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State Street Corporation, Boston, Massachusetts ("State Street" or the "Petitioner") has petitioned the Board of Bank Incorporation ("the Board") pursuant to Massachusetts General Laws chapter 167A, sections 2 and 4 to acquire ownership and control of Investors Financial Services Corporation ("Investors") and its subsidiary bank Investors Bank & Trust Company ("Investors Bank"), Boston, Massachusetts. The acquisition will be accomplished by Investors merging directly into State Street. In conjunction with the petition, a related application has been filed with the Division of Banks to merge Investors Bank with and into State Street's bank subsidiary, State Street Bank and Trust Company ("State Street Bank").
As directed by the Board, notice of the application was published and posted and a public hearing was held, thereby affording an opportunity for interested parties to attend or submit comments. Other standard procedures informing the public of this matter before the Board were implemented. The public hearing was held on May 9, 2007. Representatives of the Petitioner and Investors offered testimony and responded to questions from the members of the Board. The Board received four comment letters in support of the proposed transaction and three proponents other than the interested parties testified at the hearing. The public comment period was extended from May 31, 2007 to June 21, 2007 by the Board due to a scheduling change for Investor's shareholder meeting. Additionally, at the request of the Board, the Petitioner supplemented its application to address several matters on May 3, 2007.
The Board has reviewed the application, supplemental filing, the extensive oral and written testimony received at the public haring as well as the letters submitted during the open comment period. Under Section 2 of chapter 167A of the General Laws, the Board is required to apply the review standards found in that section and section 4 of said chapter 167A. The applicable statutory and administrative criteria require the Board's review of the transaction to focus on, 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 of the banks involved in this transaction under the Community Reinvestment Act ("CRA") set out in section 14 of chapter 167 of the General Laws and its implementing regulation, 209 CMR 46.00 et seq.
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 statute and MHPF's various affordable housing loan programs. The Board received notice in a letter dated May 4, 2007 that satisfactory arrangements had been made by the Petitioner with the MHPF.
State Street is a registered bank holding company which has elected to be treated as a financial holding company. State Street employs over 10,000 people in Massachusetts and over 21,000 people worldwide. State Street's employees, who work in State Street Bank and its other subsidiaries, provide a full range of products and services to institutional investors worldwide, including asset custody services and related products. With $11.9 trillion in assets under custody and $1.7 trillion in assets under management as of December 31, 2006, State Street operates in 26 countries. At March 31, 2007, State Street had total consolidated assets of approximately $110.1 billion. State Street offers core custodial products and value-added products and services, such as fund accounting, fund administration, securities lending, investment manager operations outsourcing, recordkeeping, performance and analytics, and transfer agency services. State Street conducts a large portion of its business through its principal banking subsidiary, State Street Bank. State Street Bank does not provide traditional banking services or retail bank branch offices. As of March 31, 2007, State Street Bank had total consolidated assets of approximately $98 billion.
Investors is a bank holding company located in Boston. It focuses on providing asset custody services to institutional investors based throughout the world. Investors employs 3,200 people in Massachusetts and 4,300 people worldwide. Investors provides certain so-called "core" custody services, such as global custody, multi-currency accounting, fund administration, and middle office outsourcing. Investors also provides its institutional clients with "value added" bundled services, including securities lending, foreign exchange, cash management and investment advisory services. As of March 31, 2007, Investors had total consolidated assets of approximately $14.2 billion. Investors conducts business primarily through its banking subsidiary, Investors Bank. Like State Street Bank, Investors Bank does not provide traditional banking services to retail customers or maintain bank branch offices. Investors Bank maintains its principal place of business in Boston, and it conducts business, directly or through its subsidiaries, from additional offices in Massachusetts, New York, and California in the United States, as well as offices in Ireland, Canada, the Cayman Islands, the United Kingdom, and Luxembourg. At March 31, 2007, Investors Bank had total consolidated assets of approximately $14.2 billion.
The Petitioner has submitted material to address the issue that competition among banks will not be unreasonably affected by the proposed transaction. On the issue of whether competition will be unreasonably affected, the Board considers, but does not rely exclusively on, the various indices used by federal agencies in measuring competition in a given market. The Board also considers the proposed transaction in light of its impact on the citizens, communities and banking structure of the Commonwealth on a community by community basis. The Petitioner has presented analysis on competition under the standard banking market consideration of deposits controlled within a geographic area. It has also presented analysis considering those segments of commercial banking in which the involved entities directly compete. As noted previously, neither State Street Bank nor Investors Bank conduct retail banking operations or operate a retail branch office network. Accordingly, traditional federal banking market analysis does not trigger any deposit concentration issues. Similarly, the Board's additional review of a transactions impact on communities and municipalities is not triggered since the subsidiary banks have only their main banking offices in Boston.
The Petitioner identifies asset custody services and related services including security services as the product market of commercial banking in which both holding companies compete. This product market is viewed as being national, if not global, with customers being large corporations, institutions and other financially sophisticated entities. State Street identifies itself as a global organization with 42% of its revenues generated from twenty-five countries outside the United States. A significant number of strong, "well-capitalized" institutions including, JP Morgan Chase and Company, Citigroup, as well as foreign based institutions compete in this product market. One of the larger, if not largest competitor would be the entity resulting from the merger of Mellon Financial Corporation and The Bank of New York Company, Inc. (the "Mellon/BONY transaction"). That proposed transaction is also pending before this Board. The similarity of the arguments for each transaction and the timing of their pending applications before the Board have allowed it to obtain a much broader view and understanding of the competition amongst institutions offering asset custody services and related services. A similar timeline existed before the Board of Governors of the Federal Reserve System which approved both this transaction and the Mellon/BONY transaction on the same date, June 14, 2007. Based upon all the different analyses reviewed and the number of significant participants remaining in the applicable product market the Board finds that banking competition will not be unreasonably affected by the proposed transaction.
The Board has also considered the record of this application to determine whether public convenience and advantage will be promoted by this transaction. That test requires a finding that a proposed transaction will better serve the public interest and not just benefit the applicant and its stockholders. The Board must also determine that net new benefits will result from the transaction. Prior decisions of the Board have established that net new benefits is not a mathematical exercise of addition and subtraction. Moreover, the Board has established that it is empowered to weigh each net new benefit criterion and determine on balance whether the broader public convenience and advantage standard is met based upon the totality of the circumstances. The Petitioner has addressed these statutory requirements in its application, supplemental filing and oral, as well as, written testimony.
The Petitioner argues that the transaction is in the best interests of its customers, employees, the Commonwealth as well as other affected parties. It states that the transaction will enhance State Street's leadership and competitiveness in this particular industry. According to the application, State Street's clients will be able to take advantage of Investor's strengths in private equity and hedge fund servicing areas. Investor's clients will also now have access to State Street's many various client services. The Petitioner acknowledges that similar services are provided by both State Street and Investors. The transaction, they believe will result in synergies in these core operations allowing for greater efficiencies to the benefit of their customers. As set forth in the analysis of competitive effects of the transaction, the Petitioner again comments on the highly competitive aspect of the asset custody business and the ongoing consolidation on a national and global basis. Accordingly, State Street argues that the transaction will enable it to better serve existing clients, allow it to expand its customer base in the United States and internationally, as well as offer more products and services.
The main focus of the Board's consideration of net new benefits from the proposed transaction centered on the job creation component of that criteria. The employment ramifications of the transaction were part of the Petitioner's supplementary filing, a major part of its oral and written testimony and the subject of several questions at the public hearing by members of the Board. Among other things, the Board questioned the impact of the transaction on State Street's employees based in Quincy and Boston as well as any outsourcing activity particularly to India. The Petitioner responded extensively on both of those questions.
In its filings and testimony, the Petitioner detailed the number of positions that would be eliminated over a period of eighteen months following consummation of the transaction, if approved. It was clearly stated that the positions eliminated would primarily be in Massachusetts. The Petitioner stressed that the numbers given reflected positions, not individuals, as some employees of Investors may fill open positions at State Street. The Petitioner emphasized in its filings that it is the top banking employer in Massachusetts and in the top twenty of employers in the Commonwealth. Hiring and payroll information over the last few years were also provided to the Board. The number of employees of State Street and Investors are set out earlier in this Decision. All of these records were submitted to strengthen the argument that the Petitioner, as a stronger company resulting from the transaction, will be well positioned for continued future growth and increased employment which will outweigh the short term impact of the transaction on jobs.
From past transactions, the Board is well aware that mergers of holding companies and banks operating within the same market, as in this transaction, result in the elimination of overlapping or redundant positions held by working citizens. The Board has also recognized that such mergers should result in a stronger, better capitalized, competitive institution. It is that combined entity that, over time, will produce more jobs than those initially lost as well as positions with a higher level of compensation. Past Decisions of the Board establish this analysis of job creation plans as part of the test of net new benefits.
Based upon all information on the record before it, the Board concludes that the Petitioner has met the burden of demonstrating that public convenience and advantage will be promoted and that net new benefits will result from the transaction.
The Board's review of this transaction includes an assessment of the subsidiary banks' performance under CRA. Such assessment for a state-chartered bank, such as State Street Bank and Investors Bank, includes examination by personnel of the Division of Banks, 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. Here, the relevant evaluations were submitted as part of Petitioner's application materials. Since neither State Street Bank nor Investors Bank offer traditional deposit and credit products and services to retail consumers nor maintain retail branch offices, each as been designated as a wholesale bank for purposes of analyzing their compliance with the federal and Massachusetts CRA. The application provides additional information on State Street's actions to meeting the needs of its community. Both State Street Bank and Investors Bank have received an "Outstanding" CRA performance rating from the Division of Banks.
The Board has also considered the financial and managerial resources and prospects of the proposed transaction. The Board has noted both State Street and Investors are "well-capitalized" holding companies as are their subsidiary banks. As set out in the application, the directors and principal officers of the combined company will be the current directors and officers of State Street. Management factors reviewed in consideration of the proposed transaction before the Board are also supportive of its approval. In evaluating financial factors, the Board has found that the resulting capital ratios and projections for the Petitioner are satisfactory.
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. The Board also finds that the banks involved in this transaction have a satisfactory record of performance under CRA. In accordance with these findings and pursuant to the statutory authority cited herein, the Board approves the application and authorizes State Street Corporation to acquire ownership and control of Investors Financial Services Corporation and Investors Bank & Trust Company.
The approval granted herein is subject to the condition that the transaction is completed within one year of the date of this Decision.
June 26, 2007
Steven L. Antonakes
Commissioner of Banks
Alan L. LeBovidge
Commissioner of Revenue
Timothy P. Cahill
Treasurer and Receiver-General