Decision relative to the petition of Chittenden Corporation, Burlington, Vermont to acquire Granite State Bankshares, Inc., Keene, New Hampshire

By the Division of Banks

Chittenden Corporation (the "Petitioner" or "Chittenden"), Burlington, Vermont, has petitioned the Board of Bank Incorporation (the "Board") pursuant to Massachusetts General Laws chapter 167A, sections 2 and 4, to acquire Granite State Bankshares, Inc. ("GSB") and its subsidiary, Granite Bank, both of Keene, New Hampshire. Subsequent to the acquisition, Chittenden will operate Granite Bank as a separate entity. In the Commonwealth, Chittenden is the bank holding company for Flagship Bank and Trust Company ("Flagship"), Worcester, Massachusetts, and The Bank of Western Massachusetts ("BWM"), Springfield, Massachusetts.

As directed by the Board, notice of the application was published and posted and a public hearing was scheduled, 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 February 21, 2003. A representative of Chittenden offered testimony and responded to questions from the members of the Board. Following the hearing, the public comment period remained open until the end of the business day so that interested parties could submit any additional comments.

Petitioner is a financial holding company headquartered in Burlington, Vermont. As of September 30, 2002, Chittenden had consolidated assets of approximately $5 billion. In addition to Flagship and BWM, which are Massachusetts-chartered trust companies, Chittenden operates three other subsidiary banks located in the Northeast: (1) Chittenden Trust Company; (2) Maine Bank and Trust Company; and (3) Ocean National Bank. Chittenden also operates a number of other subsidiary financial institutions. Collectively, Chittenden's subsidiaries offer a range of commercial and consumer banking products and services, as well as trust, investment advisory, asset management, and insurance brokerage services.

GSB is a bank holding company headquartered in Keene, New Hampshire. Its primary activity is as a holding company for Granite Bank, a New Hampshire-chartered commercial bank. At September 30, 2002, Granite Bank held approximately $1.1 billion in total assets. In addition to its main office in Keene, Granite Bank operates nineteen branch offices located throughout the Cheshire, Hillsborough, Merrimac, Rockingham, and Strafford counties. Granite Bank also has four non-bank subsidiaries, GSBI Insurance Group, Granite Holdings, Inc., Independence Trust Company, and Keene Meadows Corp.

As an interstate transaction and pursuant to the requirements of chapter 167A, § 2, the reciprocity laws of Petitioner's home state are subject to the review of the Commissioner of Banks. Specifically, the Commissioner must determine whether the transaction being proposed by the Petitioner is authorized under the laws of Vermont for a Massachusetts-based company, under conditions no more restrictive than those imposed by Massachusetts. Accordingly, the Commissioner has determined that Vermont law is reciprocal and would authorize the proposed transaction under conditions no more restrictive than those imposed by the above-referenced statute. Based on this review, and consistent with previous rulings regarding the Petitioner, the proposed transaction is permissible under the Commonwealth's Interstate Bank Act.

Prior to approving an application under chapter 167A, the Board must have received notice from the Massachusetts Housing Partnership Fund (the "MHPF") that the Petitioner has arranged to participate in the MHPF's various affordable housing loan programs. On January 23, 2003, the Board received notice from the MHPF that satisfactory arrangements had been made for this transaction.

Pursuant to the standard set forth in the above-referenced statutes, the Board's approval of the proposed transaction must be based on a finding of 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 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 matter as the Board may deem necessary or advisable. The Board also considers the bank's record of performance under the Community Reinvestment Act ("CRA") and any relevant public testimony or commentary submitted into the record.

On the issue of whether banking competition will be unreasonably affected by the proposed transaction, the Board 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. (The HHI is the sum of the squared market shares of all banks in the market.) However, the Board's analysis of a transaction is not confined to the consideration of concentration ratios to evaluate competitive conditions; it also considers the competitive impact on a community by community basis. The Petitioner has submitted the HHI analysis for the markets where its subsidiaries' banking operations overlap with those of Granite Bank. Although these markets are considered moderately to highly concentrated, the HHI data does not, pursuant to the federal guidelines, indicate that the proposed transaction would unreasonably interfere with competition. Rather, a review of the relevant banking markets indicate that these areas will have continued access to a variety of competitive deposit and credit services, offered by a number of diverse bank and financial institutions. With respect to Massachusettts, there is no overlap between the banking office networks of Flagship and BWM and GSB's subsidiary bank, or with Petitioner's other subsidiary banks. For that reason and other factors, the Board finds that competition among banking institutions will not be unreasonably affected.

The Petitioner submitted a variety of materials relating to the public convenience and advantage that will result from the proposed transaction. Specifically, it asserts that the economies of scale and operational flexibility resulting from the proposed transaction will enhance its financial strength and competitive position. Specifically, it argues that the integration of the various functional areas, which include but are not limited to audit, legal and regulatory compliance, and tax preparation, will generate cost savings that will strengthen the financial standing of the Chittenden organization. This enhanced financial strength, Petitioner maintains, will enable a more efficient response to changing market incentives and provide more favorable access to capital markets. Collectively, Petitioner asserts that these advantages will provide a platform for the future growth of the entire Chittenden organization, such as would support increased investment and job creation in Massachusetts.

In addition to the benefits of enhanced financial strength, Petitioner further notes that the proposed transaction will provide its subsidiary banks with access to a high quality pool of management and support personnel, which can be expected to maximize customer satisfaction. In addition, Petitioner asserts that the acquisition of Granite Bank's branch offices will ultimately provide the customers of all of its banking subsidiaries with a greater number of locations at which to conduct their banking business. Petitioner has advised that it has no plans, as a consequence of this transaction, to close any of the branch offices of its New Hampshire or Massachusetts subsidiaries.

As summarized above, the Board's review of the materials provided with its application and the additional information submitted at the public hearing weighs in favor of the finding that the public convenience and advantage will be promoted by the approval of the proposed transaction. The Board further concludes that the criteria for net new benefits has been established.

The Board's review of this transaction includes an assessment of the subsidiary and acquiree banks' performance under the Community Reinvestment Act ("CRA"). Such assessment for a state-chartered bank includes examination by Division of Bank personnel, 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 ratings and evaluations of the applicable federal or state bank regulatory agency. The most recent examination of Granite Bank, performed by the Federal Deposit Insurance Corporation ("FDIC"), resulted in a "Satisfactory" rating. The FDIC also conducted the most recent examinations of Chittenden Trust Company, BWM, Flagship, and Maine Bank and Trust, all of which resulted in "Outstanding" ratings. The CRA examination of Ocean National Bank, conducted by the Office of the Comptroller of the Currency, resulted in a "Satisfactory" rating.

The financial structure, tax consequences, and operational aspects of the transaction are also reviewed by the Board. It has considered the consolidated financial statements of the parties and the details of the proposed transaction, and is satisfied with the Petitioner's capital ratios and projections. Further, information regarding the expected tax consequences of the proposed transaction was provided by the Petitioner and considered by the Board. Finally, operational issues were discussed at the hearing, and the Board is satisfied that Petitioner has the resources and experience required to ensure the efficient transition of its systems.

Conclusion

Based on the record of this matter, the Board concludes that all relevant statutory and administrative requirements have been met. Specifically, the Board finds that the proposed transaction will not have a significant impact on competition among banking institutions and will promote the public convenience and advantage. The Board further finds that the banks involved in this transaction have a satisfactory record of performance under the CRA. In accordance with these findings and pursuant to the statutory authority cited herein, the Board approves the application and authorizes Chittenden Corporation to acquire 100% of the stock of Granite State Bankshares, Inc., and its subsidiary, Granite Bank.

The approval granted herein is subject to the condition that all related transactions are completed within one year of the date of this Decision.