Chittenden Corporation ("Chittenden"), a bank holding company within the meaning of the Bank Holding Company Act ("BHC Act"), has requested the Board's approval under section 3 of the BHC Act (12 U.S.C. §1842) to acquire Vermont Financial Services Corp., Brattleboro, Vermont ("Vermont Financial"), and its wholly owned subsidiary banks, Vermont National Bank ("Vermont National"), also in Brattleboro, and United Bank, Greenfield, Massachusetts ("United Bank").¹

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (64 Federal Register 6361 (1999)). The time for filing comments has expired, and the Board has considered the proposal and all comments received in light of the factors set forth in section 3 of the BHC Act.

Chittenden, with total consolidated assets of $2.1 billion, operates depository institutions in Vermont and Massachusetts.² Chittenden is headquartered in Vermont and is the third largest depository institution in the state, controlling deposits of $1.2 billion, representing approximately 16.8 percent of total deposits in insured depository institutions in the state ("state deposits"). Vermont Financial, with total consolidated assets of $2.1 billion, also operates depository institutions in Vermont and Massachusetts. Vermont Financial is the second largest depository institution in Vermont, controlling deposits of $1.3 billion, representing approximately 17.3 percent of state deposits. On consummation of the proposal, and after accounting for the proposed divestitures discussed in this order, Chittenden would become the largest depository institution in Vermont, controlling deposits of $2 billion, representing approximately 27.3 percent of state deposits.

Chittenden is the 32d largest depository institution in Massachusetts, controlling deposits of $499 million, representing less than 1 percent of state deposits. Vermont Financial is the 71st largest depository institution in the state, controlling deposits of $238 million, also representing less than 1 percent of state deposits. On consummation of the proposal, Chittenden would become the 18th largest depository institution in Massachusetts, controlling deposits of $737 million, representing less than 1 percent of state deposits.³

Interstate Analysis
Section 3(d) of the BHC Act allows the Board to approve an application by a bank holding company to acquire control of a bank located in a state other than the home state of the bank holding company if certain conditions are met.⁴ For purposes of the BHC Act, the home state of Chittenden is Vermont, and Vermont Financial's subsidiary banks are located in Vermont, Massachusetts, and New Hampshire.⁵ Thus, for purposes of section 3(d), this transaction involves the acquisition by a Vermont bank holding company of banks in Massachusetts and New Hampshire.

All the conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case.⁶ In view of all the facts of record, the Board is permitted to approve the proposal under section 3(d) of the BHC Act.

Competitive Considerations
The BHC Act prohibits the Board from approving an application under section 3 of the BHC Act if the proposal would result in a monopoly or would be in furtherance of any attempt to monopolize the business of banking. The BHC Act also prohibits the Board from approving a proposed combination that would substantially lessen competition or tend to create a monopoly in any relevant banking market, unless the Board finds that the anticompetitive effects of the proposal are clearly outweighed in the public interest by the probable effects of the proposal in meeting the convenience and needs of the community to be served.⁷

Chittenden and Vermont Financial compete directly in eight banking markets in Vermont and two banking markets in Massachusetts.⁸ The Board has carefully reviewed the competitive effects of the proposal in these banking markets in light of all the facts of record, including the number of competitors that would remain in the markets, the relative shares of total deposits in depository institutions in the markets ("market deposits")⁹ controlled by the companies involved in this transaction, the concentration levels of market deposits and the increase in these levels as measured by the Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"),¹⁰ and other characteristics of the markets.

A. Banking Markets in Massachusetts
Consummation of the proposal without divestitures would be consistent with Board precedent and the DOJ Guidelines in the Boston and Springfield, Massachusetts, banking markets.¹¹ After consummation of the proposal, numerous competitors would remain in each banking market and the markets would remain moderately concentrated as measured by the HHI.

B. Banking Markets in Vermont
To mitigate the potential anticompetitive effects of the proposal in the eight banking markets in Vermont, Chittenden has committed to divest 18 branches that control a total of $497 million in deposits.¹² After accounting for the proposed divestitures, consummation of the proposal would be consistent with Board precedent and the DOJ Guidelines in six of the Vermont banking markets: Bennington, Brattleboro, Middlebury, Rutland, Springfield, and Vergennes.¹³ In addition, a significant number of competitors would remain in each of these banking markets relative to the size of the market after consummation of the proposal.

Consummation of the proposal in the Barre-Montpelier and Burlington-St. Albans banking markets would exceed the DOJ Guidelines after accounting for the proposed divestitures. In these markets, the Board has considered whether other factors either mitigate the competitive effects of the proposal in the market or indicate that the proposal would have a significantly adverse effect on competition in the market.¹⁴

Barre-Montpelier. Chittenden is the fourth largest depository institution in the market, controlling deposits of $106.6 million, representing approximately 15.4 percent of market deposits. Vermont Financial is the second largest depository institution in the market, controlling deposits of $150.9 million, representing approximately 21.9 percent of market deposits. Chittenden proposes to divest two branches in the Barre-Montpelier banking markets with total deposits of $30.1 million to a banking organization that does not currently have a presence in the market. On consummation of the proposed merger and divestiture, Chittenden would become the largest depository institution in the market, controlling deposits of $227.3 million, representing approximately 32.9 percent of market deposits.

A number of factors indicate that the competitive effects of the proposal are not likely to be significantly adverse in this market. First, a large number of financial institutions compete in this market. Seven commercial banks, in addition to Chittenden, would remain in the market after the merger. In addition, one savings association that competes in the market is particularly active in commercial as well as mortgage and consumer lending. Based on these activities, the Board has concluded that this savings association should be considered as a full competitor of banks in this market.¹⁵ Seven credit unions also compete in the market and control approximately $234.2 million of deposits. One credit union controls approximately $191.9 million of deposits and represents that its members include approximately 38 percent of all households in the market.¹⁶

Second, the Barre-Montpelier banking market has characteristics that make it attractive for entry. From 1993 to 1998, market deposits increased 13.8 percent, compared to an average statewide increase of 10.6 percent in Vermont. One bank entered the market de novo in 1995, and three other banks have entered the market by acquisition since 1993. The proposed divestiture to an out-of-market commercial banking organization would provide another market entrant.

Burlington-St. Albans. Chittenden is the second largest depository institution in the market, controlling deposits of $604.2 million, representing approximately 26.6 percent of market deposits. Vermont Financial is the third largest depository institution in the market, controlling deposits of $348.5 million, representing approximately 15.3 percent of market deposits. Chittenden proposes to divest seven branches in the Burlington-St. Albans banking market with total deposits of $220.8 million, representing approximately 9.7 percent of market deposits, to a suitable competitor. On consummation of the proposed merger and divestiture, Chittenden would become the largest depository institution in the market, controlling deposits of $731.9 million, representing approximately 32.2 percent of market deposits. The HHI would increase not more than 219 points to 2198.

Several factors mitigate the potential adverse effects that may result from the proposal in the Burlington-St. Albans banking market. In particular, the Board has considered the number of competing institutions in and the structure of the Burlington-St. Albans banking market. Seven depository institutions in addition to Chittenden would remain in the market after the proposed acquisition. The proposed acquiror of the divested branches would become the fourth largest depository institution in the market, controlling 11.2 percent of market deposits. Four depository institutions in addition to Chittenden would each control more than 9 percent of market deposits.

The market also appears to be attractive for entry by out-of-market competitors. Average household income in the Burlington MSA, which closely approximates the banking market, substantially exceeds the statewide average in Vermont, and the population in the Burlington MSA increased 7.8 percent from 1990 to 1997, compared to an average statewide increase of 5.1 percent. In addition, one depository institution entered the market de novo in 1998, and three depository institutions have entered by acquisition since 1993.

C. Views of Other Agencies and Conclusion
The Department of Justice has conducted a detailed review of the proposal and advised the Board that, conditioned on completion of the proposed divestitures, consummation of the proposal would not likely have a significantly adverse effect on competition in any relevant banking market. The Office of the Comptroller of the Currency ("OCC") and the Federal Deposit Insurance Corporation ("FDIC") also have been afforded an opportunity to comment and have not objected to consummation of the proposal.

After carefully reviewing all the facts of record, and for the reasons discussed in the order and appendices, the Board concludes that consummation of the proposal would not likely result in a significantly adverse effect on competition or on the concentration of banking resources in any of the ten banking markets in which Chittenden and Vermont Financial directly compete or in any other relevant banking market. Accordingly, based on all the facts of record, and subject to completion of the proposed divestitures and compliance with the related commitments, the Board has determined that competitive factors are consistent with approval of the proposal.

Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the Board is required to consider the effect of the proposal on the convenience and needs of the community to be served. The Board has carefully considered the effect of the proposal on the convenience and needs of the communities to be served in light of all the facts of record, including comments submitted by two community development organizations in Vermont and New Hampshire ("Commenters"). Commenters expressed concern that the proposal may result in reduced lending for affordable housing and community development activities, reduced accessibility of banking services, and elimination of certain products and services offered by Vermont National.

The Board has long held that consideration of the convenience and needs factor includes a review of the records of the relevant depository institutions under the Community Reinvestment Act (12 U.S.C. §2901 et seq.) ("CRA"). As provided in the CRA, the Board has evaluated this factor in light of examinations by the appropriate federal banking supervisors of the CRA performance records of the relevant institutions.¹⁷ Chittenden's lead subsidiary bank, Chittenden Trust Company, Burlington, Vermont ("Chittenden Trust"), has received five consecutive "outstanding" ratings for CRA performance from the FDIC, most recently as of June 1998. Chittenden's other subsidiary banks, The Bank of Western Massachusetts, Springfield, Massachusetts ("Western Massachusetts"), and Flagship Bank & Trust Company, Worcester, Massachusetts, also received "outstanding" ratings for CRA performance from the FDIC at their most recent examinations, as of June 1998 and June 1997, respectively. Vermont Financial's lead subsidiary bank, Vermont National, was rated "satisfactory" for CRA performance by the OCC, as of June 1997, and Vermont Financial's other subsidiary bank, United Bank, was rated "satisfactory" for CRA performance by the FDIC, as of December 1996.

In reviewing this case, the Board has paid particular attention to the record of performance of Chittenden Trust in helping to meet the convenience and needs of the community, because Chittenden has indicated that Chittenden Trust and Vermont National would merge no later than April 1, 2000, and that, in the interim, executive officers of Chittenden Trust would serve as directors and officers of Vermont National.¹⁸ Chittenden also has committed that it will extend Chittenden Trust's comprehensive regulatory compliance program to Vermont National after consummation of the proposal.

A. Chittenden Trust's CRA Performance Record
In the most recent CRA performance examination of Chittenden Trust, examiners found that the geographical distribution of lending by Chittenden Trust reflected lending throughout its assessment area and at all income levels. Examiners noted no substantive or technical violations at the bank of any antidiscrimination laws or regulations.

During 1996 and 1997, the bank ranked second in the percentage of home mortgage loans originated in its assessment area, and the number and dollar volume of its home mortgage loans and its market share of all such loans steadily increased during these two years. Chittenden Trust also originated a higher percentage of its home mortgage loans during 1996 and 1997 among low- and moderate-income ("LMI") borrowers than did lenders in the aggregate.

Examiners reported that Chittenden Trust provided a broad range of loan products, including state and federal supported affordable mortgage loan programs.¹⁹ Chittenden Trust also has developed its own affordable mortgage loan programs in response to the needs of the community it serves. For example, the bank offers the Chittenden Affordable Real Estate ("CARE") Mortgage, which provides home mortgage loans featuring flexible underwriting guidelines to LMI borrowers. Chittenden Trust originated approximately $6.7 million of CARE loans during 1996 and 1997.

Examiners cited consumer lending by Chittenden Trust during 1997 as an indicator of the bank's responsiveness to the needs of its community.²⁰ Examiners also commended Chittenden Trust for its responsiveness to a demand for small business loans, noting that during 1996 it originated nearly 23 percent of the total number of small business loans made in its assessment area by reporting financial institutions.²¹

In addition, examiners found that Chittenden Trust participated in community development lending in a manner consistent with the needs of its assessment area. The bank originated over $1.5 million of qualified community development loans in its assessment area during the period covered in the CRA performance examination. The bank also made 74 qualified community development investments, totaling $9.5 million, during this period.²²

Chittenden Trust was considered by examiners to be competitive in the banking hours it offered, the accessibility of its branches and alternative retail delivery systems, and the variety of its banking products.²³ For example, Chittenden Trust's Basic Banking Account requires no minimum balance and, for a $3 monthly fee, includes ten checks a month and offers free ATM access. Chittenden Trust also offers a free checking account to senior citizens. Branch openings and closings during 1996 and 1997 were reported not to have affected any LMI areas.²⁴

B. Vermont National's CRA Performance Record
In the most recent CRA performance examination of Vermont National, Vermont Financial's lead subsidiary bank, examiners found that Vermont National extended credit to borrowers of all income levels and to businesses of all sizes throughout its assessment area. The Socially Responsible Banking Fund ("SRB Fund"), an independent division of the bank, contributed to this performance by offering the 1-4 Affordable Housing mortgage, which featured flexible underwriting guidelines and below-market fixed interest rates for residences in low-income housing projects.²⁵ The SRB Fund also offered mobile home and manufactured housing loans and other innovative home financing for LMI households. A fair lending review conducted concurrently with the CRA performance examination did not identify any violations of antidiscrimination laws and regulations and noted that the bank had an effective fair lending compliance program in place.

C. Conclusion on Convenience and Needs Considerations
The Board has carefully considered all the facts of record, including the comments received, responses to these comments, and the CRA performance records of Chittenden Trust, Vermont National, and the other subsidiary banks of Chittenden and Vermont Financial, including relevant reports of examination and other supervisory information. Based on a review of the entire record and for the reasons discussed above, the Board concludes that convenience and needs considerations, including the CRA records of performance of the institutions involved, are consistent with approval of the proposal.

Financial, Managerial, and Other Supervisory Factors
The BHC Act also requires the Board, in acting on an application, to consider the financial and managerial resources and future prospects of the companies and banks involved in a proposal, the convenience and needs of the community to be served, and certain other supervisory factors.

The Board has carefully considered the financial and managerial resources and future prospects of Chittenden and Vermont Financial and their respective subsidiary banks, and other supervisory factors in light of all the facts of record. As part of this consideration, the Board has reviewed relevant reports of examination and other supervisory information prepared by the Federal Reserve Bank of Boston and other federal banking supervisory agencies, including reports concerning the parties' data processing systems. The Board notes that the bank holding companies and their subsidiary banks are well capitalized and are expected to remain so after consummation of the proposal.

The Board also has considered other aspects of the financial condition and resources of the two organizations, the structure of the proposed transaction, and the managerial resources of each of the entities and the combined organization. Based on these and other facts of record, the Board concludes that considerations relating to the financial and managerial resources and future prospects of Chittenden, Vermont Financial, and their respective subsidiaries are consistent with approval of the proposal, as are the other supervisory factors that the Board must consider under section 3 of the BHC Act.

Conclusion
Based on the foregoing, and in light of all the facts of record, the Board has determined that the application should be, and hereby is, approved. Approval of the application is specifically conditioned on compliance by Chittenden with all the commitments made in connection with the proposal and with the conditions stated or referred to in this order, including Chittenden's divestiture commitments. For purposes of this transaction, the commitments and conditions referred to in this order shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

The acquisition shall not be consummated before the fifteenth calendar day after the effective date of this order, and the proposal shall not be consummated later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of Boston, acting pursuant to delegated authority.

By order of the Board of Governors,²⁶ effective May 12, 1999.

(signed) Robert deV. Frierson

Robert deV. Frierson