Following record earnings reported for the third quarter by Chittenden Corp., Advest Inc. Monday raised its rating on the company's stock to "buy" from "accumulate."

The Burlington, Vt.-based bank had a net income of $4.02 million for the third quarter of 1994, an increase of more than 40% over the $2.86 million from the same period last year. Frank Barkocy, a senior vice president and managing director at Advest, cited a number of additional reasons for the upgrade.

Contrary to the trend elsewhere in the industry, Chittenden's net interest margin widened in the third quarter of 1994 to 5.05%, up from 5.01% in the second quarter and 4.71% in the third quarter of last year. Mr. Barkocy projects a margin of 4.90% for the remainder of this year and for next year as well.

Thomas Theurkauf, an analyst with Keefe, Bruyette & Woods, said that the combination of interest rate margins and an improving asset quality puts Chittenden in a good market position.

"The company is running on all eight cylinders right now," he said.

But analysts point out that there are different implications for an improving bank in Vermont compared with the rest of New England.

A more deliberate Vermont culture and regulatory environment has kept the biggest three state banks, Bank North, Chittenden, and Vermont Financial Services, from the boom-and-bust cycle characteristic of other parts of the region.

The upside is that Vermont banks, even though they faced some hardship from nonperforming loans during the credit crunch of the late 1980's and early 1990's, did not experience the same problems from speculative real estate as other New England banks did.

The downside is that fewer failures have kept the Vermont banking market tight, leaving little room for intramarket consolidation.

"Vermont never had the washout of banking organizations that other New England states experienced during the recession," said one observer.

As a result of widespread state competition and a calculated approach to development, economic growth in Vermont has been moderate, controlled and consistent, without showing the same positive rebound a state with greater speculation, like New Hampshire, experienced.

Analysts give credit to Chittenden in particular for acknowledging credit problems early and taking the necessary steps to improve its portfolio. Advest estimates that as of Sept. 30, 1994, nonperforming loans were down to $9.2 million, or 1.6% of loans and foreclosed assets.

Chittenden has taken some steps toward expanding beyond the slow-growth economy of Vermont by prowling out of state for acquisitions.

Chittenden has an agreement to acquire the Bank of Western Massachusetts, which has $205 million of assets and is based in Springfield.

"The acquisition gives Chittenden more geographical diversity as well as an opportunity to increase its profitability," said Mr. Barkocy. Other analysts think that the acquisition may help Chittenden provide customers an alternative in a Massachusetts market increasingly controlled by a few large institutions.

Some also wonder whether Chittenden's increased size and diversity after the acquisition will make it a more attractive target.

"In New England in the aggregate, we've seen some major consolidation taking place," said Mr. Barkocy. "We're likely to see institutions that operate in that region looking to be fully represented," including in Vermont.

Analysts disagree about the prognosis for Chittenden in the short term.

While Mr. Barkocy rated the bank a buy, Mr. Theurkauf thinks the return of greater deposit competition will put some pressure on the market in the near future. He rates the bank "long-term attractive."

Confidence in current management is high. As one analyst said, "Anyone who's owned the stock four years ago can do nothing but stand up and cheer about what they have accomplished."

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