BURLINGTON, Vt.--There was hell to pay when Chittenden Bank, Vermont's largest, felled a maple tree at one of its 43 branches.

In Vermont, maples equate with scenery, syrup, and tourist dollars--so ensuing threats to pull deposits, delivered by phone to Chittenden CEO Paul A. Perrault, weren't idle.

Pointing out that the tree went down for municipal road work, Mr. Perrault persuaded furious depositors to stay with Chittenden. However, exchanges like these don't typify his work at Chittenden.

"I don't try to run banks out of lobby offices, and all that other |Main Street' bank stuff," says Mr. Perrault. "It's fun to meet my customers, but I'd be out of business if I did it all the time."

Hands-on Manager

At the same time, Mr. Perrault, whose specialty is working out troubled assets, enjoys "hands on" banking whenever possible, so he wouldn't prefer to run a big bank, either.

Chittenden, which holds $1.1 billion in assets, spent the 1980s preparing to be a big bank. But all the "action" prophesied by senior management never developed.

The bank hit its peak of net income, $8.8 million, in 1988--the same year that staffing, at 900 employees, also hit the top.

By 1989, however, real estate values were falling. Chittenden increased its set-asides for bad loans, driving down net income to $4.3 million in 1989. Charging off assets as well as adding to its set-asides brought the bank all the way down to a $1.5 million loss for 1990.

Profits Roar Back

Since then, Mr. Perrault has presided over a remarkable rebound. With fewer dollars provisioned for losses, a jump in noninterest earnings, a drop in core expenses, and wider spreads, net income last year stormed back to $7 million--with $10.4 million estimated for yearend 1993 by Keefe, Bruyette & Woods Inc., New York.

As Chittenden's balance sheet turned "bullet proof," Mr. Perrault started replacing its "big bank" thinking with a strategy of sufficiency."

"Bankers fall into a trap of thinking their market share has to be 20% or 30%. 1 knew Boston bankers who hit their market share targets in the early 1980s--then they sure wished they hadn't."

Experience with Workouts

Mr. Perrault was formerly in charge of controlled loans with the Bank of New England. Before the bank's demise, he was named CEO of its Old Colony Bank subsidiary in Providence, R.I.

At Chittenden, asset quality wasn't nearly so bad, with nonperforming assets at 3.48% of total assets. However, the bank had suffered a humiliating loss when a newly built, $60 million ski resort went bankrupt--taking with it $15 million in Chittenden financing.

Nonperformers had peaked at 3.84% in 1989. While that might not seem like a lot compared with other banks, it was the worst and first big asset hit in the state. Without the bank's keen internal oversight, the number of nonperformers would, have been higher.

A tough environmental statute requiring rigorous review for real estate development and a stiff tax on large real estate flips, and the state's isolation, helped keep nonperformance at other Vermont banks well below the dismal levels elsewhere in New England.

Healthy Ratio

Chittenden's nonperformers have been worked down to a healthy 2.04%. Executive vice president John W. Kelly says foreclosed real estate, which now stands at $5 million, also is falling steadily.

Formerly of Old Colony, Mr. Kelly was the only banker brought to Chittenden by Mr. Perrault, who wasted no time trimming senior management.

"Paul said, |This is a small country bank but you don't run it like one,'" says Larry W. DeShaw, also an executive vice president.

"But we were poised to be a big bank--into everything. We also had |analysis paralysis,' which happens when you have lots of top people, surrounded by support staff, working out strategy."

Mr. Perrault eliminated the jobs of 200 staffers--75% of them by attrition--as well as the matrix management" that prevailed at the bank.

"Matrix management means reporting to lots of people to coordinate cross-selling," says Mr. Perrault. "What we have now is teamwork, where we assign a banker to a customer, based on the heaviest weight of his business, and that banker informs other bankers--sometimes as many as six or eight--about the relationship, and brings them in when they're needed.

"When it works, it's seamless and beautiful."

Chittenden offers a wide range of services--private banking, trust, state and municipal banking, MasterCard, and agricultural and commercial lending--that reflect its development into an institutional bank. Mr. Perrault has implemented a training program for his branch managers that ensures skill at selling most everything warehoused at headquarters.

Tapping the Entrepreneurs

Chief among the training efforts is small-business lending--an important line of business in a state that's packed with entrepreneurs. Chittenden already is the state's leading Small Business Administration lender, with a $20 million portfolio--or 19% of its commercial portfolio.

Many of the small-business assets are in Chittenden County, which has 20% of the state's population 550,000. Danny H. O'Brien, who heads community banking for the state, says small-business lending is an important avenue for cross-selling, but adds, "We don't want branch managers to be exclusively small-business lenders, so, to make sure they know their markets inside and out, we have them develop detailed marketing plans.

"When you're in a rural, slow-growth state like Vermont, you've got to keep what you have and cross-sell the hell out of it."

Besides its emphasis on retailing and small-business lending, Chittenden also has strongly pitched Affordable Real Estate Mortgages in lower-income areas, That has translated into a long history of "outstanding" Community Reinvestment Act ratings, but Mr. Perrault is loath to advertise them.

"I've been pressed to promote our rating, but socially responsible lending isn't anything new here," says Mr. Perrault. "People know who we are, and we won't affect anyone's opinion with advertising.

The effort to expand retail and small-businesss banking is paying off with a 16% share of the de market, and a leading share in each service area. As a result, Chittenden stock, trading at 12 1 % of book value, is selling at a premium to all other Vermont bank shares.

Trailing the Pack

However, its premium lags the 161% average posted for eastern banks, says Tom Theurkauf, a Keefe Bruyette analyst. They've pulled off quite a recovery. but they're under-followed, and a lot of people are unaware of their franchise."

Over the long term, Chittenden will keep looking for smaller banks to buy. Takeovers have always played a big role in its growth strategy, with the April purchase of Bellows Falls Trust Co. its latest. Buying the $76 million-asset bank enabled Chittenden to enter southeastern Vermont. But Mr. Perrault isn't sure that all the Bellows branches, or any of the other, farthest-flung offices, will necessarily remain open.

"Everyone wants a community bank branch in their town, and it used to be that the bank and the people supported each other. They want us for checking, or a consumer loan, but they'll put their money in mutual funds or annuities instead of keeping it in the branch. I'm all for community banking, but the deal's been broken."

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