Chittenden looks ahead after years of growth: Industry wonders at next step By Sue Robinson Free Press Staff Writer Chittenden Corp., the parent of Chittenden Bank, has acquired an average of one bank a year since 1996. The financial firm's profits have gone from $49.8 million in 1998 to $63.6 million last year. The parent company runs the largest Vermont-based bank with $3 billion in assets, 54 branches and 1,000 employees in Vermont alone. Its size is nearly double its nearest in-state competitor. With $4.9 billion in total company assets, Chittenden Corp. is also a formidable corporation with banks in Maine, New Hampshire and Massachusetts, and investment and insurance subsidiaries. Chittenden Corp.'s chief executive officer, Paul Perrault, said the company is now "big enough" to offer customers everything from investment help to insurance to on-line banking and still run community banks. One national bank analyst said Chittenden Corp. must now decide: What's next? "Institutions at this point typically confront a strategic fork in the road regarding how best to create value for shareholders," said John Carusone, president of the Bank Analysis Center Inc., a Hartford, Conn.-based bank consulting firm focused on New England. "They have done a very excellent job to date," he said of Chittenden Corp. "Now they are approaching the issue of an encore problem, and that is a hard business calculus to make." Perrault doesn't like the idea of following the banking industry's prevailing trend to get bigger or merge. He would not say if Chittenden is up for sale, nor if there were even any suitors. He also declined to say whether he is looking to acquire other banks. Perrault did say the company would certainly entertain any offer, and would consider buying another bank if the circumstances were right. Instead of focusing on more mergers and acquisitions, Perrault reorganized Chittenden Corp., keeping subsidiary banks independent and backing them up with a corporation's ability to provide technology, services and capital. "I don't think you ever are taken out of that dilemma that all banks face, which is, 'Do you keep going or do you stay small?'" Perrault said. "Our answer has been to have this New-Age multi-bank holding company that can have the best of both worlds. I think we have found the solution for us." Adding banks Chittenden Corp. has been busy ever since it was founded in 1906. The bank more than doubled in size when it bought Brattleboro-based Vermont National Bank for $400 million in stock in 1998. The next year the company reported a loss of $2.5 million because it had to write down some of Vermont National's liabilities. However, it was that purchase, said the state's deputy banking commissioner, that propelled Chittenden into the top tier of Vermont banking. Once those liabilities were accounted for, the purchase helped increase corporate net income by 28 percent in three years. "We started to think about how we wanted to get involved outside the state, how we wanted to get involved with like-minded banks," Perrault said. The company wanted to stay focused on local communities, Perrault said, so it was careful about the banks it chose. Perrault looked at customer bases, trying to find banks that captured niche markets and that had brand recognition. Chittenden found three more banks that met the criteria. The company bought Maine Bank & Trust Co. in Portland, Maine, in 2001, Ocean National Bank in Kennebunk, Maine, in 2002, and Granite Bank in Keene, N.H., in 2003. These three added to the two banks in Massachusetts, bought early on in Chittenden's expansion mode during the mid-1990s. Each bank kept its name and, usually, the management team. Chittenden avoided debt by picking those banks it could pay for out of its income or by negotiating stock deals. The plan seems to be working. Carusone praised the bank's numbers, pointing out that Chittenden's ratio of net profits to assets -- 1.38 percent -- is better than the state average of 1.3, which is better than the national average of 1.2. This percentage shows the bank's profitability, and means that for every $100 of loans and investment, Chittenden earns $1.38. A good number, said Carusone, is anything over 1 percent, showing that the bank is performing well. "Their shareholders have got to be pleased with what has been taking place," Carusone said. The bank's stock price, which has had several stock splits, has nearly doubled in value since it started its buying spree in 1996. The stock closed at $26.11 per share Friday. Managing growth As Perrault added bank after bank to the mix, the corporate structure became too cumbersome. For years, the company operated its main bank, Chittenden Trust Co. -- really a subsidiary -- as a holding company. The holding company handled all of the accounting and back-room functions for the business segments from one bank. Perrault was running Chittenden Bank as well as its parent corporation, which had different needs and was more complex. "We had outgrown the arrangement that we had," Perrault said, "so we reoriented." In December, Perrault made Chittenden Bank a true subsidiary like the other acquired banks around New England. He named Burlington native Lawrence W. DeShaw the new bank president, taking Perrault's place. Then, Perrault organized all of the subsidiaries under Chittenden Corp., which had been merely a corporate shell. Each subsidiary bank makes its own decisions but has access to the corporation's products and is supported by a newly organized, separate group that handles the back-room functions. It is an unusual structure for Vermont, where most banks have only a few branches and tend to merge with their acquisitions as opposed to trying to run them independently, said Deputy Commissioner Thomas Candon of the Banking, Insurance, Securities & Health Care Administration. Banknorth operated several banks here independently, such as Franklin Lamoille and The Howard, until it merged with Peoples Bank of Maine. "So far, ... (Chittenden) seems to be comfortable working within the structure they have today," Candon said. What now? Chittenden is at the stage where most banks either accumulate more banks, like the Maine-based Banknorth, or merge with a competitor -- perhaps Banknorth itself, Carusone said. He called the crossroads a "high-class planning problem" for Chittenden Corp., and added that it is not a forgone conclusion that Chittenden will get bigger or be acquired by someone outside Vermont. But the company does need to decide what its next step will be, he said. State regulators want Chittenden Corp. to stay local. Where 10 years ago Vermont had 18 local banks, today there are just 10, Candon said. The more banks -- and the more varied the banks -- the more competition. Perrault just wants to stay successful. Does that mean more banks? "We don't set out to acquire banks," Perrault said. "Is it likely to happen again? Apparently. That seems to be the trend with us." Does it mean Vermont will lose Chittenden to a larger chain based out of state? Not necessarily, Perrault said. Success to Perrault means staying profitable while being able to take care of all the fi- nancial needs of customers under one corporate umbrella. "We long ago decided that one does not need to be big to be valuable and to be successful. We don't buy into that," Perrault said. "But you do have to be big enough to do all the things that your customers expect you to do in this day and age. We feel we're big enough to do what we need to do now." Contact Sue Robinson at 660-1852 or srobinso@bfp.burlingtonfree press.com