaction and the financial analysis of the Petitioner are addressed previously in the Decision. As part of the transaction, one director of Mercantile Capital will become a director of both Commerce Bancshares and Commerce Bank. Other executive officers of Mercantile Bank will serve as officers of the continuing bank. The Board’s consideration of the financial and managerial aspects of the transaction also supports its approval.
The application, supporting documents, as well as the testimony received at the public hearing have established a comprehensive 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 the record of performance under CRA by the subsidiary 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. Accordingly, the Board has concluded that the petition should be approved.
In accordance with the findings expressed herein and pursuant to statute, the Board hereby approves the petition and authorizes Commerce Bancshares Corp. to acquire Mercantile Capital Corporation and its subsidiary bank provided that the transaction is completed within one year of the date of this Decision.
David J. Cotney
Commissioner of Banks
Commissioner of Revenue
Treasurer and Receiver-General
July 31, 2012