After five years focusing on internal growth and buying banks outside Vermont, Chittenden Corp. returned home last week, announcing a deal that would double its size.
Chittenden's $454 million stock deal for Vermont Financial Services Corp. of Brattleboro would give the Burlington company $4.2 billion of assets and a large presence in three New England states.
"We are building a strong, diverse bank able to grow on many fronts," Paul A. Perrault, Chittenden's chairman, president, and chief executive officer, said during an investor conference call last week.
Vermont Financial, parent of one of the state's oldest institutions, has two banks with 65 branches. The deal would boost Chittenden's Massachusetts operations, where it has $616 million of assets, and give it a presence in southern New Hampshire.
But the focus of the deal is Vermont, where the two companies are second and third in deposit share, behind Banknorth Group Inc., also of Burlington. It is the first in-state deal for Chittenden since its 1993 purchase of Bellows Falls Trust Co. and only its second since 1985.
"This deal creates a powerful Vermont-based company," said Elizabeth R. Costle, Vermont's bank commissioner. "It will give state companies an in- state option when they need big-bank services."
Combined, the company would have an overwhelming market share lead in Vermont and would be dangerously close to the state's 30% deposit market cap. For that reason, divestitures are expected. By one analyst's estimate, Chittenden could be required to sell as much as 27% of its $1.8 billion of Vermont deposits.
Mr. Perrault declined to speculate on the amount of a divestiture before meeting with regulators.
"To a banker, no divestiture is reasonable," he joked. "But we will work with them, of course."
It was only a matter of time before someone bought Vermont Financial, analysts said. This year, the company has posted a 7.63% return on equity and 0.78% return on assets. By comparison, Chittenden has an 18.01% return on equity and 1.51% return on assets.
"Chittenden has been the more innovative and creative of the two banks," said Frank J. Barkocy, managing director of Josephthal, Lyon & Ross Inc., New York. "They have diversified themselves on the fee side and found new ways" to achieve growth.
The acquirer plans to cut 35% to 40% of Vermont Financial's costs to make the in-market deal profitable. That would most likely include some branch closings. The two companies operate 21 offices just in Chittenden County-population 131,761.
Once the Vermont Financial deal is completed, analysts said, they expect Chittenden again to look outside Vermont.
"Long-term growth would mean going outside their marketplace," said Kevin T. Timmons, an analyst at First Albany Corp. He said the company could look either to upstate New York or farther south in New England to make a deal.
At $4.2 billion of assets, the company also could attract the attention of a buyer such as Citizens Financial Group Inc., Providence, R.I., or Peoples Heritage Financial Group, Portland, Maine, analysts said.
