UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (Fee Required)
For the Fiscal Year Ended December 31, 1996
or
_____Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (No Fee Required)
for the transition period from _______to_______
Commission File Number 0-7974
CHITTENDEN CORPORATION
(Exact name of Registrant as specified in its charter)
Vermont 03-0228404
(State of Incorporation) (IRS Employer Identification No.)
Two Burlington Square
Burlington, Vermont 05401
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: 802-658-4000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant, on February 28, 1997 as reported on NASDAQ, was
$337,430,170.
At February 28, 1997, there were 12,270,188 shares of the Registrant's common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of this Annual Report on Form 10-K:
1. Proxy Statement for 1997 Annual Meeting of Registrant's Stockholders:
Part III, Items 10, 11, 12, 13.
This Form 10-K contains certain statements that may be considered forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Company s actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors, of
changes in general, national or regional economic conditions, changes in loan
default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
PART I
ITEM 1
BUSINESS
Chittenden Corporation (the "Company" or "CC"), a Vermont corporation organized
in 1971, is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended. Assets of the Company were $1,988,746,000 at December 31,
1996. The Company is the holding company parent of Chittenden Trust Company
("CTC"), Flagship Bank and Trust Company ("FBT") and The Bank of Western
Massachusetts ("BWM") and, as of December 31, 1996, owned 100% of the
outstanding common stock of those banks. During 1996 the Company created and
became the holding company parent of Chittenden Connecticut Corporation ("CCC"),
a non-bank mortgage company, and owns 100% of its outstanding common stock of
that non-bank mortgage company.
The Company's principal executive offices are located at Two Burlington Square,
Burlington, Vermont 05401; telephone number: 802-658-4000.
CHITTENDEN TRUST COMPANY
CTC was chartered by the Vermont Legislature as a commercial bank in 1904. It
is the largest bank in Vermont, based on total assets of $1,425,044,000 and
total deposits of $1,258,189,000 at December 31, 1996. CTC's principal offices
are in Burlington, Vermont and it has 35 additional locations in Vermont, of
which three are free standing automated teller machines ("ATM's"). (See Item 2,
"Properties"). All of these offices use the trade name "Chittenden Bank".
CTC offers a variety of lending services, with loans and leases totaling
$919,805,000 at December 31, 1996. The largest loan category is commercial
loans, including those secured by commercial real estate, and others made to a
variety of businesses, including retail concerns, small manufacturing
businesses, larger corporations, other commercial banks, and to political sub-
divisions in the U.S. These loans amounted to 37% of the total loans
outstanding at December 31, 1996. Loans secured by residential properties,
including closed-ended home equity loans, are also substantial, and amounted to
34% of total loans outstanding at December 31, 1996. CTC underwrites
substantially all of its residential mortgages to secondary market standards and
sells substantially all of its fixed-rate residential mortgage production on a
servicing-retained basis. Variable-rate mortgage loans are typically held in
portfolio. The remaining real estate loans mortgage loans, which are 1% of
total loans outstanding at December 31, 1996, are construction loans secured by
residential and commercial land under development.
Consumer loans outstanding at December 31, 1996 were 20% of total loans. These
include direct and indirect installment loans, auto leases and revolving credit.
Revolving home equity loans as a separate group amounted to 8% of loans at
December 31, 1996. These loans are generally underwritten to the same standards
as first mortgages.
CTC's lending activities are conducted primarily in Vermont, with additional
activity related to nearby market areas in Quebec, New York, New Hampshire,
Massachusetts, Maine and Connecticut. In addition to the portfolio diversifi-
cation described above, the loans are widely diversified by borrowers and indus-
try groups. In making commercial loans, CTC occasionally solicits the
participation of other Vermont banks or correspondent banks and other financial
investors outside the State. CTC also occasionally participates in loans
originated by other banks. Certain of CTC's commercial loans are made under
programs administered by the Vermont Industrial Development Authority, the U.S.
Small Business Administration, or the U.S. Farmers Home Administration. These
loans contain repayment guarantees by the agency involved in varying amounts up
to 90% of the original loan.
CTC offers a wide range of banking services, including the acceptance of demand,
savings, and time deposits. As of December 31, 1996, total interest-bearing
deposits amounted to $1,065,084,000 or 85% of total deposits. CTC also provides
personal trust services, including services as executor, trustee, administrator,
custodian and guardian. Corporate trust services are also provided, including
services as trustee for pension and profit sharing plans. Asset management
services are provided with both the personal and corporate trust services.
CTC offers data processing services consisting primarily of payroll and
automated clearing house for several outside clients. Financial and investment
counseling is provided to municipalities and school districts within CTC's
service area, as well as, central depository, lending, payroll, and other
banking services for such customers. CTC offers a variety of other services
including safe deposit facilities, Mastercard, and VISA credit card services,
the processing of merchant credit card services, and certain non-bank,
investment products through a dual-employee contractual relationship with Link
Investment Services, Inc.
THE BANK OF WESTERN MASSACHUSETTS
BWM was chartered by the Commonwealth of Massachusetts as a commercial bank in
1986. BWM had total assets of $259,485,000 and total deposits of $225,225,000
at December 31, 1996. BWM's principal offices are in Springfield, Massachusetts
and it has 4 additional locations in the greater Springfield,Massachusetts area.
(See Item 2, "Properties").
BWM offers a variety of lending services, with loans totaling $185,849,000 at
December 31, 1996. The largest loan category is commercial loans, including
those secured by commercial real estate, and others made to a variety of
businesses, including retail concerns and small manufacturing businesses. These
loans amounted to 73% of total loans outstanding at December 31, 1996. Loans
secured by residential properties, including closed-ended home equity loans,
amounted to 19% of total loans outstanding at December 31, 1996. The remaining
real estate mortgage loans, which are 2% of total loans outstanding at December
31, 1996, are primarily construction loans.
Consumer loans outstanding at December 31, 1996 were 3% of total loans. These
include direct and indirect installment loans, and revolving credit. Revolving
home equity loans as a separate group amounted to 3% of loans at December 31,
1996. These loans are generally underwritten to the same standards as first
mortgages.
BWM's lending activities are conducted primarily in the greater Springfield,
Massachusetts area. In making commercial loans, BWM occasionally solicits the
participation of other banks, including its affiliates, CTC and FBT. BWM also
occasionally participates in loans originated by other banks. Certain of BWM's
commercial loans are made under programs administered by the U.S. Small Business
Administration, or the U.S. Farmers Home Administration. These loans have
repayment guarantees by the agency involved in varying amounts up to 90% of the
original loan.
BWM offers a wide range of banking services, including the acceptance of demand,
savings, and time deposits. As of December 31, 1996, total interest-bearing
deposits amounted to $188,773,000 or 84% of total deposits.
BWM provides personal trust services, through CTC, including services as
executor, trustee, administrator, custodian and guardian. Also through CTC, BWM
provides corporate trust services, including services as trustee for pension and
profit sharing plans.
FLAGSHIP BANK AND TRUST COMPANY
FBT was chartered by the Commonwealth of Massachusetts as a commercial bank in
1986. FBT had total assets of $312,375,000 and total deposits of $287,973,000
at December 31, 1996. FBT's principal offices are in Worcester, Massachusetts
and it has 5 additional locations in the greater Worcester, Massachusetts area.
(See Item 2, "Properties").
FBT offers a variety of lending services, with loans totaling $190,914,000 at
December 31, 1996. The largest loan category is commercial loans, including
those secured by commercial real estate, and others made to a variety of
businesses, including retail concerns and small manufacturing businesses. These
loans amounted to 53% of total loans outstanding at December 31, 1996. Loans
secured by residential properties, including closed-ended home equity loans,
amounted to 33% of total loans outstanding at December 31, 1996. The remaining
real estate mortgage loans, which are 6% of total loans outstanding at December
31, 1996, are primarily construction loans.
Consumer loans outstanding at December 31, 1996 were 5% of total loans. These
include direct and indirect installment loans, and revolving credit. Revolving
home equity loans as a separate group amounted to 3% of loans at December 31,
1996. These loans are generally underwritten to the same standards as first
mortgages.
FBT's lending activities are conducted primarily in the greater Worcester,
Massachusetts area. In making commercial loans, FBT occasionally solicits the
participation of other banks, including its affiliates, CTC and BWM. FBT also
occasionally participates in loans originated by other banks. Certain of FBT's
commercial loans are made under programs administered by the U.S. Small Business
Administration, or the U.S. Farmers Home Administration. These loans contain
repayment guarantees by the agency involved in varying amounts up to 90% of the
original loan.
FBT offers a wide range of banking services, including the acceptance of demand,
savings, and time deposits. As of December 31, 1996, total interest-bearing
deposits amounted to $230,424,000 or 80% of total deposits.
FBT provides personal trust services, through CTC, including services as
executor, trustee, administrator, custodian and guardian. Also through CTC, FBT
provides corporate trust services, including services as trustee for pension and
profit sharing plans.
CHITTENDEN CONNECTICUT CORPORATION
CCC was chartered by the State of Vermont as a mortgage company in 1996 and its
principal offices are in Burlington, Vermont. CCC has additional offices in
Brattleboro, Vermont, and in Glastonbury and Southbury, Connecticut (See Item
2, "Properties"). CCC's primary business is the origination of conforming
residential real estate mortgage loans for resale to the secondary market. CCC
originates these loans for resale through correspondent relationships with
credit unions and through other mortgage brokers in the state of Connecticut who
receive loan applications. These applications are underwritten by CTC in
Vermont to secondary market standards and then sold. In addition, CCC uses
brokers that are directly employed by and working through various financial
institutions in Connecticut.
ECONOMY
The New England economy showed signs of continued improvement in 1996. Retail
sales improved along with increases in both housing permits and new construction
contracts. New England unemployment levels also continued to decrease. The
ability and willingness of the Company's borrowers to honor their repayment
commitments are impacted by many factors, including prevailing market interest
rates and the level of overall economic activity within the borrowers'
geographic area.
COMPETITION
There is vigorous competition in the Company's marketplace for all aspects of
the banking and related financial services activities presently engaged in by
the Company and its subsidiaries.
CTC competes with Vermont banks and metropolitan banks based in southern New
England and New York City to provide commercial banking services to businesses.
Many of these out-of-state banks have greater financial resources than those of
Vermont banks and are actively seeking financial relationships with promising
Vermont enterprises. Two out-of-state banks own in-state banks or operate in-
state branches; Allbank acquired Marble Bank early in 1996 and Key Bank
operates branches throughout Vermont.
In the retail financial services market, competitors include other banks, credit
unions, finance companies, thrift institutions and, increasingly, brokerage
firms, insurance companies, and mortgage loan companies. Money market deposit
accounts and short term flexible-maturity certificates of deposit offered by CTC
compete with investment account offerings of brokerage firms and, more
recently, with new products offered by insurance companies. CTC also competes
for personal and commercial trust business with investment advisory firms,
mutual funds, and insurance companies.
BWM and FBT also operate in areas in which competition among financial
institutions is continuously increasing. BWM has focused on meeting the needs
of the smaller and medium-sized businesses and professionals in its market area,
while FBT has taken a balanced approach in serving the needs of both smaller and
medium-sized businesses, as well as retail consumers in its market.
SUPERVISION AND REGULATION
The Company and its banking subsidiaries (CTC, BWM and FBT) are subject to
extensive regulation under federal and state banking laws and regulations. The
following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant state and
federal statutes and regulations. A change in the applicable laws or
regulations may have a material effect on the business of the Company
and/or its banking subsidiaries.
Regulation of the Company
GENERAL. As a bank holding company, the Company is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). Under the BHC Act, bank holding companies generally may not acquire
ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. In addition, bank holding
companies are generally prohibited under the BHC Act from engaging in non-
banking activities, subject to certain exceptions. As a bank holding company,
the Company's activities are limited generally to the business of banking and
activities determined by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto. The Federal Reserve Board has
authority to issue cease and desist orders and assess civil money penalties
against bank holding companies and their non-bank subsidiaries, officers,
directors and other institution-affiliated parties, and to remove officers,
directors and other institution-affiliated parties to terminate or prevent
unsafe or unsound banking practices or violations of laws or regulations.
INTERSTATE ACQUISITIONS. Prior to September 29, 1995, under the BHC Act a bank
holding company was permitted to acquire a bank in another state only if the law
of the state in which the bank to be acquired was located specifically
authorized such acquisition of an in-state bank by an out-of-state bank holding
company. As described below under "Capital Requirements and FDICIA - Interstate
Banking and Branching", the BHC Act was amended, effective September 29, 1995,
to remove this prohibition. Even prior to this amendment to the BHC Act, state
legislation enacted in recent years substantially lessened prior legislative
restrictions on geographic expansion by bank holding companies from and into
Massachusetts and Vermont. For example, under nationwide reciprocal interstate
banking legislation adopted by both states which became effective in 1990, bank
holding companies whose subsidiaries' banking operations were principally
conducted in any state outside Massachusetts or Vermont were authorized to
acquire Massachusetts or Vermont banking organizations, provided that such
companies' home states afforded Massachusetts or Vermont banking organizations
reciprocal rights to acquire banks in such states.
DIVIDENDS. The Federal Reserve Board has authority to prohibit bank holding
companies from paying dividends if such payment is deemed to be an unsafe or
unsound practice. The Federal Reserve Board has indicated generally that it may
be an unsound practice for bank holding companies to pay dividends unless the
bank holding company's net income over the preceding year is sufficient to fund
the dividends and the expected rate of earnings retention is consistent with the
organization's capital needs, asset quality, and overall financial condition.
The Company's ability to pay dividends is dependent upon the flow of dividend
income to it from its banking subsidiaries, which may be affected or limited by
regulatory restrictions imposed by federal or state bank regulatory agencies.
See "- Regulation of CTC, BWM and FBT - Dividends."
CERTAIN TRANSACTIONS BY BANK HOLDING COMPANIES WITH THEIR AFFILIATES. There are
various legal restrictions on the extent to which bank holding companies and
their non-bank subsidiaries may borrow, obtain credit from or otherwise engage
in "covered transactions" with their insured depository institution sub-
sidiaries. Such borrowings and other covered transactions by an insured
depository institution subsidiary (and its subsidiaries) with its non-depository
institution affiliates are limited to the following amounts: (a) in the case
of any one such affiliate, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 10% of the
capital stock and surplus of the insured depository institution; and (b) in the
case of all affiliates, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 20% of the
capital stock and surplus of the insured depository institution. "Covered
transactions" are defined by statute for these purposes to include a
loan or extension of credit to an affiliate, a purchase of or investment in
securities issued by an affiliate, a purchase of assets from an affiliate unless
exempted by the Federal Reserve Board, the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any person or
company, or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate. Covered transactions are also subject to certain
collateral security requirements. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property of any kind,
or furnishing of any service.
HOLDING COMPANY SUPPORT OF SUBSIDIARY BANKS. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to its
subsidiary banks and to commit resources to support such subsidiaries. This
support of its subsidiary banks may be required at times when, absent such
Federal Reserve Board policy, the Company might not otherwise be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and certain
other indebtedness of such subsidiary banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
LIABILITY OF COMMONLY CONTROLLED DEPOSITORY INSTITUTIONS. Under the Federal
Deposit Insurance Act, as amended ("FDI Act"), an FDIC-insured depository
institution, such as CTC, BWM or FBT, can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the "default" of a commonly controlled FDIC-insured
depository institution, or (ii) any assistance provided by the FDIC to any
commonly controlled depository institution in "danger of default." For
these purposes, the term "default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur
without Federal regulatory assistance.
Regulation of CTC, BWM and FBT
GENERAL. As FDIC-insured state-chartered banks, CTC, BWM and FBT are subject to
supervision of and regulation by the Commissioner of Banking, Insurance,
Securities and Heath Care Administration of the State of Vermont, in connection
with CTC, and the Commissioner of Banks of the Commonwealth of Massachusetts in
connection with BWM and FBT (collectively, the "Commissioners") and, for all
three banks, by the FDIC. This supervision and regulation is for the protection
of depositors, the BIF (as hereinafter defined), and consumers, and is not for
the protection of the Company's stockholders. The prior approval of the FDIC
and the Commissioners is required for CTC, BWM or FBT to establish or relocate
an additional branch office, assume deposits, or engage in any merger,
consolidation or purchase or sale of all or substantially all of the assets of
any bank or savings association.
EXAMINATIONS AND SUPERVISION. The FDIC and the Commissioners regularly examine
the operations of CTC, BWM and FBT, including (but not limited to) their capital
adequacy, reserves, loans, investments, earnings, liquidity, compliance with
laws and regulations, record of performance under the Community Reinvestment Act
and management practices. In addition, CTC, BWM and FBT are required to furnish
quarterly and annual reports of income and condition to the FDIC and periodic
reports to the Commissioners. The enforcement authority of the FDIC includes
the power to impose civil money penalties, terminate insurance coverage, remove
officers and directors and issue cease-and-desist orders to prevent unsafe or
unsound practices or violations of laws or regulations. In addition, under
recent federal banking legislation, the FDIC has authority to impose additional
restrictions and requirements with respect to banks that do not satisfy
applicable regulatory capital requirements. See "- Capital Requirements and
FDICIA - Prompt Corrective Action" below.
DIVIDENDS. The principal source of the Company's revenue is dividends from CTC,
one of its bank subsidiaries. Payment of dividends by CTC, BWM and FBT are
subject to certain Vermont and Massachusetts banking law restrictions. Payment
of dividends by CTC is subject to Vermont banking law restrictions which require
that, except when surplus and paid-in capital together amount to 10% or more of
deposits and other liabilities (not including surplus, paid-in capital, capital
notes and debentures, and funds held in a fiduciary capacity), at least one-
tenth of its net profits must be set aside annually and added to surplus.
The FDIC has authority to prevent CTC, BWM and FBT from paying dividends if such
payment would constitute an unsafe or unsound banking practice or reduce the
respective bank's capital below safe and sound levels. In addition, federal
legislation prohibits FDIC-insured depository institutions from paying dividends
or making capital distributions that would cause the institution to fail to meet
minimum capital requirements. See "Capital Requirements and FDICIA - Prompt
Corrective Action" below.
AFFILIATE TRANSACTIONS. As noted above, banks are subject to restrictions
imposed by federal law on extensions of credit to, purchases of assets from, and
certain other transactions with, affiliates, and on investments in stock or
other securities issued by affiliates. Such restrictions prevent CTC, BWM and
FBT from making loans to affiliates unless the loans are secured by collateral
in specified amounts and have terms at least as favorable to the bank as the
terms of comparable transactions between the bank and non-affiliates. Further,
federal and applicable state laws significantly restrict extensions of credit by
CTC, BWM and FBT to directors, executive officers and principal stockholders and
related interests of such persons.
DEPOSIT INSURANCE. CTC's, BWM's and FBT's deposits are insured by the Bank
Insurance Fund ("BIF") of the FDIC to the legal maximum of $100,000 for each
insured depositor. The FDI Act provides that the FDIC shall set deposit
insurance assessment rates on a semi-annual basis at a level sufficient to
increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25%
over a 15-year period commencing in 1991, and to maintain that ratio. Although
the established framework of risk-based insurance assessments accomplished
this increase in May 1995, and the FDIC has made a substantial reduction in the
assessment rate schedule, the BIF insurance assessments may be increased in the
future if necessary to maintain BIF reserves at the required level. In addition,
legislation enacted in 1996 to recapitalize the Savings Association Insurance
Fund ("SAIF"), which insures the deposits of savings associations and certain
savings banks, will result in increased BIF assessments. See "Capital
Requirements and FDICIA - Risk-Based Deposit Insurance and FICO Assessments"
below.
FEDERAL RESERVE BOARD POLICIES. The monetary policies and regulations of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past and are expected to continue to do so in the future. Federal
Reserve Board Policies affect the levels of bank earnings on loans and
investments and the levels of interest paid on bank deposits through the Federal
Reserve System's open-market operations in United States government securities,
regulation of the discount rate on bank borrowings from Federal Reserve Banks
and regulation of non-earning reserve requirements applicable to bank deposit
account balances.
CONSUMER PROTECTION REGULATION; BANK SECRECY ACT. Other aspects of the lending
and deposit business of CTC, BWM and FBT that are subject to regulation by the
FDIC and the Commissioners include disclosure requirements with respect to
interest, payment and other terms of consumer and residential mortgage loans and
disclosure of interest and fees and other terms of, and the availability of,
funds for withdrawal from consumer deposit accounts. In addition, CTC, BWM and
FBT are subject to federal and state laws and regulations prohibiting certain
forms of discrimination in credit transactions, and imposing certain record
keeping, reporting and disclosure requirements with respect to residential
mortgage loan applications. In addition, CTC, BWM and FBT are subject to
federal laws establishing certain record keeping, customer identification, and
reporting requirements with respect to certain large cash transactions, sales of
travelers checks or other monetary instruments and the international transpor-
tation of cash or monetary instruments.
CRA Regulations
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of their last CRA examinations, CTC and FBT
received a rating of "Outstanding" and BWM received a rating of "Satisfactory."
Failure of an institution to receive at least a "Satisfactory" rating could
inhibit such institution's undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. The Federal Reserve Board
must take into account the record of performance of banks in meeting the credit
needs of the entire community served, including low and moderate income
neighborhoods.
The federal bank regulatory agencies have jointly issued amendments to the
regulations implementing the CRA that revised the CRA framework effective
January 1, 1996. These amended CRA regulations rely more than the former CRA
regulations upon objective criteria of the performance of institutions under
three key assessment tests: a lending test, a service test and an investment
test. CTC, BWM and FBT are committed to meeting the existing or anticipated
credit needs of their entire communities, including low and moderate income
neighborhoods, consistent with safe and sound operations.
Capital Requirements and FDICIA
GENERAL. The FDIC has established guidelines with respect to the maintenance of
appropriate levels of capital by FDIC-insured banks. The Federal Reserve Board
has established substantially identical guidelines with respect to the
maintenance of appropriate levels of capital, on a consolidated basis, by bank
holding companies. If a banking organization's capital levels fall below the
minimum requirements established by such guidelines, a bank or bank holding
company will be expected to develop and implement a plan acceptable to the
FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of
capital within a reasonable period, and may be denied approval to acquire or
establish additional banks or non-bank businesses, merge with other institutions
or open branch facilities until such capital levels are achieved. Federal
legislation requires federal bank regulators to take "prompt corrective
action" with respect to insured depository institutions that fail to satisfy
minimum capital requirements and imposes significant restrictions on such
institutions. See "Prompt Corrective Action" below.
LEVERAGE CAPITAL RATIO. The regulations of the FDIC require FDIC-insured banks
to maintain a minimum "Leverage Capital Ratio" or "Tier 1 Capital" (as defined
in the Risk-Based Capital Guidelines discussed in the following paragraphs) to
Total Assets of 3.0%. The regulations of the FDIC state that only banks with
the highest federal bank regulatory examination rating will be permitted to
operate at or near such minimum level of capital. All other banks are expected
to maintain an additional margin of capital, equal to at least 1% to 2% of Total
Assets, above the minimum ratio. Any bank experiencing or anticipating
significant growth is expected to maintain capital well above the minimum
levels. The Federal Reserve Board's guidelines impose substantially similar
leverage capital requirements on bank holding companies on a consolidated basis.
RISK-BASED CAPITAL REQUIREMENTS. The regulations of the FDIC also require FDIC-
insured banks to maintain minimum capital levels measured as a percentage of
such banks' risk-adjusted assets. A bank's qualifying total capital ("Total
Capital") for this purpose may include two components - "Core" (Tier 1) Capital
and "Supplementary" (Tier 2) Capital. Core Capital consists primarily of common
stockholders' equity, which generally includes common stock, related surplus and
retained earnings, certain non-cumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries, and (subject to certain limitations) mortgage servicing rights and
purchased credit card relationships, less all other intangible assets (primarily
goodwill). Supplementary Capital elements include, subject to certain
limitations, a portion of the allowance for losses on loans and leases,
perpetual preferred stock that does not qualify for inclusion in Tier 1 capital,
long-term preferred stock with an original maturity of at least 20 years and
related surplus, certain forms of perpetual debt and mandatory convertible
securities, and certain forms of subordinated debt and intermediate-term
preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve Board assign a
bank's balance sheet assets and the credit equivalent amounts of the bank's off-
balance sheet obligations to one of four risk categories, weighted at 0%, 20%,
50% or 100%, respectively. Applying these risk-weights to each category of the
bank's balance sheet assets and to credit the equivalent amounts of the bank's
off-balance sheet obligations and summing the totals results in the amount of
the bank's total Risk-Adjusted Assets for purposes of the risk-based capital
requirements. Risk-Adjusted Assets can either exceed or be less than reported
balance sheet assets, depending on the risk profile of the banking organization.
Risk-Adjusted Assets for institutions such as CTC, BWM and FBT will generally be
less than reported balance sheet assets because its retail banking activities
include proportionally more residential mortgage loans with a lower risk
weighing and relatively smaller off-balance sheet obligations.
The risk-based capital regulations require all banks to maintain a minimum ratio
of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-half
(4.0%) must be Core (Tier 1) Capital. For the purpose of calculating these
ratios: (i) a banking organization's Supplementary Capital eligible for
inclusion in Total Capital is limited to no more than 100% of Core Capital; and
(ii) the aggregate amount of certain types of Supplementary Capital eligible for
inclusion in Total Capital is further limited. For example, the regulations
limit the portion of the allowance for loan losses eligible for inclusion in
Total Capital to 1.25% of Risk-Adjusted Assets. The Federal Reserve Board has
established substantially identical risk-based capital requirements which are
applied to bank holding companies on a consolidated basis. The risk-based
capital regulations provide explicitly for consideration of interest rate risk
in the FDIC's overall evaluation of a bank's capital adequacy to ensure that
banks effectively measure and monitor their interest rate risk, and that they
maintain capital adequate for that risk. A bank deemed by the FDIC to have
excessive interest rate risk exposure may be required by the FDIC to maintain
additional capital (that is, capital in excess of the minimum ratios discussed
above). CTC, BWM and FBT believe that this provision will not have a material
adverse effect on them.
At December 31, 1996, the Company's consolidated Total and Tier 1 Risk-Based
Capital Ratios were 13.06% and 11.71%, respectively, and its Leverage Capital
Ratio was 8.58%. Based on the above figures and accompanying discussion, CC
exceeds all regulatory capital requirements.
PROMPT CORRECTIVE ACTION. Among other things, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") requires the federal banking regulators
to take "prompt corrective action" with respect to, and imposes significant
restrictions on, any bank that fails to satisfy its applicable minimum capital
requirements. FDICIA establishes five capital categories consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under applicable
regulations, a bank that has a Total Risk-Based Capital Ratio of 10.0% or
greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Leverage
Capital Ratio of 5.0% or greater, and is not subject to any written agreement,
order, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure is deemed to be "well
capitalized." A bank that has a Total Risk-Based Capital Ratio of 8.0% or
greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or greater and a Leverage
Capital Ratio of 4.0% or greater and does not meet the definition of a well
capitalized bank is considered to be "adequately capitalized." A bank that has
a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1 Risk-Based
Capital Ratio that is less than 4.0% or generally a Leverage Capital Ratio of
less than 4.0% is considered "undercapitalized." A bank that has a Total Risk-
Based Capital Ratio of less than 6.0%, or a Tier 1 Risk-Based Capital Ratio that
is less than 3.0% or a Leverage Capital Ratio that is less than 3.0% is
considered to be "significantly undercapitalized," and a bank that has a ratio
of tangible equity to total assets equal to or less than 2% is deemed to be
"critically undercapitalized." A bank may be deemed to be in a capital category
lower than is indicated by its actual capital position if it is determined to be
in an unsafe or unsound condition or receives an unsatisfactory examination
rating. FDICIA generally prohibits a bank from making capital distributions
(including payment of dividends) or paying management fees to controlling
stockholders or their affiliates if, after such payment, the bank would be
undercapitalized.
Under FDICIA and the applicable implementing regulations, an undercapitalized
bank will be (i) subject to increased monitoring by the FDIC; (ii) required to
submit to the FDIC an acceptable capital restoration plan (guaranteed, subject
to certain limits, by the bank's holding company) within 45 days; (iii) subject
to strict asset growth limitations; and (iv) required to obtain prior regulatory
approval for certain acquisitions, transactions not in the ordinary course of
business, and entry into new lines of business. In addition to the foregoing,
the FDIC may issue a "prompt corrective action directive" to any undercapital-
ized institution. Such a directive may require sale or re-capitalization of the
bank, impose additional restrictions on transactions between the bank and its
affiliates, limit interest rates paid by the bank on deposits, limit asset
growth and other activities, require divestiture of subsidiaries, require
replacement of directors and officers, and restrict capital distributions by the
bank's parent holding company.
In addition to the foregoing, a significantly undercapitalized institution may
not award bonuses or increases in compensation to its senior executive officers
until it has submitted an acceptable capital restoration plan and received
approval from the FDIC.
Not later than 90 days after an institution becomes critically undercapitalized,
the appropriate federal banking agency for the institution must appoint a
receiver or, with the concurrence of the FDIC, a conservator, unless the agency,
with the concurrence of the FDIC, determines that the purposes of the prompt
corrective action provisions would be better served by another course of action.
FDICIA requires that any alternative determination be "documented" and re-
assessed on a periodic basis. Notwithstanding the foregoing, a receiver must be
appointed after 270 days unless the appropriate federal banking agency and the
FDIC certify that the institution is viable and not expected to fail.
RISK-BASED DEPOSIT INSURANCE AND FICO ASSESSMENTS. The FDIC has adopted a rule
establishing a risk-based system which assigns an institution to one of three
capital categories consisting of (1) well capitalized, (2) adequately capital-
ized, or (3) undercapitalized, and one of three supervisory categories. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under this rule there are nine assessment
risk classifications (i.e. combinations of capital categories and supervisory
subgroups within each capital group). An institution's deposit insurance
assessment rate is determined by assigning the institution to a capital category
and a supervisory subgroup to determine which one of the nine risk
classification categories is applicable. The FDIC is authorized to raise the
assessment rates in certain circumstances. If the FDIC determines to increase
the assessment rates for all institutions, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in the
past and may raise BIF insurance premiums again in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of CTC,
BWM and FBT, the extent of which is not currently quantifiable. The risk
classification to which an institution is assigned by the FDIC is confidential
and may not be disclosed.
Current assessment rates range from 0% of domestic deposits for an institution
in the lowest risk category (i.e., well-capitalized and healthy from a
supervisory standpoint) to 0.27% of domestic deposits for institutions in the
highest risk category (i.e., undercapitalized and unhealthy from a supervisory
standpoint), for the first semiannual period of 1997. During 1996 assessment
rates also included a minimum annual assessment of $2,000 per institution. CTC,
BWM and FBT qualified for, and paid in 1996, the minimum annual assessment under
this rate schedule.
The Deposit Insurance Funds Act of 1996 eliminates the minimum assessment and
authorizes the Financing Corporation (FICO) to levy assessments on BIF-
assessable deposits and stipulates that the rate must equal one-fifth the FICO
assessment rate that is applied to deposits assessable by the SAIF. The actual
assessment rates for FICO were determined by deposit data from the September 30,
1996, Call Reports. Based on the 1996 Act, the Company anticipates that the
Banks will pay assessments of 1.3 cents per $100 of deposits in 1997, which
would amount to approximately $275,000 of expense for that year.
BROKERED DEPOSITS AND PASS-THROUGH DEPOSIT INSURANCE LIMITATIONS. Under FDICIA,
a bank cannot accept brokered deposits unless it either (i) is "Well
Capitalized" or (ii) is "Adequately Capitalized" and has received a written
waiver from the FDIC. For this purpose, "Well Capitalized" and "Adequately
Capitalized" have the same definitions as in the Prompt Corrective Action
regulations. See"- Prompt Corrective Action" above. Banks that are not in the
"Well Capitalized" category are subject to certain limits on the rates of
interest they may offer on any deposits (whether or not obtained through a
third-party deposit broker). Pass-through insurance coverage is not available
for deposits of certain employee benefit plans in banks that do not satisfy the
requirements for acceptance of brokered deposits, except that pass-through
insurance coverage will be provided for employee benefit plan deposits in
institutions which at the time of acceptance of the deposit meet all applicable
regulatory capital requirements and send written notice to their depositors that
their funds are eligible for pass-through deposit insurance. Although eligible
to do so, CTC, BWM and FBT do not accept brokered deposits.
CONSERVATORSHIP AND RECEIVERSHIP AMENDMENTS. FDICIA authorizes the FDIC to
appoint itself conservator or receiver for a state-chartered bank under certain
circumstances and expands the grounds for appointment of a conservator or
receiver for an insured depository institution to include (i) consent to such
action by the board of directors of the institution; (ii) cessation of the
institution's status as an insured depository institution; (iii) the institution
is undercapitalized and has no reasonable prospect of becoming adequately
capitalized, or fails to become adequately capitalized when required to do so,
or fails to timely submit an acceptable capital plan, or materially fails to
implement an acceptable capital plan; and (iv) the institution is critically
undercapitalized or otherwise has substantially insufficient capital. FDICIA
provides that an institution's directors shall not be liable to its stockholders
or creditors for acquiescing in or consenting to the appointment of the FDIC as
receiver or conservator for, or as a supervisor in the acquisition of, the
institution.
REAL ESTATE LENDING STANDARDS. FDICIA requires the federal bank regulatory
agencies to adopt uniform real estate lending standards. The FDIC has adopted
implementing regulations which establish supervisory limitations on Loan-to-
Value ("LTV") ratios in real estate loans by FDIC-insured banks. The
regulations require FDIC-insured banks to establish LTV ratio limitations within
or below the prescribed uniform range of supervisory limits.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank regulatory
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide "excessive" compensation, fees or benefits, or
that could lead to material financial loss. In addition, the federal bank
regulatory agencies are required by FDICIA to prescribe standards specifying;
(i) maximum classified assets to capital ratios; (ii) minimum earnings
sufficient to absorb losses without impairing capital; and (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly-traded
shares of depository institutions and depository institution holding companies.
The FDIC has issued regulations implementing certain of these provisions.
ACTIVITIES AND INVESTMENTS OF INSURED STATE BANKS. FDICIA provides that FDIC-
insured state banks such as CTC, BWM and FBT may not engage as a principal,
directly or through a subsidiary, in any activity that is not permissible for a
national bank unless the FDIC determines that the activity does not pose a
significant risk to the BIF, and the bank is in compliance with its applicable
capital standards. In addition, an insured state bank may not acquire or
retain, directly or through a subsidiary, any equity investment of a type, or in
an amount, that is not permissible for a national bank.
Subject to certain limited exceptions, the foregoing provisions of FDICIA
prohibit insured state banks such as CTC, BWM and FBT or any subsidiary of such
insured state banks from retaining or acquiring equity investments. However,
under an exception in the statute, an insured state bank that (i) is located in
a state such as Vermont or Massachusetts which authorized, as of September 30,
1991, state banks to invest in common or preferred stock listed on a national
securities exchange ("listed stock") or shares of an investment company
registered under the Investment Company Act of 1940 ("registered shares") and
(ii) during the period beginning September 30, 1990 and ending on November 26,
1991 made or maintained investments in listed stocks and registered shares, may
retain whatever listed stock or registered shares it lawfully acquired or held
prior to December 19, 1991 and may continue to acquire listed stock or
registered shares which may not exceed, taken together in the aggregate, 100% of
the bank's Tier 1 Capital. In order to acquire or retain any listed stock or
registered shares under this exception, the bank must file a one-time notice
with the FDIC containing specified information, and the FDIC must determine that
acquiring or retaining the listed stock or registered shares will not pose a
significant risk to the BIF. Any such approval may be subject to whatever
conditions or restrictions the FDIC determines to be necessary or appropriate
and will terminate with respect to further acquisitions of listed stock or
registered shares if the bank or its holding company experiences a change in
control and in certain other circumstances. CTC filed the one-time notice with
the FDIC and the FDIC did not object.
CONSUMER PROTECTION PROVISIONS. FDICIA also includes provisions requiring
advance notice to regulators and customers for any proposed branch closing and
authorizing (subject to future appropriation of the necessary funds) reduced
insurance assessments for institutions offering "lifeline" banking accounts or
engaged in lending in distressed communities. FDICIA also includes provisions
requiring depository institutions to make additional and uniform disclosures to
depositors with respect to the rates of interest, fees and other terms
applicable to consumer deposit accounts.
DEPOSITOR PRIORITY STATUTE. The FDI Act provides that, in the liquidation or
other resolution by any receiver of a bank insured by the FDIC, the claims of
depositors have priority over the general claims of other creditors. Hence, in
the event of the liquidation or other resolution of a banking subsidiary of the
Company, the general claims of the Company as creditor of such banking
subsidiary would be subordinate to the claims of the depositors of such banking
subsidiary, even if the claims of CC were not by their terms so subordinated.
In addition, this statute may, in certain circumstances, increase the costs to
banks of obtaining funds through non-deposit liabilities.
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal Act") provides that an adequately
capitalized and managed bank holding company may (with Federal Reserve Board
approval) acquire control of banks outside its principal state of operations,
without regard to whether such acquisitions are permissible under state law.
States may, however, limit the eligibility of banks to be acquired by an out-of-
state bank holding company to banks in existence for a minimum period of time
(not in excess of five years). No bank holding company may make an acquisition
outside its principal state of operations which would result in it controlling
more than 10% of the total amount of deposits of all insured depository
institutions in the United States, or 30% or more of the total deposits of
insured depository institutions in any state (unless such limit is waived,
or a more restrictive or permissible limit is established, by a particular
state). In addition, beginning June 1, 1997, banks may branch across state
lines either by merging with banks in other states or by establishing new
branches in other states. The date relating to interstate branching through
mergers may be accelerated by any state. The provision relating to establishing
new branches in another state requires a state's specific approval. Effective
in 1996, the Vermont and Massachusetts legislatures adopted legislation to
accelerate the effective date of interstate branching through mergers (that is,
to "opt-in early"). Since 1990, Massachusetts has had nationwide reciprocal
interstate banking legislation permitting out-of-state banks to conduct banking
operations in that state both by mergers and by establishing new banks, subject
to the reciprocity requirements that banks from another state may acquire banks
in Massachusetts only if Massachusetts banks may conduct banking operations in
that state. CC is unable to predict the ultimate impact of this interstate
banking legislation on it or its competitors.
The United States Congress has periodically considered and adopted legislation
which has resulted in and could result in further regulation or deregulation of
both banks and other financial institutions. Such legislation could place the
Company, CTC, BWM, FBT or CCC in more direct competition with other financial
institutions, including mutual funds, securities brokerage firms and investment
banking firms. No assurance can be given as to whether any additional
legislation will be enacted or as to the effect of such legislation on the
business of the Company, CTC, BWM, FBT or CCC.
EMPLOYEES
The Company and its subsidiaries on December 31, 1996 employed 944 persons, with
a full-time equivalency of 877 employees. The Company enjoys good relations
with its employees. A variety of employee benefits, including health, group
life and disability income replacement insurance, a funded, non-contributory
pension plan, and an incentive savings and profit sharing plan, are available to
qualifying officers and employees.
SELECTED STATISTICAL INFORMATION
Certain consolidated financial data about the business of the Company is
contained on pages 13 to 53 of the Company's 1996 Annual Report to Stockholders
which is attached hereto as Exhibit 13.
ITEM 2
PROPERTIES
The Company's principal banking subsidiary, CTC, operates banking facilities in
36 locations in Vermont. The offices of the Company are located in the main
office of the CTC, which occupied all of the five-floor Chittenden Building at
Two Burlington Square in Burlington as of December 31, 1996. The Chittenden
Building is owned by CTC.
BWM and FBT both operate banking facilities in Massachusetts; BWM operating 6
locations and FBT operating 6 locations. CCC operates 2 mortgage company
facilities in Connecticut. The offices of CTC, BWM, FBT and CCC are in good
physical condition with modern equipment and facilities considered adequate to
meet the banking needs of customers in the communities serviced.
ITEM 3
LEGAL PROCEEDINGS
A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1996. Management, after reviewing
these claims with legal counsel, is of the opinion that these matters, when
resolved, will not have a material effect on the consolidated financial
statements.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters.
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information regarding the market in which the Company's common stock is traded,
and the quarterly high and low bid quotations for the Company's common stock
during the past five years are included in the Company's 1996 Annual Report to
Stockholders on page 57, and is attached hereto as Exhibit 13. The approximate
number of stockholders at February 28, 1997 was 3,147. Note 8 of the
Consolidated Financial Statements appearing on page 28 of the Company's 1996
Annual Report to Stockholders contains a discussion of restrictions on
dividends and is attached hereto as Exhibit 13.
Beginning October 17, 1996 through December 30, 1996, there were eight
transactions in which 27,171 shares of the Company's common stock were issued
pursuant to the 1993 Stock Option Plan (The SOP ). The SOP provides an
opportunity for key employees of the Company to purchase the Company's common
stock at stated exercise prices. Options exercised during the fourth quarter
had exercise prices ranging from $3.97 to $14.80 per share, with a weighted
average price of $9.20 per share. The Company received cash in the amount of
$249,952 from these transactions. The Company relies on Section 4 (2) of the
Securities Act of 1933 for exemption from registration. The Company anticipates
filing a Registration Statement on Form S-8 in the second quarter of 1997
covering the shares of the Company's common stock issued and issuable pursuant
to the SOP.
ITEM 6
SELECTED FINANCIAL DATA
A five-year summary of selected consolidated financial data for the Company and
its subsidiaries is included on page 40 of the Company's 1996 Annual Report to
Stockholders and is attached hereto as Exhibit 13.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included on pages 41 to 53 of the Company's 1996 Annual Report to
Stockholders and is attached hereto as Exhibit 13.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries appear in the Company's 1996 Annual Report to Stockholders at the
pages indicated and are attached hereto as Exhibit 13:
Report of Independent Public Accountants Page 39
Consolidated Balance Sheets at
December 31, 1996 and 1995 Page 13
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995, and 1994 Page 14
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994 Page 15
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996, 1995,
and 1994 Page 16
Notes to Consolidated Financial Statements Pages 17-38
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and director-nominees of the Registrant is
included in the Company's definitive Proxy Statement for the 1997 Annual Meeting
of Stockholders at pages 5-10, and is specifically incorporated herein by
reference.
At December 31, 1996, the principal officers of the Company and its principal
subsidiary, CTC, with their ages, positions, and years of appointment, were as
follows:
YEAR
NAME AND AGE APPOINTED POSITIONS
- --------------------------------------------------------------------------------
Barbara W. Snelling, 69 1990 Chair of the Company and CTC
Paul A. Perrault, 45 1990 President and Chief Executive
Officer of the Company and CTC
Lawrence W. DeShaw, 50 1990 Executive Vice President of the
Company and CTC
John W. Kelly, 47 1990 Executive Vice President of the
Company and CTC
Kirk W. Walters, 41 1996 Executive Vice President, Chief
Financial Officer, and Treasurer of
the Company and CTC
F. Sheldon Prentice, 46 1985 Senior Vice President, General
Counsel, and Secretary of the
Company and CTC
John P. Barnes, 41 1990 Senior Vice President of the
Company and CTC
Danny H. O'Brien, 46 1990 Senior Vice President of the
Company and CTC
Howard L. Atkinson, 52 1996 Chief Auditor, CTC
- -------------------------------------------------------------------------------
All of the current officers, except Mr. Walters and Mr. Atkinson, have been
principally employed in executive positions with CTC for more than five years.
In accordance with the provisions of the Company's By-Laws, the officers, with
the exception of the Secretary, hold office at the pleasure of the Board of
Directors. The Secretary is elected annually by the Board of Directors.
ITEM 11
EXECUTIVE COMPENSATION
Information regarding remuneration of the directors and officers of the Company
is included in the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders at pages 11-19 and is specifically incorporated herein
by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of directors and director-nominees
of the Company, all directors and officers of the Company as a group, and
certain beneficial owners of the Company's common stock, as of January 31, 1997,
is included in the Company's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders, at pages 4-10, and is specifically incorporated herein
by reference.
There are no arrangements known to the registrant which may, at a subsequent
date, result in a change of control of the registrant.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the Company
and its Directors, Director-Nominees, Executive Officers, and family members of
these individuals, is included in the Company's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders at page 20, and is specifically
incorporated herein by reference.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
(1) FINANCIAL STATEMENTS
The financial statements of the Company and its subsidiaries appear in the
Company's 1996 Annual Report to Stockholders at the pages indicated in Item 8,
and are attached hereto as Exhibit 13.
(2) FINANCIAL STATEMENT SCHEDULES
There are no financial statement schedules required to be included in this
report.
(3) EXHIBITS
The following are included as exhibits to this report:
3. By-Laws of the Company, as amended, incorporated herein by reference to
Exhibit 3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1985.
3.01 Amendment to the By-Laws of the Company, dated February 16, 1988,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1987.
3.02 Amendment to the By-Laws of the Company, dated January 17, 1990,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1989.
3.03 Amendment to the By-Laws of the Company, dated June 19, 1991,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1991.
3.04 Amendment to the By-Laws of the Company, dated November 15, 1995,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
3.1 Articles of Association of the Company, as amended, incorporated herein
by reference to the Proxy Statement for the 1994 Annual Meeting of
Stockholders.
4. Statement of the Company regarding its Dividend Reinvestment Plan is
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
10.1 Directors' Deferred Compensation Plan, dated April 1972, as amended May
20, 1992, incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.
10.2 Pension Plan of CTC, incorporated herein by reference to the Company's
Annual Report on form 10-K for the year ended December 31, 1994, as
amended on March 15, 1995 and December 20, 1995, and incorporated
herein by reference to the Company's Annual Report on form 10-K for the
year ended December 31, 1995, and December 20, 1996 attached to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
10.3 Incentive Savings and Profit Sharing Plan, attached to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, as
amended for the year ended December 31, 1995.
10.4 Letter from the Company to Paul A. Perrault, dated July 26, 1990,
regarding terms of employment, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990.
10.5 The Company's 1988 Stock Option Plan, incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 1987.
10.6 The Company's Restricted Stock Plan, incorporated herein by reference
to the Company's Proxy Statement in connection with the 1986 Annual
Meeting of Stockholders.
10.7 Registration Statement under The Securities Act of 1933 on form S-8
dated February 27, 1996, incorporated herein by reference.
10.8 Executive Management Incentive Compensation Plan ("EMICP"),
incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.9 Amendment to EMICP to increase cap on awards from 60% to 100% of base
salary.
10.10 The Company's Stock Incentive Plan, dated January 1, 1993, incorporated
herein by reference to the Company's Proxy Statement for the 1993
Annual Meeting of Stockholders.
10.11 Compensation plan of Paul A. Perrault.
10.12 Supplemental Executive Retirement Plan of Paul A. Perrault.
13. The Company's 1996 Annual Report to Stockholders.
21. List of subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
A report was filed by the Company on Form 8-K December 20, 1996 in connection
with the Company's hiring of Kirk W. Walters as Executive Vice President, Chief
Financial Officer and Treasurer.
EXHIBITS
(c)
EXHIBIT 10.2
BOARD OF DIRECTORS RESOLUTION RENAMING THE PENSION PLAN FOR EMPLOYEES OF THE
CHITTENDEN CORPORATION TO THE "CHITTENDEN PENSION ACCOUNT PLAN" AND AMENDING THE
PLAN TO A CASH BALANCE ACCOUNT TYPE PLAN.
EXHIBIT 10.9
AMENDMENT TO EMICP TO INCREASE CAP ON AWARDS FROM 60% TO 100% OF BASE SALARY.
EXHIBIT 10.11
COMPENSATION PLAN OF PAUL A. PERRAULT
EXHIBIT 10.12
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF PAUL A. PERRAULT
EXHIBIT 13
CHITTENDEN'S 1996 ANNUAL REPORT HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 21
LIST OF SUBSIDIARIES OF CHITTENDEN CORPORATION
Chittenden Trust Company, Vermont, d/b/a Chittenden Bank, Mortgage Service
Center of New England and CUMEX Mortgage Service Center
The Bank of Western Massachusetts, Massachusetts
Flagship Bank and Trust Company, Massachusetts
Chittenden Connecticut Corporation, Vermont, d/b/a Mortgage Service Center of
New England and CUMEX Mortgage Service Center
EXHIBIT 23
CONSENT OF ARTHUR ANDERSEN LLP HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 27
FINAICIAL DATA SCHEDULE HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 10.2
CHITTENDEN CORPORATION
BOARD OF DIRECTORS RESOLUTION
AUTHORIZING THE ADOPTION OF THE
CHITTENDEN PENSION ACCOUNT PLAN
EFFECTIVE JANUARY 1, 1996
WHEREAS, Chittenden Corporation (the "Principal Employer") heretofore
adopted the Pension Plan for Employees of the Chittenden Corporation (the
"Plan"); and
WHEREAS, the Principal Employer desires to amend and restate the plan to
reflect changing employee retirement objectives; and
WHEREAS, the Principal Employer is permitted to amend the Plan at any time
by means of a resolution of the Board of Directors;
NOW, THEREFORE, the Board of Directors, at a meeting held on September 20,
1995 and at which a quorum was present and acting throughout, hereby authorizes
the Principal Employer to rename the Plan and to amend and restate the Plan as
follows:
Effective January 1, 1996, the Plan shall be renamed the "Chittenden
Pension Account Plan". The Plan shall be amended to a cash balance account
type plan. All benefits that accrued under the Plan as in effect
immediately prior to January 1, 1996, shall be converted to an actuarial
equivalent opening account balance under the Plan and shall further serve
as the minimum retirement benefit for an individual covered under the Plan
as of January 1, 1996.
The Plan shall be further amended to recognize the incorporation of a
previously eligible employee group. Effective as of October 7, 1996, the
Chittenden Connecticut Corporation shall become an "Employer" as defined
under the terms of the Plan. Employees of such corporation shall continue
to be eligible to participate in and accrue benefits under the terms of the
Plan without interruption.
The Principal Employer is further authorized to take whatever action is
necessary and appropriate to effect the amendment and restatement of the
Plan. A summary of the principal provision of the amended Plan are
documented in the attached summary.
IN WITNESS WHEREOF, the Board of Directors has caused this instrument to be
executed by its officer duly authorized and its corporate seal to be hereunto
affixed as of the 20th day of December, 1996.
CHITTENDEN CORPORATION
By: /s/F. Sheldon Prentice
F. Sheldon Prentice
SVP, General Counsel
& Secretary
ATTEST: /s/Eugenie J. Fortin
(CORPORATE SEAL)
EXHIBIT 10.9
FIRST AMENDMENT
This Amendment effective March 20, 1996 shall amend the Chittenden Corporation
Executive Management Incentive Compensation Plan (the "Plan") as follows:
1. Paragraph "a" of Section II of the Plan is hereby deleted in its entirety
and is replaced by the following paragraph:
a. Adjusted Earnings means the earnings per share or return
on equity, as the case may be, calculated based on the
actual after tax profit of the Company as published,
recognizing amounts awarded under this Plan, but excluding
(i) gains or losses from sales of assets not in the normal
course of business and exceeding $50,000 per year in the
aggregate, and (ii) gains or losses as a result of
securities transactions.
2. The reference to 60% in Paragraph "h" of Section II of the Plan shall be
changed to 100% and said Paragraph "h" of Section II shall now read as follows:
h. Incentive Award means bonuses ranging from 0% to 100% in such
percentages as shall be designated annually by the President of
the Company, with approval of the Board.
3. Paragraph "l" of Section II of the Plan is hereby deleted in its entirety
and is replaced by the following paragraph:
l. Profit Goal means the performance target of the Company
established each year by the Board for the then current Plan Year
as measured by the level of earnings per share and return on
equity of the Company. Each year the Board shall establish for
the then current Plan Year the targeted level of earnings per
share and the targeted level of return on equity. To the extent
that either of these targets is met, the performance target will
be achieved. The calculation of earnings per share and return on
equity shall be based on after-tax profit of the Company,
computed according to generally accepted accounting principles,
consistently applied, recognizing amounts awarded under this Plan
but excluding (i) gains or losses from sales of assets not in the
normal course of business and exceeding $50,000 per year in the
aggregate, and (ii) gains or losses as a result of securities
transactions.
4. All terms of the Plan not expressly amended herein shall remain in full
force and effect.
This Amendment shall be effective as of March 20, 1996.
ATTEST:
CHITTENDEN CORPORATION
By: S/F. SHELDON PRENTICE S/SARAH P. MERRITT
Witness
Title: SVP, GENERAL COUNSEL AND SECRETARY
EXHIBIT 10.11
PAUL A. PERRAULT
COMPENSATION PLAN
June 19, 1996
1. Base Salary: Increase in 1996 to $250,000 and in
1997 to $300,000, effective one and two years, respectively,
from date of last increase.
2. EMCIP: The following changes have already been
implemented:
- Increase cap to 100% of salary
- Payments all in cash
- Flexibility in payment of deferred portion of
award
3. Cash Bonus Plan: If (i) the Corporation's net income
(calculated after making an accrual for the amount payable
pursuant to this plan) exceeds a specified ROE and (ii) the
year-to-year increase in EPS is at least 10 percent, a cash
bonus (subject to a cap of 100% of base salary) will be paid
based upon a percentage of earnings in excess of such
earnings as equate to the specific ROE, as follows:
Bonus % on
earnings is
If ROE is: excess of 15% ROE:
------------ -------------------
15 - 17% 2%
17% + 5%
For example, assume average equity of $170 million (est.)
and 12.5 million (est.) shares outstanding:
Earnings in
Earnings EPS ROE excess of 15% % Amount
-----------------------------------------------------------------------
$25 million $2.00 14.70% $ ------- 2% $ ------
$26 million $2.08 15.29% $ 500,000 2% $ 10,000
$27 million $2.16 15.88% $1,500,000 2% $ 30,000
$28 million $2.24 16.47% $2,500,000 2% $ 50,000
$30 million $2.40 17.64% $4,500,000 5% $225,000
This plan is subject to annual review.
4. Stock Options: Options will be granted to purchase
150,000 shares, 50,000 vesting annually June 19, 1997, June
19, 1998 and June 19, 1999. The option price will be as
follows:
Date of Vesting Price
--------------- -------------------
June 1, 1997 June 19, 1996 price
June 1, 1998 20% in excess of June 19, 1996 price
June 1, 1999 30% in excess of June 19, 1996 price
Options must be exercised within five years of date of
vesting, or, if employment is terminated, within 60 days of
termination.
In the event of a "change in control," all options will vest
immediately.
Example based upon a current price of $22 per share, 10% per
year increase in market price of stock and exercise of
options five years after vesting:
Option Price at Gain per Total
Price exercise share gain
-------------------------------------------------------
$22.00 $38.97 $16.97 $ 848,500
$26.40 $42.52 $16.12 $ 806,000
$28.60 $46.06 $17.46 $ 873,000
---------------
$2,527,500
Market capitalization, June 19, 1996 to June 19, 2004:
12.5 million shares @ $22/share $275,000,000
12.5 million shares @ $47/share $587,500,000
Increase $312,500,000
Paul's gain $ 2,527,500
Gain as percentage of increase .81%
5. LTD: In the event of permanent disability resulting in
termination of employment, a monthly benefit will be paid
through age 60 based upon 60 percent of base salary at the
time of disability.
By: /s/ James C. Pizzagalli
------------------------
James C. Pizzagalli
EXHIBIT 10.12
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF PAUL A. PERRAULT
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
I. Purpose
Chittenden finds it desirable to create a non-qualified supplemental retirement
plan for it Chief Executive Officer to: (1) offset the effect of certain
regulatory restrictions on contributions to a qualified pension plan, and (2)
recognize that the Chief Executive Officer may have an insufficient working
career at Chittenden to realize a pension benefit that is an acceptable portion
of the Chief Executive's working salary and benefits. To compensate for these
factors and to reward a Chief Executive's performance, Chittenden will create a
Supplemental Pension for the Chief Executive under the terms and conditions
contained herein.
II. Definitions
(a) Accrued Benefit shall mean all sums allocated in prior years including
interest credited thereon pursuant to Section IV.
(b) Board shall mean the Board of Directors of the Chittenden Corporation.
(c) Chief Executive Officer shall mean Paul Perrault.
(d) Chittenden shall mean Chittenden Corporation.
(e) Code shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) Disability shall mean a total or permanent condition which qualifies
the Chief executive Officer to receive full Social Security Benefits.
(g) ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
(h) Gross Salary shall mean the total of all salary, benefits, and bonuses
paid to the CEO by the Corporation or its subsidiaries and reported in
box 1 ("wages, tips, other compensation") of form W-2 together with
that portion of compensation not reported in box 1 of the form W-2
(i.e. Flexible Medical/Dental premiums, Health Care/Dependent Care
Flexible spending accounts and 401k contributions).
(i) Plan shall mean this Supplement Executive Retirement Plan.
(j) ROE shall mean return on average common shareholders' equity
calculated on an annual basis as of 12/31.
III. Plan Construction
This is a defined contribution, non-qualified retirement plan. This means that
Chittenden will allocate a specific amount to a notional account calculated in
accordance with Paragraph IV below but the Plan will not pay a specific benefit.
Further, this Plan is intended to be a Top Hat Plan under ERISA and benefits
under the plan are not protected by the Pension Benefit Guaranty Corporation.
Any assets funding the Plan are subject to the claims of the general creditors
of Chittenden.
IV. Allocations
Allocations to the Plan shall be made on an annual basis each January. The
amount of the allocation shall be a certain percentage of gross salary based on
the ROE of Chittenden as of December 31st of each year determined in accordance
with the following schedule:
ROE % % Of Gross Salary
-------- -------------------
10 6.68
11 10.68
12 14.69
13 18.69
14 22.70
15 26.70
16 29.37
17 32.04
18 34.71
19 37.38
20 40.05
Should attained ROE in any given year be a partial percentage, it shall be
rounded to the nearest .5% and the annual contribution shall be interpolated
accordingly.
An allocation shall be made each year that the minimum ROE is met and the Chief
Executive remains employed with Chittenden in a full time capacity. The Board,
at its sole discretion, may amend the above schedule at any time.
V. Interest Calculation
Accrued balances shall earn interest based upon Chittenden's average yield on
earning assets. Such earnings shall be computed on an annual basis based upon
the preceding year's average yield on earning assets and calculated on the
December 31st balance plus any award for the current year. For example,
interest earned for 1995 would be calculated by multiplying the December 31st,
1994 balance, plus any award granted based upon 1994 performance, times the 1994
average yield on earning assets.
VI. Distributions
Distributions from the Plan shall begin when the Chief Executive retires
directly from active employment at or after reaching the age of 55.
Distributions of the accrued benefit shall be made on a schedule of monthly,
annual or lump sum payments. Such selection must be made at least 12 months
prior to the actual separation.
All accrued contributions shall be forfeited if the Chief Executive ceases
employment prior to age 55. Not withstanding the foregoing, accrued
contributions shall be distributed to the Chief Executive or his designated
beneficiary in the event of his death or disability or at the discretion of the
Board.
Distributions to a designated beneficiary or beneficiaries upon the Chief
Executive's death shall be as a lump sum.
VII. Successor Obligations
Not withstanding the provisions of section VIII, in the event of a merger or
acquisition in which Chittenden shall cease to exist as a distinct entity or a
change of control as defined in a certain agreement between Chittenden Bank and
Paul Perrault dated July 26, 1990, the surviving organization shall have no
obligation or requirement to make continuing contributions under the terms of
this Plan; provided however, such surviving Corporation shall remain liable to
the Chief Executive for all sums accrued prior to the merger or acquisition
regardless of his age at the time of this event. Interest as defined in Section
V shall continue to accrue on the undistributed balance. Such sums shall be
payable at the time of termination or retirement, whether prior or subsequent to
the attainment of age 55.
VIII. Plan Amendment and Termination
Chittenden or its successors and assigns may amend or terminate this plan at any
time at its discretion. All sums accrued for the benefit of the Chief Executive
to the date of plan termination shall remain due and payable in accordance with
this Plan. In the event that the Plan is amended or terminated all sums accrued
as of such date shall not be reduced and shall remain due and payable under the
terms of the Plan. Interest as defined in Section V shall continue to accrue on
the undistributed balance.
IX. Effective Date
This plan shall be effective on January 1, 1993.
IN WITNESS WHEREOF, this Supplemental Executive Retirement Plan has been adopted
and approved by the Board of Directors of the Chittenden Corporation and is
executed on behalf of the Corporation this 15th day of June, 1994 by
Barbara Snelling, Chair and Sarah Merritt, Senior Vice President and Human
Resources Director.
CHITTENDEN CORPORATION
By: /s/ Barbara W. Snelling
Barbara W. Snelling
Chair
By: /s/ Sarah P. Merritt
Sarah P. Merritt
Senior Vice President
And Duly Authorized Agent
IN THE PRESENCE OF:
/s/ F. Sheldon Prentice
F. Sheldon Prentice
Corporate Secretary
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1997 CHITTENDEN CORPORATION
BY: /S/ PAUL A. PERRAULT
Paul A. Perrault
President, Chief Executive Officer
and Director
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- -------------------------------------------------------------------------------
/s/ Barbara W. Snelling Chair of the Board of Directors 03-22-97
/s/ Paul A. Perrault President, Chief Executive Officer
and Director 03-19-97
/s/ Kirk W. Walters Executive Vice President, Chief
Financial Officer and Treasurer
(principal accounting officer) 03-19-97
/s/ Frederic H. Bertrand Director 03-19-97
/s/ David M. Boardman Director 03-19-97
/s/ Paul J. Carrara Director 03-19-97
/s/ Lyn Hutton Director 03-19-97
/s/ Philip A. Kolvoord Director 03-19-97
/s/ James C. Pizzagalli Director 03-19-97
/s/ Pall D. Spera Director 03-19-97
Martel D. Wilson, Jr. Director
<PAGE 1>
Successful growth needs to start from a solid foundation. At Chittenden
Corporation, our strength and foundation comes from the business we know best -
traditional, local banking.
From that core strength, we have made strategic changes which have transformed
Chittenden from a local Vermont institution into a regional financial services
company. Our growth has been through targeted acquisition of other banks and
continued expansion of our specialized businesses.
These three areas - traditional banking, targeted acquisitions and specialized
businesses - give us a broad foundation aimed at sustained growth and balance.
With this strategy in place, Chittenden is poised to handle the changes and
challenges ahead, while remaining a secure and dynamic financial institution
well into the future.
<PAGE 2>
TABLE OF CONTENTS
3 Financial Highlights
4 Letter to Stockholders
6 Chittenden - Plotting Progress
8 Chittenden - A Strategic Approach to Banking
13 Consolidated Financial Statements
39 Report of Independent Public Accountants
41 Management's Discussion and Analysis of Financial
Condition and Results of Operation
54 Directors and Officers
57 Stockholder Information
<PAGE 3>
FINANCIAL HIGHLIGHTS
1996 1995
---------------------------
(dollars in thousands
except per share amounts)
FOR THE YEAR
Net Interest income $ 83,993 $ 78,331
Provision for possible loan losses 4,183 5,000
Noninterest income 24,920 22,040
Noninterest expense 64,557 61,584
Net income 26,721 22,131
Cash dividends declared 8,747 4,803
----------------------------
AT YEAR END
Investment securities $ 397,092 $ 321,486
Net loans 1,268,472 1,179,788
Deposits 1,761,579 1,587,723
Stockholders' equity 174,401 153,949
Total assets 1,988,746 1,794,704
Number of stockholder 3,167 3,073
Number of employees 944 920
-------------------------------
PER SHARE OF COMMON STOCK
Fully diluted earnings $ 2.14 $ 1.83
Cash dividends declared 0.71 0.40
Book value at end of year 14.21 12.85
Weighted average shares outstanding 12,486,200 12,084,731
during year --------------------------------
<PAGE 4>
LETTER TO STOCKHOLDERS
Since our last annual report, several things at Chittenden Corporation have
changed; however, some things haven't changed at all. One constant is our
commitment to execution - carrying out well-planned strategies that are
beneficial to our shareholders and customers in a workmanlike fashion, insuring
their effectiveness and sustainability.
We are pleased to report that these strategies are providing continued earnings
momentum. At $2.14 per share, earnings are up 17% from 1995, once again a new
record for the Corporation. I am particularly pleased that these results were
achieved while maintaining our core value of "balance" in all of our activities.
On the revenue side, net interest income increased 7%, and non-interest income
increased 13%, both numbers exhibiting gains across a broad array of activities.
Recognizing that even high-quality providers need to be low-cost producers,
expense growth has been contained to 5% during 1996 and, despite the obvious
strength of our loan loss reserves we provided for losses at a rate of $4.1
million, continuing to provide sufficient resources to maintain and even grow
our outstanding balance sheet strength.
One of the greatest challenges we continue to face, along with all financial
services providers, is offering the right mix of products and services at the
right time in ways that are beneficial for, and expected by, the marketplace.
Across the company, efforts are continuous on all these fronts, with customers
first in mind. Encouraging customers to utilize readily available technology,
expanding the availability of many services outside the branch environment, and
locating and staffing community offices to be complementary with our overall
effort reflects the reasons why customers of Chittenden's banks are loyal. They
expect more from Chittenden, and they get it. The choices of Who, What, When,
and Where, remain with the customer.
Much has been written in recent years about financial services, particularly the
impact that mergers and unregulated providers will have on traditional, local
banking. Some pundits take the view that, like Canada and parts of Europe and
Asia, the United States will soon consolidate to a handful of national banks. We
agree with the notion that we will have a few national banking companies, but we
do not believe that they will dominate the financial services industry nor make
obsolete the successful participation of other players.
<PAGE 5>
Historically, Americans have not tended to behave in a way that would suggest
following patterns of other countries. Our nation's entrepreneurial spirit,
natural apprehension about size, and the advance of technology will ensure that
our citizens will continue to have a diverse array of options.
To remain viable, however, we at Chittenden believe it is crucial to be price
competitive, product competitive and personnel competitive. This means being
cost efficient, able to manage and integrate a number of diverse businesses, and
be the "employer of choice" up and down the line. Each of our major
constituencies has many choices. Investors, customers, employees and communities
are constantly presented with choices. It is our job to present the right
combination of our attributes to each member of these constituencies, to deepen
our relationships, and to continue our established "pattern of progress." I can
assure you that we are taking steps every day to keep Chittenden and the
consumer out in front by not becoming complacent, and by focusing on our role in
the future.
As I have said before, I am very proud of our results in 1996. But more that
anything else, I believe they show that our course is a good one. Our "steady
hand at the helm" philosophy doesn't mean we are inflexible, nor do we wait to
see what happens. It does mean we focus on execution today, and focus on what's
ahead. We look to be successful now, and in the future. By properly taking care
of business today we will be positioned to take care of business tomorrow. That
is the Chittenden of today, and of the future.
Our shareholders and customers deserve nothing less. In closing, I want to
publicly express my admiration and appreciation to the Chittenden people, your
employees and Board of Directors, who continue to be the inspiration for our
results. Thank you.
<PAGE 6>
CHITTENDEN - PLOTTING PROGRESS
The following graphs are provided to give you a brief, visual review of
Chittenden's progress over the past six years. The graphs indicate that
Chittenden has achieved consistent and steady improvement in a number of
measurements. This performance is a reflection of Chittenden's commitment to a
balanced, efficient, and sound approach to banking.
Return on Average Equity (as a percent)
- ---------------------------------------
91 92 93 94 95 96
5.5 8.9 12.2 15.6 15.9 16.4
Return on Average Assets (as a percent)
- ----------------------------------------
91 92 93 94 95 96
0.37 0.62 0.94 1.2 1.3 1.4
Earnings per Share (in dollars)
- ---------------------------------------
91 92 93 94 95 96
0.4 0.7 1.1 1.6 1.8 2.1
Book Value per Share (in dollars)
- ---------------------------------------
91 92 93 94 95 96
8.0 8.8 10.0 10.4 12.8 14.2
Closing Price per Share (in dollars)
- ---------------------------------------
91 92 93 94 95 96
4.5 8.2 11.8 13.3 25.6 23.9
Efficiency Ratio (as a percent)
- ---------------------------------------
91 92 93 94 95 96
71 65 64 60 61 58
<PAGE 8>
CHITTENDEN - A STRATEGIC APPROACH TO BANKING
TRADITIONAL BANKING
At Chittenden Corporation, our success as a whole is largely a reflection of the
success of our core business - traditional, local banking. For over 90 years, we
have constantly evolved to meet our customers' changing needs while remaining
focused on growth and efficiency.
Rather than pursuing growth by just adding more branches, the nature of Vermont
banking demands a creative approach. With a limited number of customers to be
found in-state, we have focused on expanding the products and services we can
offer our existing customers.
At a basic banking level, these efforts translate into innovative products that
create new ways and more reasons to bank with Chittenden. This year, we debuted
our Internet website, which can be found at www.chittenden.com. This handy tool
gives customers instant access to useful financial information and investment
advice. With other new service enhancements, customers can access specific
information about their accounts. Our newly expanded Automated Banking Line lets
customers use their phone to do much of their banking, such as account transfers
and loan payments. Chittenden's Loan-by-Phone program offers our customers the
convenience of applying for a consumer loan from their home or office. With
Chittenden Electronic Banking, businesses can keep an eye on finances and bank
from the convenience of their office PC. On a consumer product level, one of our
latest introductions is the Chittenden ATM & Check Card which works like a
check, but offers the convenience of a credit card. When a customer makes a
purchase using the card wherever Visa is accepted, the money is simply deducted
from their account electronically.
New products often come about from customer input. With the help of small
business owners, we put together our new "Chittenden Small Business Advantage"
package, combining valuable services with discounts and incentives. Our new
branch on Shelburne Road was designed with the customer in mind. An excellent
location, easy access, a separate commercial area, an information kiosk and
specialized service representatives will make this branch service-oriented for
commercial and retail customers alike.
Chittenden Bank also continues to grow beyond the traditional realm of deposits
and withdrawals. In a variety of areas, we provide products and services
designed to meet the unique, individual needs of our clients. We provide these
services through many different venues, including traditional branches and high-
tech connections. Because of this, Chittenden is becoming more and more a one-
stop shop for banking and financial services.
Small businesses have long been a major part of the Vermont economy. From "mom
and pop" operations to nationally known companies, their needs are very diverse.
One of the biggest differences between Chittenden and other banks is our
willingness to work with the smallest of these businesses, often ones that are
just getting started. Beyond providing loans, our Business Bankers provide the
<PAGE 9>
advice and information needed to start a business. If we can't initially provide
financing, we work with the company and refer them to technical service programs
or financial access programs.
Much of our success in Business Banking comes from our knowledge of local
markets. Many offices have their own Business Banking specialists in-house who
have the authority to make decisions on loans. Through their knowledge of the
local market, these people are in a better position to evaluate the loan. While
Business Banking does not typically produce loans with enormous individual
dollar amounts, the volume of loans adds up to a significant piece of business
for the bank and establishes a strong relationship with each business. With this
focus on providing complete, custom services, Business Banking will continue to
benefit Chittenden and Vermont businesses. Our skill in small business lending
is also reflected in the volume of SBA lending through the Low Doc program. In
1996, our Branch Managers and Business Bankers helped earn Chittenden special
recognition for the highest volume of Low Doc loans in Vermont.
Our Commercial Finance Group gives businesses a helping hand by providing asset-
based lending. By lending against a company's inventory and receivables, we
provide new or expanding businesses the financing they need to keep growing. We
work closely with these customers, staying in contact with them on an almost
daily basis. This close contact, combined with aggressive sales efforts, has
paid off. Unique among Vermont banks and only three years old, our Commercial
Finance division has performed beyond expectations and will continue to succeed
in the future.
Another area of Chittenden which continues to grow is Correspondent Banking.
Working closely with smaller community banks around New England, we help furnish
their customers with mortgage services, automotive financing, and merchant
credit card services, all of which they would otherwise be unable to provide. We
also help these banks with commercial loans they are unable to approve because
of lending limitations. These programs consistently prove to be "win/win"
relationships. Chittenden gets the benefit of additional business and the
community bank can satisfy their customers' needs without losing out to a larger
competitor.
Chittenden has always offered investment products and investment management.
Over this past year, however, Chittenden Investment Services has begun to expand
and take on its own identity through distinctive marketing that gives more
significance to the brand. Investment Services has also grown by working closely
with other areas of the bank. One example of such cooperation is seen with
Private Banking. In this partnership, Private Banking can offer its professional
clients investments as well as loans and other bank services. Similarly, our
Investment Services area gets to strengthen their client base. These links
between departments will continue to expand, providing more business for the
bank and giving our customers more services under one roof.
<PAGE 10>
Through a strong client base and close customer contact, Chittenden's Government
Banking group continues to be an extremely valuable part of the bank's core
business. This area provides almost 10% of the bank's deposits. By providing
state and local organizations with financial services, Government Banking gives
the bank a steady and relatively secure level of business. With the addition of
new technology, such as providing taxpayers the option of having their property
taxes automatically withdrawn from their account, Government Banking will
continue its steady position well into the future.
SPECIALIZED BUSINESSES
At Chittenden, Specialized Businesses continue to play an increasing role in our
growth. Specialized Businesses are services that were already in place at
Chittenden and have been expanded to a much wider market. By working closely
with outside banks and businesses, we can aggressively seek out new customers
for these existing services.
While we have long provided merchant services (the electronic processing of
credit card transactions) in Vermont, the field has changed dramatically.
Working with outside organizations, such as consultants, service providers and
other banks, 80% of our Merchant Services business is now located out of state.
In just the last two years, Merchant Services' volume has more than tripled,
going from $265 million in 1994 to $801 million in 1996.
Chittenden's Automotive Finance operation has also seen tremendous growth. Not
long ago, most people went directly to a bank to obtain auto financing. Now,
direct lending accounts for only a fraction of all auto loans. More and more,
people secure their financing right at the dealership. As a consequence,
Chittenden works with dealers across New England to provide loans. And with the
introduction of our TAMMAC Leasing operation, we now offer a full range of auto
financing products. In just two years, total loan and lease originations have
increased 80%, going from just under $50 million to almost $90 million, and
year-end outstandings have more than doubled. This growth also provides more
security for the bank. Rather than having a number of loans concentrated in one
geographic area, Chittenden can diversify and spread loans over a wider client
and geographic base.
Because of favorable tax laws in Vermont, many captive insurance companies are
based here. Captive insurers offer companies an alternative to traditional
insurance methods by providing the ability to insure themselves. We have carved
out a niche business for ourselves by catering to the specific needs of these
companies. Through a high level of service and an aggressive sales effort, our
customer base has grown from 30 companies in 1990 to almost 100 today in a
market of only 300. Captive insurers now have more reasons to do business with
Chittenden. Many of them are on-line so they can better monitor their financial
operations, and we have given them more options by providing
<PAGE 11>
other services such as trust and investments. With these advancements and our
commitment to customer service, our business with the captive insurance industry
will continue to expand and contribute to Chittenden's success.
Chittenden has provided Payroll Services since 1969, but through sales efforts
and improvements in technology, the business has grown rapidly, tripling the
customer base in just four years. With a new software system, we can now provide
customers with more options and quicker processing. Through aggressive marketing
and new technology, Payroll Services will continue to be another growth-
oriented, Specialized Business for the bank.
Mortgage Service Center of New England, our wholesale mortgage business, has
grown significantly to give Chittenden the ability to offer residential mortgage
services to other financial institutions across New England. This ability was
further augmented by the 1995 acquisition of CUMEX, which specializes in
offering residential mortgage services to credit unions in the northeast region.
Mortgage Service Center can offer all or any portion of the mortgage operation
to its clients. For example, this year we entered into an agreement with a local
community bank in Connecticut to provide the entire mortgage operation to the
bank, complete with loan officers in local branches and servicing of originated
mortgages.
Chittenden's Specialized Businesses owe their growth to a basic change in
philosophy. Gone are the days when we could wait for customers to come to us. We
now have the ability to form unique alliances with a variety of organizations
across the country who can bring us new customers. With our experience,
technology, and consistent approach to business, along with a proven ability to
venture into new areas, Specialized Businesses will contribute to Chittenden's
success for years to come.
TARGETED ACQUISITIONS
Chittenden Corporation has also expanded beyond Vermont through targeted
acquisitions of other institutions. This strategy is not one based on geographic
proximity, but rather on selecting acquisitions of quality that can grow and
succeed with Chittenden's input, expertise and product offerings.
Both of our recent acquisitions fit this profile. Flagship Bank and Trust
Company, based in Worcester, Massachusetts, is a relatively new bank that has a
strong management team in place and is located in a market where there is plenty
of room to grow. The Worcester market is dominated by two large banks, but
Flagship Bank and Trust Company, with the ability to offer new products and
services that Chittenden provides, will be a viable and attractive, local
alternative to the larger competitors.
<PAGE 12>
The Bank of Western Massachusetts is in a similar position. Based in
Springfield, Massachusetts, The Bank of Western Massachusetts is poised to
capture more market share from its larger competitors with an increased product
line. This year, we successfully introduced our Automotive Finance operation in
the Springfield area through The Bank of Western Massachusetts. To start this
operation from scratch would have been an expensive proposition, taking years to
become profitable. With the platform already in place at Chittenden, the start-
up was quicker, had less overhead, and became profitable in a shorter period of
time.
Both of these banks were managed successfully before we came along and that
success continues to grow today. With Chittenden's ability to bring in new
products, this success will be magnified and expanded much faster than would
have been possible before the mergers.
Chittenden will continue to be active in the acquisitions market. We have looked
at many different merger possibilities, but often walk away without taking
action because the match wasn't right. Future transactions will likely fall into
two areas: we will continue to look for banks in new markets that fit well with
Chittenden's business culture and philosophy, and we will look for opportunities
in markets where we already have a presence. Only when the situation makes sense
and when there is a real opportunity for cooperative growth and profitable
expansion, will future acquisitions be made.
Chittenden's dynamic, sustained success over the past six years is attributable
in part to our concentration on delivering the best in traditional, local
banking. In addition, strategic moves to augment growth and earnings have
resulted in developing two additional elements: targeted acquisitions and
expanded specialized businesses. With these three key components in place, the
result has been a balanced performance based on contributions from all of
Chittenden's business areas. This strategy will continue to keep Chittenden
ahead of the competition well into the 21st century.
<PAGE 13>
<TABLE>
CHITTENDEN CORPORATION CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
1996 1995
(in thousands)
ASSETS Restated
<S> <C> <C>
Cash and cash equivalents $ 230,259 $ 197,140
Securities available for sale 358,536 278,322
Securities held for investment (market value
$38,381,000 in 1996 and $42,634,000 in 1995) 38,556 43,164
Federal Home Loan Bank stock 5,591 5,591
Mortgage loans held for sale 9,870 14,692
Loans 1,296,568 1,207,606
Allowance for possible loan losses (28,096) (27,818)
-------------------------
Net loans 1,268,472 1,179,788
Accrued interest receivable 14,179 12,880
Other real estate owned 2,251 2,652
Net deferred tax asset 10,647 10,159
Other assets 15,797 13,855
Premises and equipment, net 24,297 24,947
Intangible assets 10,291 11,514
--------------------------
Total assets $1,988,746 $1,794,704
==========================
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES:
Deposits:
Demand $ 286,932 $ 252,421
Certificates of deposit $100,000 and over 104,295 105,604
Savings and other time 1,370,352 1,229,698
--------------------------
Total deposits 1,761,579 1,587,723
Short-term borrowings 23,992 25,025
Accrued expenses and other liabilities 26,234 25,523
Long-term debt 2,540 2,484
--------------------------
Total liabilities 1,814,345 1,640,755
==========================
Commitments and contingencies
STOCKHOLDERS EQUITY:
Preferred stock - $100 par value
authorized - 200,000 shares
issued and outstanding - none
Common stock - $1 par value
authorized - 30,000,000 shares
issued - 12,678,625 in 1996 and 12,345,304 in
1995 12,679 12,345
Surplus 74,706 70,806
Retained earnings 92,040 74,066
Treasury stock, at cost - 402,413 shares in 1996
and 367,417 shares in 1995 (4,770) (3,967)
Net unrealized gain (loss) on securities available
for sale, net of taxes of
($102,000) in 1996 and $533,000 in 1995 (208) 768
Unearned portion of employee restricted stock (46) (69)
------------------------
Total stockholders equity 174,401 153,949
------------------------
Total liabilities and stockholders equity $1,988,746 $1,794,704
===========================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE 14>
<TABLE>
CHITTENDEN CORPORATION CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
1996 1995 1994
(in thousands, except per share amounts)
INTEREST INCOME: Restated
<S> <C> <C> <C>
Interest on loans $116,563 $111,087 $ 82,396
Investment securities:
Mortgage-backed securities 6,062 5,666 1,058
Taxable 14,528 12,972 14,728
Tax-favored debt 2,950 2,687 1,678
Tax-favored equity 962 700 529
Short-term investments 1,527 1,991 994
-------------------------------------------
Total interest income 142,592 135,103 101,383
-------------------------------------------
INTEREST EXPENSE:
Deposits:
Savings 27,268 26,211 18,351
Time 29,247 27,560 15,492
-------------------------------------------
Total interest on deposits 56,515 53,771 33,843
Short-term borrowings 1,887 2,858 2,118
Long-term debt 197 143 127
-------------------------------------------
Total interest expense 58,599 56,772 36,088
-------------------------------------------
Net interest income 83,993 78,331 65,295
Provision for possible loan losses 4,183 5,000 5,500
-------------------------------------------
Net interest income after provision
for possible loan losses 79,810 73,331 59,795
-------------------------------------------
NONINTEREST INCOME:
Trust income 4,876 4,456 4,038
Service charges on deposit
accounts 6,260 5,860 5,266
Gains (losses) on sales of
securities, net (98) 205 (362)
Mortgage servicing income 2,454 2,427 2,288
Gains on sales of mortgage 2,720 1,282 1,208
loans, net
Credit card income, net 4,212 3,634 2,739
Other 4,496 4,176 4,175
------------------------------------------
Total noninterest income 24,920 22,040 19,352
------------------------------------------
Noninterest expense:
Salaries 25,517 23,372 19,884
Employee benefits 7,509 8,160 6,916
Net occupancy expense 9,475 8,449 7,093
FDIC deposit insurance 27 1,580 2,769
Other real estate owned, income
and expense, net 153 (243) (215)
Other 21,876 20,266 14,946
-------------------------------------------
Total noninterest expense 64,557 61,584 51,393
-------------------------------------------
Income before income taxes 40,173 33,787 27,754
-------------------------------------------
Provision for income taxes 13,452 11,656 9,717
-------------------------------------------
Net income $ 26,721 $ 22,131 $ 18,037
===========================================
Earnings per share $2.14 $1.83 $1.57
Dividends declared per share $0.71 $0.40 $0.27
Weighted average shares outstanding 12,468,200 12,084,731 11,472,933
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE 15>
<TABLE>
CHITTENDEN CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
<CAPTION>
Years ended December 31, 1996, 1995, and 1994
Common Retained Treasury
Stock Surplus Earnings Stock
-----------------------------------------------------
(in thousands)
Balance at December 31, 1993,
<S> <C> <C> <C> <C>
restated $11,714 $61,145 $41,837 $(2,982)
Cumulative effect of adoption
of SFAS 115
Net income 18,037
Cash dividends declared
($0.27 per share) (3,136)
Shares issued/forfeited under
various stock plans, net 39 331
Amortization of deferred
compensation for restricted
stock earned
Repurchase of common stock (6,685)
Issuance of treasury stock (15) - 81
Change in net unrealized loss
on securities available for
sale -------------------------------------------------
Balance at December 31, 1994,
restated 11,753 61,461 56,738 (9,586)
Net income 22,131
Cash dividends declared
($0.40 per share) (4,803)
Shares issued in conjunction
with acquisition of The Bank
of Western Massachusetts 470 8,292 5,514
Shares issued/forfeited under
various stock plans, net 122 1,071
Amortization of deferred
compensation for restricted
stock earned
Issuance of treasury stock (18) 105
Change in net unrealized gain
on securities available for sale
--------------------------------------------------
Balance at December 31, 1995,
restated 12,345 70,806 74,066 (3,967)
Net income 26,721
Cash dividends declared
($0.71 per share) (8,747)
Shares issued/forfeited under
various stock plans, net 334 3,917 (853)
Amortization of deferred
compensation for restricted
stock earned
Issuance of treasury stock (17) 50
Change in net unrealized
gain/loss on securities
available for sale
------------------------------------------------
Balance at December 31, 1996 $12,679 $74,706 $92,040 $(4,770)
================================================
</TABLE>
<TABLE>
<CAPTION>
Valuation Net
Allowance for Unrealized
Net Unrealized Gain (Loss) Unearned
Loss on Portion of Total
Securities
on Marketable Available Employee Stock-
Equity for Sale, Restricted holders
Securities Net of Taxes Stock Equity
---------------------------------------------------------
(in thousands)
Balance at December 31, 1993,
<S> <C> <C> <C> <C>
restated $(21) $ $(31) $111,662
Cumulative effect of adoption
of SFAS 115 21 1,357 1,378
Net income 18,037
Cash dividends declared
($0.27 per share) (3,136)
Shares issued/forfeited under
various stock plans, net (116) 254
Amortization of deferred 43 43
compensation for restricted
stock earned
Repurchase of common stock (6,685)
Issuance of treasury stock 66
Change in net unrealized loss
on securities available for
sale (8,298) (8,298)
----------------------------------------------
Balance at December 31, 1994,
restated (6,941) (104) 113,321
Net income 22,131
Cash dividends declared
($0.40 per share) (4,803)
Shares issued in conjunction
with acquisition of The Bank
of Western Massachusetts - 14,276
Shares issued/forfeited under
various stock plans, net 1,193
Amortization of deferred
compensation for restricted
stock earned 35 35
Issuance of treasury stock 87
Change in net unrealized gain
on securities available for
sale 7,709 7,709
------------------------------------------------
Balance at December 31, 1995,
restated 768 (69) 153,949
Net income 26,721
Cash dividends declared
($0.71 per share) (8,747)
Shares issued/forfeited under
various stock plans, net 3,398
Amortization of deferred
compensation for restricted
stock earned 23 23
Issuance of treasury stock 33
Change in net unrealized
gain/loss on securities
available for sale (976) (976)
-----------------------------------------------
Balance at December 31, 1996 $- $(208) $(46) $174,401
===============================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE 16>
<TABLE>
CHITTENDEN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
1996 1995 1994
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: Restated
<S> <C> <C> <C>
Net income $ 26,721 $ 22,131 $ 18,037
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 4,183 5,000 5,500
Depreciation and amortization 3,551 2,840 2,560
Amortization of intangible assets 1,223 1,031
Amortization of premiums, fees, and
discounts, net 2,854 1,449 1,721
Investment securities (gains) losses 98 (205) 362
Deferred (prepaid) income taxes (133) (43) 257
Loans originated and purchased for (193,833) (159,895) (123,626)
sale
Proceeds from sales of loans 201,375 150,771 133,610
Gains on sales of loans (2,720) (1,282) (1,208)
Increase in Federal Home Loan Bank
stock (374)
Gains on sales of premises and
equipment (225) (425)
Changes in assets and liabilities, net of
effect from purchase of
The Bank of Western Massachusetts:
Accrued interest receivable (1,299) (108) (3,764)
Other assets (2,721) 1474 (1,865)
Accrued expenses and other
liabilities 896 (1,042) 3,728
-------------------------------------
Net cash provided by operating
activities 40,195 21,522 34,887
-------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of The Bank of Western
Massachusetts, net of cash acquired (3,455)
Proceeds from sales of securities
available for sale 9,291 9,473 46,083
Proceeds from maturing securities and
principal payments on securities
available for sale 490,591 325,985 155,357
Purchases of securities available for sale (581,842) (317,340) (278,622)
Proceeds from principal payments on
securities held for investment 9,578 6,054 11,178
Purchases of securities held for
investment (5,047) (6,034) (12,772)
Loans originated, net of principal
repayments (94,106) (37,235) (45,508)
Purchases of premises and equipment (2,901) (4,254) (4,933)
Proceeds from sales of premises and
equipment 488 496
---------------------------------------
Net cash used in investing activities (174,436) (26,318) (128,721)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 173,653 115,637 48,116
Net decrease in short-term borrowings (1,033) (24,884) (58,428)
Net increase in long-term borrowings 56 54 53
Proceeds from issuance of treasury and 3,431 1,280 320
common stock
Dividends on common stock (8,747) (4,803) (3,136)
Repurchase of common stock (6,685)
---------------------------------------
Net cash provided by (used in)
financing activities 167,360 87,284 (19,760)
---------------------------------------
Net increase (decrease) in cash and cash
equivalents 33,119 82,488 (113,594)
Cash and cash equivalents at beginning of
year 197,140 114,652 228,246
---------------------------------------
Cash and cash equivalents at end of year $230,259 $197,140 $114,652
=======================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $58,201 $56,410 $35,269
Income taxes 9,950 11,668 7,996
Noncash investing and financing
activities:
Loans transferred to other real estate
owned 2,444 5,152 2,511
Mortgage loans securitized 3,665 9,228
Acquisition of The Bank of Western
Massachusetts:
Fair value of assets acquired 229,971
Liabilities assumed (203,518)
Common stock issued (14,276)
Cash paid 12,177
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
<PAGE 17>
CHITTENDEN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
the accompanying consolidated financial statements include the accounts of
Chittenden Corporation (the Company ) and its subsidiaries, Chittenden Trust
Company (CTC), The Bank of Western Massachusetts (BWM), Flagship Bank and Trust
Company (FBT), and Chittenden Connecticut Corporation (CCC). (CTC, BWM, and FBT
are collectively referred to as the Banks. ) All material intercompany accounts
and transactions have been eliminated in consolidation. All 1995 and 1994
information presented has been restated to include FBT, which was acquired on
February 29, 1996 (see note 2). This transaction was accounted for as a pooling
of interests.
NATURE OF OPERATIONS
CTC operates thirty-six branches throughout the state of Vermont, BWM operates
five branches in the greater Springfield, Massachusetts area and FBT operates
six branches in the greater Worcester, Massachusetts area. The Banks primary
business is providing loans, deposits, and other banking services to commercial,
individual, and public sector customers. CCC is a mortgage banking operation
with offices in Southbury and Glastonbury, Connecticut.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
SECURITIES
Under Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities (SFAS 115), investments in
debt securities may be classified as held for investment and measured at
amortized cost only if the Company has the positive intent and ability to hold
such securities to maturity. Investments in debt securities that are not
classified as held for investment and equity securities that have readily
determinable fair values are classified as either trading securities or
securities available for sale. Trading securities are investments purchased and
held principally for the purpose of selling in the near term; securities
available for sale are investments not classified as trading or held for
investment. Unrealized holding gains and losses on trading securities are
included in earnings; unrealized holding gains and losses on securities
available for sale are reported as a separate component of stockholders
equity, net of applicable income taxes.
The Company adopted SFAS 115 on January 1, 1994. The majority of the Company's
investment portfolio was classified as available for sale and the cumulative net
unrealized holding gain of $1,357,000, net of applicable taxes, was recorded in
stockholders equity. All other debt securities held are classified as held for
investment as the Company has the positive intent and ability to hold such
securities to maturity. Dividend and interest income, including amortization of
premiums and discounts, is included in earnings for all categories of investment
securities. Discounts and premiums related to debt securities are amortized
using a method which approximates the level-yield method, adjusted for estimated
prepayments in the case of mortgage-backed securities.
Unrealized losses which are considered other than temporary in nature are
recognized in earnings.
LOANS
Loans are stated at the amount of unpaid principal, net of unearned discounts
and unearned net loan origination fees. Such fees and discounts are accreted
using methods that approximate the effective-interest method.
Interest on loans is included in income as earned based upon interest rates
applied to unpaid principal. Interest is not accrued on loans 90 days or more
past due unless they are adequately secured and in the process of collection, or
on other loans when management believes collection is doubtful. All loans
considered impaired under SFAS 114 (except troubled debt restructurings), as
defined below, are nonaccruing. Interest on nonaccruing loans is recognized when
payments are received when the ultimate collectibility of interest is no longer
considered doubtful. When a loan is placed on nonaccrual status, all
interest previously accrued is reversed against current-period interest income.
<PAGE 18>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is based on management s estimate of the
amount required to reflect the risks in the loan portfolio, based on circum-
stances and conditions known or anticipated at each reporting date. There are
inherent uncertainties with respect to the final outcome of the Banks loans.
Because of these inherent uncertainties, it is reasonably possible that actual
losses experienced in the near term may differ from the amounts reflected in
these consolidated financial statements. The inherent uncertainties in the
assumptions relative to projected sales prices or rental rates may result in the
ultimate realization of amounts on certain loans that are significantly
different from the amounts reflected in these consolidated financial statements.
Factors considered in evaluating the adequacy of the allowance for possible loan
losses include previous loss experience, current economic conditions and their
effect on borrowers, the performance of individual loans in relation to contract
terms, and estimated fair values of underlying collateral. Losses are charged
against the allowance for possible loan losses when management believes that the
collectibility of principal is doubtful.
Key elements of the above estimates, including assumptions used in developing
independent appraisals, are dependent on the economic conditions prevailing at
the time such estimates are made. Accordingly, uncertainty exists as to the
final outcome of certain valuation judgments as a result of changes in economic
conditions in the Banks' lending areas.
As of January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended
by SFAS No. 118 (hereafter collectively referred to as SFAS 114). A loan is
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS 114 requires that impaired loans be measured
based on the present value of the expected future cash flows discounted at the
loan's effective interest rate. In the case of collateral dependent loans,
impairment may be measured based on the fair value of the collateral. When the
measure of the impaired loan is less than the recorded investment in the loan,
the impairment is recorded through a valuation allowance. This change in
accounting policy, as prescribed by SFAS 114, did not result in a cumulative
adjustment of the Company s reported financial condition. Further, adoption of
SFAS 114 did not affect the Company's provision for possible loan losses for the
year ended December 31, 1995.
The adoption of SFAS 114 had no impact on the Company s income recognition
policy for nonaccrual loans.
LOAN ORIGINATION AND COMMITMENT FEES
Loan origination and commitment fees, and certain loan origination costs, are
deferred and amortized over the contractual terms of the related loans as yield
adjustments using primarily the level-yield method. When loans are sold or paid
off, the unamortized net fees and costs are recognized in income. Net deferred
loan fees amounted to $1,121,000 and $1,964,000 at December 31, 1996 and 1995,
respectively.
PURCHASED MORTGAGE SERVICING RIGHTS
Purchased mortgage servicing rights (PMSRs) are initially recorded at the lower
of cost or the present value of the estimated future net servicing income. Such
amounts are amortized in proportion to and over the period of the estimated net
servicing income. The Company periodically evaluates the carrying value of PMSRs
for individual servicing acquisitions, compared with the present value of
estimated future net servicing income. Amortization is adjusted to reflect
changes in prepayment experience. PMSRs included in Other Assets amounted to
$1,836,000 and $2,126,000 at December 31, 1996 and 1995, respectively.
ORIGINATED MORTGAGE SERVICING RIGHTS
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 122, Accounting For Mortgage Servicing Rights ( SFAS 122 ).
SFAS 122 requires the recognition, as separate assets, of rights to service
mortgage loans for others, when the related loans are sold and the servicing
rights are retained. The amount capitalized is based on an allocation of the
total cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values.
SFAS 122 also requires capitalized mortgage servicing rights to be assessed for
impairment based on the fair value of those rights. This change in accounting
was adopted prospectively for mortgage loans sold on or after January 1, 1996.
Mortgage servicing rights capitalized during the year ended December 31, 1996
net of amortization recorded using the proportional method, totaled $1,189,000.
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which
superseded SFAS 122 effective January 1, 1997. Under the financial-components
approach set forth in SFAS 125, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. The Statement also provides
consistent standards for distinguishing transfers of financial assets that are
<PAGE 19>
sales from transfers that are secured borrowings. The Company expects the
adoption of SFAS 125 will not have a significant impact on the Company s
financial position or results of operation.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are carried at the lower of aggregate cost or
market value. Gains and losses on sales of mortgage loans are recognized at the
time of the sale and are adjusted when the interest rate charged to the borrower
and the interest rate paid to the purchaser, after considering a normal
servicing fee (and, in the case of mortgage-backed securities, a guarantee fee),
differ.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight line method over the estimated
useful lives of the premises and equipment. Leasehold improvements are amortized
over the shorter of the terms of the respective leases or the estimated useful
lives of the improvements. Expenditures for maintenance, repairs, and renewals
of minor items are charged to expense as incurred.
OTHER REAL ESTATE OWNED
Collateral acquired through foreclosure ( Other Real Estate Owned or OREO ) is
recorded at the lower of the carrying amount of the loan or the fair value of
the property, less estimated costs to sell, at the time of acquisition. A
valuation allowance for the estimated costs to sell is charged to expense.
Subsequent changes in the fair value of OREO are reflected in the valuation
allowance and charged or credited to expense. Such amounts and net operating
income or expense related to OREO are included in noninterest expense in the
accompanying consolidated statements of income.
INTANGIBLE ASSETS
Intangible assets include the excess of the purchase price over the fair value
of net assets acquired (goodwill) in the acquisition of BWM as well as a core
deposit intangible (see Note 2). Goodwill is being amortized on a straight-line
basis over 15 years. The core deposit intangible is being amortized on an
accelerated basis over 10 years. The Company periodically evaluates intangible
assets for impairment on the basis of whether these assets are fully recoverable
from projected, undiscounted net cash flows of the related acquired entity.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), which
recognizes income taxes under the asset and liability method. Under this method,
deferred tax assets and liabilities are established for the temporary
differences between the accounting basis and the tax basis of the Company's
assets and liabilities at enacted tax rates expected to be in effect when the
amounts related to such temporary differences are realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
EARNINGS PER SHARE
The calculation of earnings per share is based on the weighted average number of
shares of common stock outstanding, adjusted for the incremental shares
attributed to outstanding common stock equivalents, using the treasury stock
method. Common stock equivalents include options granted under the Company's
stock plans and shares to be issued under the Directors' Deferred Compensation
Plan.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest- bearing deposits, certain money market mutual fund investments, and
investments with original maturities of less than three months. Cash equivalents
are accounted for at cost which approximates fair value.
TRUST DEPARTMENT
Trust department assets of approximately $2.6 billion and $2.2 billion at
December 31, 1996 and 1995, respectively, held by the Banks in a fiduciary or
agency capacity for customers are not included in the accompanying consolidated
balance sheets as they are not assets of the Company. Trust income is recorded
on the cash basis in accordance with industry practice.
CREDIT CARD INCOME
Credit card income includes annual fees and interchange income from credit cards
issued by the Banks, and merchant discount income. Merchant discount income
consists of the fees charged on credit card receipts submitted by the Company's
business customers. Credit card income is presented net of credit card expense,
which includes fees paid by the Company to credit card issuers and third-party
processors. Such amounts are recognized on the accrual basis, and are presented
in noninterest income in the accompanying statements of income.
<PAGE 20>
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The Company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the date of the
grant over the exercise price of the stock.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to be consistent with current year presentation.
NOTE 2 ACQUISITIONS
THE BANK OF WESTERN MASSACHUSETTS
On March 17, 1995, the Company acquired all of the outstanding shares of the
common stock of The Bank of Western Massachusetts. The Company issued 980,508
shares at a price of $14.56 per share; 510,742 of the shares issued were
treasury stock. The total cash outlay, including payments made with respect to
outstanding stock options and warrants issued by BWM, was $12.2 million. This
transaction has been accounted for as a purchase and, accordingly, the
consolidated statement of income includes BWM s results of operations from the
date of acquisition.
The purchase price has been allocated to assets acquired and liabilities assumed
based on estimates of fair value at the date of acquisition. The excess of
purchase price over the fair value of assets acquired, including a core deposit
intangible asset, has been recorded as goodwill. The fair value of these assets
and liabilities is summarized as follows (in thousands):
Cash and cash equivalents $ 8,715
Securities available for sale 42,123
Net loans 158,975
Premises and equipment 1,422
Core deposit intangible 5,021
Goodwill 7,123
Other real estate owned 1,296
Prepaid expenses and other assets 5,296
Deposits (176,395)
Short-term borrowings (18,980)
Accrued expenses and other liabilities (8,143)
----------
Total acquisition cost $ 26,453
==========
Included in the total acquisition cost is approximately $100,000 of capitalized
costs incurred in connection with the acquisition.
Following is supplemental information reflecting selected pro forma results for
the Company as if this acquisition had been consummated as of January 1, 1994:
1995 1994
------------------------
(in thousands, except EPS)
Total revenue $103,037 $ 91,008
Income before income taxes 33,379 28,747
Net income 21,804 18,421
Earnings per share (EPS) 1.80 1.61
Total revenue includes net interest income and noninterest income.
<PAGE 21>
FLAGSHIP BANK AND TRUST COMPANY
On February 29, 1996, the Company acquired Flagship Bank and Trust Company (FBT)
of Worcester, Massachusetts for stock. Under the agreement, FBT shareholders
received 1.2 shares of Chittenden Corporation common stock for each share of FBT
stock. Total shares outstanding of Chittenden Corporation stock increased by 1.6
million shares as a result of the acquisition. Based on the closing price of
Chittenden stock as of February 29, 1996, the market value of the shares
exchanged totaled $35.2 million. The acquisition was accounted for as a pooling
of interests. Accordingly, the financial statements for 1995 and 1994 have been
restated to include FBT.
Total revenue, income before income taxes, net income, and earnings per share
data of the separate companies for the periods preceding the acquisition were:
<TABLE>
1995 1994
Chittenden Chittenden
Corporation FBT Combined Corporation FBT Combined
----------------------------------------------------------------------------
(in thousands, except EPS)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Total Revenue $86,176 $14,195 $100,371 $71,964 $12,683 $84,647
Income before
Income Taxes 31,178 2,609 33,787 23,755 3,999 27,754
Net Income 20,885 1,246 22,131 15,537 2,500 18,037
Earnings per
Share 2.00 0.76 1.83 1.58 1.54 1.57
Total revenue includes net interest income and noninterest income.
Total transaction costs expensed in relation to the transaction were $295,000 and
$1,842,000 in 1996 and 1995, respectively.
</TABLE>
NOTE 3 SECURITIES
Investment securities at December 31, 1996 and 1995 are as follows:
<TABLE>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------
<CAPTION>
1996 (in thousands)
SECURITIES AVAILABLE FOR SALE:
<S><C> <S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $109,606 $ 440 $ (575) $109,471
U.S. government agency
obligations 76,179 695 (167) 76,707
Obligations of states and
political subdivisions 45,123 45,123
Mortgage-backed securities 51,850 245 (491) 51,604
Corporate bonds and notes 65,248 133 (191) 65,190
Government bond mutual funds 10,605 - (502) 10,103
Marketable equity securities 235 103 - 338
---------------------------------------------------
Total securities available for
sale $358,846 $1,616 $(1,926) $358,536
===================================================
SECURITIES HELD FOR INVESTMENT:
U.S. government agency
obligation $ 198 $ $ $ 198
Obligations of states and
political subdivisions 3,466 3,466
Mortgage-backed securities 34,761 77 (252) 34,586
Corporate bonds and notes 25 25
Other debt securities 106 106
------------------------------------------------------
Total securities held for
investment $ 38,556 $77 $(252) $38,381
======================================================
1995
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 81,625 $1,101 $(123) $ 82,603
U.S. government agency
obligations 60,448 556 (57) 60,947
Obligations of states and
political subdivisions 44,853 44,853
Mortgage-backed securities 49,187 334 (194) 49,327
Corporate bonds and notes 30,072 70 (118) 30,024
Government bond mutual funds 10,605 (288) 10,317
Marketable equity securities 231 20 251
-----------------------------------------------------
Total securities available for
sale $277,021 $2,081 $(780) $278,322
=====================================================
SECURITIES HELD FOR INVESTMENT:
U.S. government agency $ 298 $ $ (1) $ 297
obligation
Obligations of states and
political subdivisions 5,119 5,119
Mortgage-backed securities 37,747 211 (740) 37,218
------------------------------------------------------
Total securities held for
investment $43,164 $211 $(741) $42,634
======================================================
</TABLE>
<PAGE 22>
Proceeds from sales of debt securities amounted to $9,291,000, $9,473,000 and
$46,083,000 in 1996, 1995, and 1994, respectively. Realized gains on sales of
debt securities were $13,000 and $246,000 in 1995 and 1994, respectively.
Realized losses on sales of debt securities were $98,000, $73,000 and $142,000
in 1996, 1995, and 1994, respectively. In 1994, the Company sold government
bond mutual funds at a loss of $466,000. The Company sold marketable equity
securities at a gain of $265,000 in 1995.
Market value of securities pledged to secure U.S. Treasury borrowings, public
deposits, securities sold under agreements to repurchase, and for other purposes
required by law, amounted to $179,642,000 and $73,698,000 at December 31, 1996
and 1995, respectively.
The following table shows the maturity distribution of the amortized cost of the
Company's investment securities at December 31, 1996, with a comparative total
for 1995:
<TABLE>
After After
One But Five But
Within Within Within
One Five Ten
Year Years Years
-----------------------------------------
(in thousands)
<CAPTION>
SECURITIES AVAILABLE FOR SALE:
<S><C> <S> <C> <C> <C>
U.S. Treasury securities $ 24,265 $ 80,297 $ 5,044
U.S. government agency obligations 7,439 63,940 3,000
Obligations of states and political
subdivisions 42,587 2,130 406
Mortgage-backed securities (1) 8,663 29,129 11,529
Corporate bonds and notes 17,297 47,951
Government bond mutual funds
Marketable equity securities
----------------------------------------
Total securities available for sale 100,251 223,447 19,979
----------------------------------------
SECURITIES HELD FOR INVESTMENT:
U.S. government agency obligations 198
Obligations of states and political
subdivisions 2,549 605 312
Mortgage-backed securities (1) 11,944 17,868 2,389
Corporate bonds and notes 25
Other debt securities 20 51
------------------------------------------
Total securities held for investment 14,691 18,493 2,777
------------------------------------------
Total securities $114,942 $241,940 $22,756
==========================================
Comparative amounts at December 31, 1995 $116,649 $155,707 $29,222
After
Ten No Fixed
Years Maturity Total
-----------------------------------------
(in thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ $ $109,606
U.S. government agency obligations 1,800 76,179
Obligations of states and political
subdivisions 45,123
Mortgage-backed securities (1) 2,529 51,850
Corporate bonds and notes 65,248
Government bond mutual funds 10,605 10,605
Marketable equity securities 235 235
-----------------------------------------
Total securities available for sale 4,329 10,840 358,846
-----------------------------------------
SECURITIES HELD FOR INVESTMENT:
U.S. government agency obligations 198
Obligations of states and political
subdivisions 3,466
Mortgage-backed securities (1) 2,560 34,761
Corporate bonds and notes 25
Other debt securities 35 106
----------------------------------------
Total securities held for investment 2,595 38,556
----------------------------------------
Total securities $6,924 $10,840 $397,402
========================================
Comparative amounts at December 31, 1995 $7,771 $10,836 $320,185
_____________________________
(1) Maturities of mortgage-backed securities are based on forecasted mortgage loan prepayments.
</TABLE>
<PAGE 23>
The following table shows the maturity distribution of the fair value of the
Company's investment securities at December 31, 1996, with a comparative total
for 1995:
<TABLE>
After After
One But Five But
Within Within Within
One Five Ten
Year Years Years
----------------------------------------
(in thousands)
<CAPTION>
SECURITIES AVAILABLE FOR SALE:
<S><C> <S> <C> <C> <C>
U.S. Treasury securities $ 24,338 $ 80,283 $ 4,850
U.S. government agency obligations 7,474 64,445 3,046
Obligations of states and political
subdivisions 42,587 2,130 406
Mortgage-backed securities (1) 8,593 28,981 11,503
Corporate bonds and notes 17,259 47,931
Government bond mutual funds
Marketable equity securities
---------------------------------------
Total securities available for sale 100,251 223,770 19,805
---------------------------------------
SECURITIES HELD FOR INVESTMENT:
U.S. government agency obligations 198
Obligations of states and political
subdivisions 2,549 605 312
Mortgage-backed securities (1) 11,884 17,778 2,377
Corporate bonds and notes 25
Other debt securities 20 51
---------------------------------------
Total securities held for investment 14,631 18,403 2,765
---------------------------------------
Total securities $114,882 $242,173 $22,570
=======================================
Comparative amounts at December 31, 1995 $116,763 $156,635 $29,139
After
Ten No Fixed
Years Maturity Total
--------------------------------------
(in thousands)
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ $ $109,471
U.S. government agency obligations 1,742 76,707
Obligations of states and political
subdivisions 45,123
Mortgage-backed securities (1) 2,527 51,604
Corporate bonds and notes 65,190
Government bond mutual funds 10,103 10,103
Marketable equity securities 338 338
---------------------------------------
Total securities available for sale 4,269 10,441 358,536
---------------------------------------
SECURITIES HELD FOR INVESTMENT:
U.S. government agency obligations 198
Obligations of states and political
subdivisions 3,466
Mortgage-backed securities (1) 2,547 34,586
Corporate bonds and notes 25
Other debt securities 35 106
---------------------------------------
Total securities held for investment 2,582 38,381
---------------------------------------
Total securities $6,851 $10,441 $396,917
=======================================
Comparative amounts at December 31, 1995 $7,851 $10,568 $320,956
_________________________
(1) Maturities of mortgage-backed securities are based on forecasted mortgage loan
prepayments. The fair value adjustment is applied to the maturity distribution
proportionately. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
</TABLE>
<PAGE 24>
NOTE 4 LOANS
Major classifications of loans at December 31, 1996 and 1995 are as follows:
1996 1995
---------------------------
(in thousands)
Commercial $ 272,969 $ 248,604
Real estate:
Residential 406,850 388,705
Commercial 304,530 305,941
Construction 25,084 25,796
---------------------------
Total real estate 736,464 720,442
Home equity 84,319 78,600
Consumer 161,699 147,540
Leases 41,117 12,420
--------------------------
Total gross loans 1,296,568 1,207,606
Allowance for possible loan losses (28,096) (27,818)
--------------------------
Net loans $1,268,472 $1,179,788
==========================
Mortgage loans held for sale $9,870 $14,692
==========================
Leases include the estimated residual value of leased vehicles of approximately
$24,207,000 and $6,821,000 at December 31, 1996 and 1995, respectively, and are
net of unearned interest income of approximately $5,855,000 and $1,880,000 at
those dates.
CTC's lending activities are conducted primarily in Vermont, with additional
activity relating to nearby trading areas in Quebec, New York, New Hampshire,
Maine, and Connecticut. BWM s lending activities are conducted primarily in the
greater Springfield, Massachusetts area while FBT s lending activities are
conducted primarily in the Worcester, Massachusetts area. The Banks make single
family and multi-family residential loans, commercial real estate loans,
commercial loans, and a variety of consumer loans. In addition, the Banks make
loans for the construction of residential homes, multi-family and commercial
properties, and for land development. The ability and willingness of the
Banks' borrowers to honor their repayment commitments are impacted by many
factors, including the level of overall economic activity within the borrowers
geographic areas.
Changes in the allowance for possible loan losses are summarized as follows:
1996 1995 1994
---------------------------------
(in thousands)
Balance at beginning of year $27,818 $ 22,163 $ 21,672
Allowance of BWM at acquisition 4,135
Provision for possible loan losses 4,183 5,000 5,500
Loan recoveries 2,204 3,002 1,230
Loans charged off (6,109) (6,482) (6,239)
----------------------------------
Balance at end of year $28,096 $ 27,818 $ 22,163
==================================
The principal amount of loans on nonaccrual status was $10,601,000 and
$9,939,000 at December 31, 1996 and 1995, respectively. Loans whose terms have
been substantially modified in troubled debt restructurings amounted to $638,000
and $2,502,000 at December 31, 1996 and 1995, respectively.
The amount of interest which was not earned but which would have been earned had
the nonaccrual and restructured loans performed in accordance with their
original terms and conditions was as follows:
1996 1995 1994
---------------------------------
(in thousands)
Interest income in accordance with
original loan terms $1,668 $1,007 $1,453
Interest income recognized 721 513 508
---------------------------------
Reduction in interest income $ 947 $ 494 $ 945
=================================
At December 31, 1996, the Banks were not committed to lend any additional funds
to borrowers with loans whose terms have been restructured.
<PAGE 25>
Disclosures related to impaired loans at, and for the years ended, December 31,
1996 and 1995, are as follows:
1996 1995
(in thousands)
At December 31
Investment in loans considered impaired
under SFAS 114 (1) $6,035 $8,162
Impaired loans with a related loan
loss allowance 4,324 3,389
Specific loan loss allowance for
impaired loans 1,190 821
Impaired loans with no specific
loan loss allowance 1,711 4,773
For the year ended
Average recorded investment in
impaired loans 7,609 9,433
Interest income on impaired loans 319 319
Amount of interest income recognized
on a cash basis 76 221
____________________________
(1) All such loans, except troubled debt restructurings, were on a nonaccrual
basis.
Residential mortgage loans serviced for others, which are not reflected in the
consolidated balance sheets, totaled approximately $1,006,853,000 and
$960,212,000 at December 31, 1996 and 1995, respectively. No formal recourse
provisions exist in connection with such servicing.
The following table is a summary of activity for mortgage servicing rights
purchased and originated for the year ended December 31, 1996:
Purchased Originated Total
-----------------------------------
(in thousands)
Balance at January 1, 1996 $2,126 $ - $2,126
Additions 35 1,334 1,369
Amortization (325) (145) (470)
------------------------------------
Balance at December 31, 1996 $1,836 $1,189 $3,025
====================================
SFAS 122 requires enterprises to measure the impairment of servicing rights
based on the difference between the carrying amount of the servicing rights and
current fair value. At December 31, 1996, no allowance for impairment in the
Company s mortgage servicing rights was necessary.
<PAGE 26>
NOTE 5 PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995 are summarized as follows:
Estimated Original
1996 1995 Useful Lives
-------------------------------------------
(in thousands)
Land $ 3,162 $ 3,162 -
Buildings and improvements 9,430 9,427 25 - 50 years
Leasehold improvements 12,962 12,052 2 - 50 years
Furniture and equipment 20,802 19,577 3 - 15 years
Construction in progress 593 133
-----------------------
46,949 44,351
Accumulated depreciation and
amortization (22,652) (19,404)
------------------------
$24,297 $24,947
The Company is obligated under various noncancelable leases for premises and
equipment expiring in various years through the year 2008. Total lease expense,
less income from subleases, amounted to approximately $2,031,000, $1,849,000 and
$1,273,000 in 1996, 1995, and 1994, respectively.
Future minimum rental commitments for noncancelable leases for premises and
equipment with initial or remaining terms of one year or more at December 31,
1996 are as follows:
Year Capital Leases Operating Leases
- --------------------------------------------------------------------------------
(in thousands)
1997 $ 83 $ 1,886
1998 87 1,714
1999 1,755 1,595
2000 - 1,549
2001 - 1,343
Thereafter - 6,897
---------------------------------------
Total minimum lease payments 1,925 $14,984
======================
Amounts representing interest 385
-----------
Present value of net minimum
lease payments $1,540
===========
NOTE 6 BORROWINGS
Short-term borrowings at December 31, 1996 and 1995 consist of the following:
1996 1995
--------------------
(in thousands)
Securities sold under agreements to repurchase:
Due through January 6, 1997, weighted average rate
of 9.20% $10,000 $ -
Due through January 8, 1996, weighted average rate
of 9.20% - 10,000
U.S. Treasury borrowings, 5.18% in 1996 and 5.16%
in 1995, due on demand 13,894 11,927
FHLB Term Advances, 5.79% in 1995 due on
October 3, 1996 - 3,000
FHLB Affordable Housing Program Advance,
no fixed maturity, 5.79% 98 98
--------------------
$23,992 $25,025
====================
Short-term borrowings are collateralized by U.S. Treasury and agency securities,
mortgage-backed securities, and residential mortgage loans. These assets had a
carrying value and a fair value of $28,019,000 and $28,006,000, respectively, at
December 31, 1996, and $25,471,000 and $25,542,000, respectively, at December
31, 1995.
<PAGE 27>
The following information relates to securities sold under agreements to
repurchase:
<TABLE>
1996 1995 1994
-------------------------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Average balance outstanding during the year $10,097 $11,304 $11,806
Average interest rate during the year 9.18% 8.83% 8.46%
Maximum amount outstanding at any month-end $10,000 $20,000 $20,237
The following information relates to U.S. Treasury borrowings:
1996 1995 1994
------------------------------
(in thousands)
Average balance outstanding during the year $15,282 $19,556 $20,349
Average interest rate during the year 5.16% 5.73% 3.74%
Maximum amount outstanding at any month-end $62,858 $70,669 $70,517
The following information relates to short-term FHLB borrowings:
1996 1995 1994
-------------------------------
(in thousands)
Average balance outstanding during the year $2,307 $7,162 $5,954
Average interest rate during the year 5.77% 5.96% 5.34%
Maximum amount outstanding at any month-end $3,000 $12,725 $6,098
The following information relates to long-term debt:
1996 1995
------------------
(in thousands)
FHLB Term Advance, 5.81%, due on October 19, 1998 $1,000 $1,000
Capitalized lease obligation 1,540 1,484
------------------
$2,540 $2,484
==================
The advance from the Federal Home Loan Bank of Boston is collateralized by the Company s
holdings of Federal Home Loan Bank of Boston stock and residential real estate loans equal
to at least 200% of the advance.
NOTE 7 INCOME TAXES
The provision for income taxes consists of the following:
1996 1995 1994
------------------------------
(in thousands)
Current payable
Federal $12,414 $10,713 $8,723
State 1,171 986 737
-------------------------------
13,585 11,699 9,460
Deferred (prepaid)
Federal (147) (45) 270
State 14 2 (13)
-------------------------------
(133) (43) 257
-------------------------------
Provision for income taxes $13,452 $11,656 $9,717
===============================
Current income taxes receivable, included in other assets, were $410,000 and $943,000, at
December 31, 1996 and 1995, respectively. Current income taxes payable, included in
accrued expenses and other liabilities, was $330,000 at December 31, 1996.
<PAGE 28>
The State of Vermont assesses a franchise tax for banks in lieu of a bank income tax. The
franchise tax, assessed based on deposits, amounted to approximately $562,000, $530,000,
and $493,000 in 1996, 1995, and 1994, respectively. These amounts are included in
provision for income taxes in the accompanying consolidated statements of income.
The following is a reconciliation of the provision for Federal income taxes, calculated at
the statutory rate of 35%, to the recorded provision for income taxes:
1996 1995 1994
-------------------------------
(in thousands)
Computed tax at statutory Federal rate $14,061 $11,826 $9,714
Increase (decrease) in taxes from:
Amortization of intangible assets 166 142
Tax-exempt interest, net (992) (1,109) (682)
Dividends received deduction (238) (214) (134)
State taxes, net of Federal Tax benefit 770 449 473
Other, net (315) 562 346
--------------------------------
Total $13,452 $11,656 $9,717
================================
Effective income tax rate 33.5% 34.5% 35.0%
The components of the net deferred tax asset at December 31, 1996 and 1995 are as follows:
1996 1995
----------------------
(in thousands)
Allowance for possible loan losses $ 9,209 $ 8,940
Deferred compensation and pension 2,332 2,522
Other real estate owned writedowns 94 133
Depreciation (535) (769)
Accrued liabilities 294 714
Unrealized (gain) loss on securities available for sale 86 (535)
Basis differences, purchase accounting 387 579
Core deposit intangible (1,614) (1,911)
Other 394 486
---------------------
$10,647 $10,159
=====================
</TABLE>
NOTE 8 STOCKHOLDERS EQUITY
TREASURY STOCK
On October 26 and November 7, 1994, the Company purchased 354,492 and 156,250
shares, Respectively, of its common stock for a total cost of $6.7 million.
On March 17, 1995, the Company issued 510,742 common shares from treasury in the
acquisition of The Bank of Western Massachusetts.
DIVIDENDS
Dividends paid by the Banks are the primary source of funds available to the
Company for payment of dividends to its stockholders and for other corporate
needs. Applicable Federal and state statutes, regulations, and guidelines impose
restrictions on the amount of dividends that may be declared by the Banks.
The Company declared dividends of $8,747,000, $4,803,000, and $3,136,000 during
1996, 1995, and 1994, respectively. These amounts represented $0.71, $0.40, and
$0.27 per share.
SURPLUS
CTC is required by Vermont statute to transfer a minimum of 10% of net income
from retained earnings to surplus on an annual basis. No transfer is required
if net worth as a percent of deposits and other liabilities exceeds 10%.
Prior to the payment of dividends, BWM and FBT are required by Massachusetts
statute to transfer an amount from retained earnings to surplus such that the
total of capital stock and surplus is a minimum of 10% of deposits. Because
these levels were exceeded at December 31, 1996, no transfers were made during
the year.
<PAGE 29>
STOCK SPLITS
On May 24, 1996 and May 26, 1995, the Company distributed five-for-four stock
splits. All historical share information presented in the consolidated financial
statements has been restated to reflect these events.
NOTE 9 STOCK PLANS
The Company has two stock option plans: the 1988 Employee Stock Option plan and
the 1993 Stock Incentive Plan. The Company accounts for these plans in
accordance with APB Opinion No. 25, under which no compensation cost has been
recognized.
Under the Stock Incentive Plan, certain key employees and directors are eligible
to receive various types of stock incentives: options to purchase a specified
number of shares of stock at a specified price (including incentive stock
options and non-qualified stock options); restricted stock which vests after a
specified period of time; non-employee directors stock options to purchase
stock at predetermined prices over a five-year period. A total of 732,422 shares
are allocated to the Stock Incentive Plan. At December 31, 1996 there were
694,087 shares reserved under the plan.
Information regarding the Company s stock option plans is summarized as follows:
Weighted
Average Price
Per Share Options
-------------------------
December 31, 1993 $ 7.51 614,943
Granted 10.46 37,673
Exercised 8.76 (19,548)
Expired 7.47 (60,046)
-------------------------
December 31, 1994 7.67 573,022
Granted 14.21 194,815
Exercised 9.82 (106,785)
Expired 10.73 (10,225)
-------------------------
December 31, 1995 9.37 650,827
Granted 25.47 177,533
Exercised 5.88 (324,048)
Expired 17.62 (25,904)
-------------------------
December 31, 1996 $17.26 478,408
=========================
If compensation cost for these plans had been determined in accordance with SFAS
123, the Company's net income and earnings per share would have been reduced to
the following pro forma amounts:
1996 1995
-----------------------------------
(in thousands, except per share data)
Net Income
As Reported $26,721 $22,131
Pro Forma 26,434 22,049
Earnings Per Share
As Reported $2.14 $1.83
Pro Forma 2.12 1.82
The SFAS 123 method of accounting has not been applied to options granted prior
to January 1, 1995. Accordingly, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
Of the 478,408 options outstanding at December 31, 1996, 286,759 have exercise
prices between $3.20 and $16.64, with a weighted average exercise price of
$12.07 and a weighted average remaining contractual life of 6.76 years. All of
these options are exercisable. The remaining 191,649 options have exercise
prices between $19.14 and $29.93, with a weighted average exercise price of
$25.03 and a weighted average remaining contractual life of 6.83 years. Of these
options, 5,397 are exercisable and their weighted average exercise price is
$22.73.
<PAGE 30>
The fair value of each option granted is estimated on the date of grant using
the Black- Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995:
1996 1995
---------------
Expected life (years) 7.75 7.75
Interest rate 6.75% 6.50%
Volatility 25.4 25.4
Dividend yield 3.60 5.61
Using these assumptions, the weighted average fair value of options granted was
$5.78 and $2.74 per share, in 1996 and 1995, respectively.
NOTE 10 EMPLOYEE BENEFITS
PENSION PLAN
CTC has a noncontributory pension plan covering substantially all of its
employees. Benefits are based on years of service and the level of compensation
during each year of employment, and accumulate using a cash balance formula. The
funding policy of the Bank for the plan is to contribute annually the amount
necessary to meet the minimum funding standards established by the Employee
Retirement Income Security Act (ERISA). This contribution is based on an
actuarial method that recognizes estimated future salary levels and service.
The funded status of the plan is as follows at December 31, 1996 and 1995:
1996 1995
-------------------
(in thousands)
Vested benefits $13,851 $12,699
Nonvested benefits 195 1,364
-------------------
Accumulated benefit obligation 14,046 14,063
Additional benefits related to
future compensation levels 1,680 1,766
-------------------
Projected benefit obligation 15,726 15,829
Fair value of plan assets, invested
primarily in equity securities and bonds 16,036 14,083
-------------------
Plan assets in excess of (less than)
projected benefit obligation $ 310 $(1,746)
====================
Amounts resulting from changes in actuarial assumptions used to measure the
Bank's benefit obligations are not recognized as they occur, but are amortized
systematically over subsequent periods. Unrecognized amounts to be amortized and
the reconciliation of the plan assets less than the projected benefit obligation
to the amounts included in the consolidated balance sheets at December 31, 1996
and 1995 are shown below:
1996 1995
-----------------------
(in thousands)
Plan assets in excess of (less than)
projected benefit obligation $ 310 $(1,746)
Unrecognized net transition asset
being amortized over participants
period of service (118) (130)
Prior service cost not yet recognized in
net periodic pension cost (2,659) (3,043)
Unrecognized net loss from past
experience different from that assumed 278 1,956
------------------------
Accrued pension cost included in accrued
expenses and other liabilities $(2,189) $(2,963)
========================
Net pension expense, included in employee benefits in the consolidated
statements of income, includes the following components:
1996 1995 1994
----------------------------------
(in thousands)
Service cost - benefits attributable
to service during the period $ 441 $ 814 $ 868
Interest cost on projected benefit
obligation 1,112 1,297 1,136
Actual return on plan assets (1,947) (2,301) 72
Net amortization and deferral 419 1,257 (1,186)
-----------------------------------
Net pension expense $ 25 $1,067 $ 890
===================================
<PAGE 31>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5%, 7.0%, and 8.0% at December
31, 1996, 1995 and 1994, respectively. Future compensation levels were
estimated using average salary increases of 5.25%, 5.0%, and 6.0% at December
31, 1996, 1995 and 1994, respectively. The expected long-term rate of return on
plan assets was 9.0% in 1996, 1995, and 1994.
In September 1995, the Company approved an amendment to the pension plan,
effective January 1, 1996, adopting a cash balance approach. This amendment led
to the reduction of the Company s pension expense from $1,067,000 in 1995 to
$25,000 in 1996. Based on current actuarial assumptions, management expects
future annual pension expense of approximately $600,000.
CTC has supplemental pension arrangements with certain retired employees. The
liability, included in accrued expenses and other liabilities, related to such
arrangements was $772,000 and $883,000 at December 31, 1996 and 1995,
respectively. The Company has established a Supplemental Executive Retirement
Plan (SERP) for its Chief Executive Officer. The SERP is a defined contribution
plan in which contributions are accrued based upon the Company s Return on
Equity (ROE). An ROE of 10% is the minimum threshold at which any contribution
will be made. Benefits are payable upon attaining the age of 55, except in the
event of death or disability. The liability related to the SERP, included in
accrued expenses and other liabilities, was $379,000 and $234,000 at December
31, 1996 and 1995, respectively.
POSTRETIREMENT BENEFITS
In addition to providing pension benefits, CTC provides certain postretirement
health care benefits to retirees who meet certain age and length of service
criteria.
The Company accounts for postretirement and postemployment benefits in
accordance with Statement of Financial Accounting Standards No. 106, Employers'
Accounting for Postretirement Benefits Other Than Pensions (SFAS 106). This
accounting standard requires that the expected cost of postretirement benefits
be charged to expense during the years that the employees render service. The
Company has elected to amortize the unfunded obligation that was measured as of
January 1, 1993 over a period of 20 years.
The following table reconciles the plan's funded status to the accrued post-
retirement health care liability as reflected in the balance sheets at December
31, 1996 and 1995:
1996 1995
------------------
(in thousands)
Accumulated postretirement benefit obligation:
Retirees $ 725 $ 781
Other fully eligible participants 157 147
Other active participants 274 466
-------------------
$1,156 1,394
Unrecognized actuarial gain 340 152
Unrecognized transition obligation (1,286) (1,366)
-------------------
Accrued postretirement health care liability $ 210 $ 180
===================
Net postretirement health care expense includes the following components:
Service cost - benefits attributed to service
during the period $ 11 $ 16
Interest cost on accumulated postretirement
benefit obligation 83 101
Net amortization and deferral 48 64
------------------
Net postretirement health care expense $142 $181
==================
The weighted average discount rate used in determining the accumulated post-
retirement benefit obligation at December 31, 1996 and 1995, was 7.5% and 7.0%,
respectively. For measurement purposes, 7.0% and 9.0% annual rate of increase
in the per capita cost of covered health care benefits was assumed for the
respective periods.
OTHER BENEFIT PLANS
CTC has an incentive savings and profit sharing plan to provide eligible
employees with a means to save and invest a portion of their earnings,
supplemented by contributions from CTC. Investment in the Company's common
stock is one of four investment options available to employees.
Eligible employees of CTC may contribute, by salary reductions, up to 6% of
their compensation as a basic employee contribution and may contribute up to an
additional 10% of their compensation as a supplemental employee contribution.
CTC makes an incentive savings contribution in an amount equal to 35% of each
employee's basic contribution. In 1996, 1995, and 1994, 49,422, 38,580 and
<PAGE 32>
22,795 shares, respectively, of the Company's common stock were purchased
through the incentive savings and profit sharing plan; $290,000, $274,000, and
$214,000, respectively, were charged to expense for contributions and payments
made, or to be made, under the plan.
CTC may also make an additional matching contribution based on the extent to
which the annual corporate profitability goal established by the Board of
Directors is met. Expenses related to achievement of profitability goals
totaled $319,000, $364,000, and $214,000, in 1996, 1995, and 1994, respectively.
CTC also has an Executive Management Incentive Compensation Plan. Executives
performing at defined levels of responsibility are eligible to participate in
the plan. Incentive award payments are determined on the basis of corporate
profitability and individual performance, with incentive awards ranging from
zero to 100% of annual compensation. These awards are paid over a four-year
period, contingent upon meeting profitability goals in subsequent years.
Expenses for this plan totaled $769,000, $599,000, and $529,000 in 1996,
1995, and 1994, respectively.
The Company has a Directors' Deferred Compensation Plan. Under the plan,
Directors may defer fees and retainers that would otherwise be payable
currently. Deferrals may be made to an uninsured interest account or an account
recorded in equivalents of the Company's common stock. Expenses for this plan
totaled $365,000, $183,000, and $202,000 for 1996, 1995, and 1994, respectively.
Shares which will be issued under the plan totaled 168,505 at December 31, 1996.
BWM and FBT have separate 401(k) plans under which $178,000 and $157,000 were
contributed by those banks in 1996 and 1995, respectively.
NOTE 11 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, to meet the financing needs of their customers
and to reduce their own exposure to fluctuations in interest rates, the Banks
are parties to financial instruments with off-balance sheet risk, held for
purposes other than trading. The financial instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The Banks' exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument, for loan commitments and standby letters of credit, is represented
by the contractual amount of those instruments, assuming that the amounts are
fully advanced and that collateral or other security is of no value. The Banks
use the same credit policies in making commitments and conditional obligations
as they do for on-balance sheet instruments. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Banks upon extension of credit,is based on management's
credit evaluation of the borrower. Collateral held varies, but may include
accounts receivable, inventory, property, plant and equipment, and income-
producing commercial properties.
Commitments to originate loans, unused lines of credit, and unadvanced portions
of construction loans are agreements to lend to a customer provided there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Many of the commitments are expected to expire without being drawn
upon. Therefore, the amounts presented below do not necessarily represent future
cash requirements.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance by a customer to a third party. These guarantees are
issued primarily to support public and private borrowing arrangements, bond
financing, and similar transactions. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending loan commitments
to customers.
Financial instruments whose contractual amounts represent off-balance sheet risk
at December 31, 1996 and 1995 are as follows:
1996 1995
-------------------
(in thousands)
Commitments to originate loans $33,450 $ 34,189
Unused lines of credit 172,240 189,317
Standby letters of credit 24,231 13,329
Unadvanced portions of construction loans 11,635 9,268
Equity commitments to limited partnerships 675 -
<PAGE 33>
NOTE 12 COMMITMENTS AND CONTINGENCIES
As nonmembers of the Federal Reserve System, the Banks are required to maintain
certain reserve requirements of vault cash and/or deposits with the Federal
Reserve Bank of Boston. The amount of this reserve requirement, included in cash
and cash equivalents, was $27,189,000 and $25,520,000 at December 31, 1996 and
1995, respectively.
CTC and FBT have contracts for data processing services that extend to July 1998
and April 1999, respectively. Base fees required to be paid during the remaining
terms of the contracts are approximately $6,785,000. Total fees to be paid may
be the same as or exceed the base fees depending on additional services rendered
and consumer price index changes during the remaining term of the contract.
The Company has entered into severance agreements with several members of senior
management. Payments under these agreements are triggered by a change of
control and subsequent termination of employment under certain circumstances and
are equal to 1.5 to 2.99 times annual salary for the individual participating
members of senior management.
Various legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1996. Management, after reviewing
these claims with legal counsel, is of the opinion that the resolution of these
claims will not have a material effect on financial condition or results of
operations.
NOTE 13 OTHER NONINTEREST EXPENSE
The components of other noninterest expense for the years presented are as
follows:
1996 1995 1994
------------------------------
(in thousands)
Data processing $ 5,023 $ 4,463 $ 3,906
Amortization of intangible assets 1,223 1,031 -
Legal and professional 1,453 1,254 985
Other 14,177 13,518 10,055
--------------------------------
$21,876 $20,266 $14,946
================================
NOTE 14 RELATED PARTY TRANSACTIONS
Directors and executive officers of the Banks and their associates are credit
customers of the Banks in the normal course of business. All loans and
commitments included in such transactions are made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and do not involve more than
normal risk of collectibility or present other unfavorable features.
An analysis of loans to directors and executive officers of the Banks and their
associates, for 1996, is as follows (in thousands):
Balance at Balance at
December 31, 1995 Additions Reductions December 31, 1996
------------------------------------------------------------------------
$8,104 $4,519 $3,763 $8,860
=========================================================================
BWM does business with several businesses controlled by members of its Board of
Directors. Amounts paid for rent, marketing, legal services, and insurance to
these businesses totaled $439,000 and $370,000 in 1996 and 1995, respectively.
FBT purchases loans from a finance company controlled by a member of its Board
of Directors. Prepaid interest advanced to this company totaled $1,205,000,
$238,000, and $47,000 in 1996, 1995, and 1994, respectively.
A construction company, whose principal owner is a member of the Board of
Directors of the Company and of CTC, was hired in 1994 to build a new banking
facility for CTC. CTC paid the construction company approximately $2,391,000
and $1,575,000 in 1995 and 1994, respectively.
<PAGE 34>
NOTE 15 QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial data for 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1996 Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total interest income $34,656 $35,040 $35,941 $36,955
Total interest expense 14,592 14,397 14,828 14,782
-------------------------------------------------
Net interest income 20,064 20,643 21,113 22,173
Provision for possible loan losses 983 1,025 850 1,325
Noninterest income 6,132 6,337 6,306 6,145
Noninterest expense 16,092 15,934 16,252 16,279
-------------------------------------------------
Income before income taxes 9,121 10,021 10,317 10,714
Provision for income taxes 3,108 3,324 3,440 3,580
-------------------------------------------------
Net income $ 6,013 $ 6,697 $ 6,877 $ 7,134
==================================================
Earnings per share $ 0.49 $ 0.54 $ 0.55 $ 0.57
Dividends declared per share $ 0.11 $ 0.20 $ 0.20 $ 0.20
1995 Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
------------------------------------------------------
(in thousands, except per share amounts)
Total interest income $29,812 $34,558 $35,164 $35,569
Total interest expense 12,191 14,835 14,806 14,940
-----------------------------------------------------
Net interest income 17,621 19,723 20,358 20,629
Provision for possible loan losses 1,150 800 1,400 1,650
Noninterest income 5,196 5,387 5,795 5,662
Noninterest expense(1) 13,593 15,611 15,051 17,329
----------------------------------------------------
Income before income taxes 8,074 8,699 9,702 7,312
Provision for income taxes 2,732 2,993 3,262 2,669
----------------------------------------------------
Net income $ 5,342 $ 5,706 $ 6,440 $ 4,643
====================================================
Earnings per share $ 0.47 $ 0.47 $ 0.52 $ 0.38
Dividends declared per share $ 0.08 $ 0.10 $ 0.11 $ 0.11
___________________________
(1) Merger expenses of $1,703,000 related to the FBT acquisition were recognized in the
fourth quarter. Also, noninterest expense increased in the fourth quarter due to accruals
for various performance-based incentive plans.
</TABLE>
NOTE 16 FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH AND CASH EQUIVALENTS
The carrying amounts for cash and cash equivalents approximate fair value
because they mature in 90 days or less and do not present unanticipated
valuation risk.
SECURITIES
The fair value of investment securities, other than obligations of states,
political subdivisions, and Federal Home Loan Bank (FHLB) stock, is based on
quoted market prices. The fair value of obligations of states and political
subdivisions is estimated to be equal to amortized cost since most of these
notes mature within six months and there is no active market for these
instruments. The carrying value of FHLB stock represents its redemption value.
LOANS
Fair values are estimated for portfolios of loans with similar financial and
credit characteristics. The loan portfolio was evaluated in the following
segments: commercial, residential real estate, commercial real estate,
construction, home equity, and other consumer loans. Other consumer loans
include installment, credit card, and student loans. Each of these consumer
portfolios also was evaluated separately.
The fair value of performing commercial and real estate loans is estimated by
discounting cash flows through the estimated maturity using discount rates that
reflect the expected maturity and the credit and interest rate risk inherent in
<PAGE 35>
such loans. The fair value of nonperforming commercial and real estate loans is
estimated using historical net charge- off experience applied to the
nonperforming balances. For performing residential mortgage loans, fair value is
estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources. The fair
value of home equity, credit card, leasing, and other consumer loans is
estimated based on secondary market prices for asset-backed securities with
similar characteristics.
PURCHASED MORTGAGE SERVICE RIGHTS & ORIGINATED MORTGAGE SERVICE RIGHTS
The fair value is estimated by discounting the future cash flows through the
estimated maturity of the underlying mortgage loans.
DEPOSITS
The fair value of deposits with no stated maturity, such as noninterest-bearing
demand deposits, savings and N.O.W. accounts, and money market and checking
accounts, is equal to the amount payable on demand,that is, the carrying amount.
The fair value of certificates of deposit and retirement accounts is based on
the discounted value of contractual cash flows. The discount rate used is based
on the estimated rates currently offered for deposits of similar remaining
maturities.
BORROWINGS
The carrying amounts for short-term borrowings approximate fair value because
they mature or are callable in ten days or less and do not present unanticipated
valuation risk. Long-term debt has an estimated fair value equal to its carrying
amount.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of financial standby letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties.
ASSUMPTIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about specific financial instruments. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Banks entire holdings of a particular financial
instrument. Because no active observable market exists for a significant portion
of the Banks financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
The estimated fair values of the Company s financial instruments are as follows:
December 31,
-----------------------------------
1996 1995
------------------------------------
Carrying Amount Fair Value
------------------------------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 230,259 $ 230,259
Securities available for sale 358,536 358,536
Securities held for investment 38,556 38,381
Federal Home Loan Bank Stock 5,591 5,591
Loans, net 1,268,472 1,271,139
Mortgage loans held for sale 9,870 9,870
Mortgage servicing rights 3,025 3,938
Financial liabilities:
Deposits:
Demand 286,932 286,932
Savings 961,902 961,902
Time:
Certificates of deposit $100,000
and over 104,295 104,346
Other time deposits 408,450 409,303
Short-term borrowings 23,992 23,992
Long-term debt 2,540 2,540
Commitments 121 105
December 31,
---------------------------------
1995
---------------------------------
Carrying Amount Fair Value
---------------------------------
(in thousands)
Financial assets:
Cash and cash equivalents $ 197,140 $ 197,140
Securities available for sale 278,322 278,322
Securities held for investment 43,164 42,634
Federal Home Loan Bank Stock 5,591 5,591
Loans, net 1,179,788 1,191,666
Mortgage loans held for sale 14,692 14,692
Mortgage servicing rights 2,126 2,126
Financial liabilities:
Deposits:
Demand 252,421 252,421
Savings 807,132 807,132
Time:
Certificates of deposit $100,000
and over 105,604 105,755
Other time deposits 422,566 423,529
Short-term borrowings 25,025 25,025
Long-term debt 2,484 2,484
Commitments 130 125
<PAGE 36>
NOTE 17 PARENT COMPANY FINANCIAL STATEMENTS
CHITTENDEN CORPORATION (PARENT COMPANY ONLY)
BALANCE SHEETS December 31,
---------------------
1996 1995
---------------------
(in thousands)
Assets Restated
Cash and cash equivalents $ 9,732 $ 6,621
Investment securities 330 247
Investment in bank subsidiaries
at equity in net assets 164,240 146,813
Other assets 376 323
---------------------
Total assets $174,678 $154,004
=====================
Liabilities and stockholders' equity
Liabilities:
Accrued expenses and other
liabilities $ 277 $ 55
---------------------
Total liabilities 277 55
---------------------
Total stockholders' equity 174,401 153,949
---------------------
Total liabilities and
stockholders equity $174,678 $154,004
=====================
STATEMENTS OF INCOME Years Ended December 31,
------------------------------
1996 1995 1994
------------------------------
(in thousands)
Operating income: Restated
Dividends from bank
subsidiaries $10,383 $17,324 $13,573
Dividends from investment
securitie 11 10 19
Interest income 92 135 13
---------------------------------
Total operating income 10,486 17,469 13,605
---------------------------------
Operating expense 929 610 1,268
---------------------------------
Total operating expense 929 610 1,268
---------------------------------
Income before income taxes and
equity in undistributed earnings
of subsidiaries 9,557 16,859 12,337
Income tax benefit 260 143 420
---------------------------------
Income before equity in undistributed
earnings of subsidiaries 9,817 17,002 12,757
Equity in undistributed earnings
of bank subsidiaries 16,904 5,129 5,280
---------------------------------
Net income $26,721 $22,131 $18,037
=================================
STATEMENTS OF CASH FLOWS Years Ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
(in thousands)
Cash flows from operating activities: Restated
Net income $26,721 $22,131 $18,037
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed earnings
of bank subsidiaries (16,904) (5,129) (5,280)
(Increase) decrease in other
assets (136) 404 (252)
Increase (decrease) in accrued
expenses and other liabilities (29) (96) 105
----------------------------------
Net cash provided by
operating activities 9,652 17,310 12,610
----------------------------------
Cash flows from investing activities:
Purchase of The Bank of Western
Massachusetts - (12,177) -
-----------------------------------
Net cash used in investing
activities - (12,177) -
-----------------------------------
Cash flows from financing activities:
Proceeds from issuance of treasury and
common stock 2,206 1,280 320
Dividends on common stock (8,747) (4,803) (3,136)
Repurchase of common stock - - (6,685)
-----------------------------------
Net cash used in financing
activities (6,541) (3,523) (9,501)
-----------------------------------
Net increase in cash and cash
equivalents 3,111 1,610 3,109
Cash and cash equivalents at
beginning of year 6,621 5,011 1,902
----------------------------------
Cash and cash equivalents at
end of year $ 9,732 $ 6,621 $ 5,011
==================================
<PAGE 37>
NOTE 18 REGULATORY MATTERS
The Company and the Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Banks
must meet specific capital guidelines that involve quantitative measures of
their assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Each entity s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Banks to maintain minimum amounts and ratios (set
forth in the tables below) of total and Tier I capital (as defined in the
regulation) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 1996, that
the Company and the Banks meet all capital adequacy requirements to which they
are subject.
As of December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company and the Banks as well-capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately or well-capitalized, the Company and the Banks must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the tables below. There are no conditions or events since that date
that management believes have changed the institutions categories.
The Company's and the Banks actual capital amounts (dollars in thousands) and
ratios are presented in the following tables:
For Capital
Actual Adequacy Purposes
------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $180,962 13.06% $110,822 8.00%
Chittenden Trust Company 126,285 12.51 80,736 8.00
Bank of Western Massachusetts 21,270 11.44 14,878 8.00
Flagship Bank & Trust 23,364 12.21 15,302 8.00
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated 163,513 11.71 55,837 4.00
Chittenden Trust Company 113,577 11.17 40,666 4.00
Bank of Western Massachusetts 18,918 10.05 7,528 4.00
Flagship Bank & Trust 20,961 10.90 7,690 4.00
Tier 1 Capital (to Average
Assets):
Consolidated 163,513 8.58 76,245 4.00
Chittenden Trust Company 113,577 8.42 53,968 4.00
Bank of Western Massachusetts 18,918 7.85 9,642 4.00
Flagship Bank & Trust 20,961 6.85 12,238 4.00
To Be Well
Capitalized Under
Prompt Correction
Action Provisions:
-------------------
Amount Ratio
-------------------
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated N/A N/A
Chittenden Trust Company $100,920 10.00%
Bank of Western Massachusetts 18,598 10.00
Flagship Bank & Trust 19,128 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated N/A N/A
Chittenden Trust Company 60,999 6.00
Bank of Western Massachusetts 11,292 6.00
Flagship Bank & Trust 11,534 6.00
Tier 1 Capital (to Average Assets):
Consolidated N/A N/A
Chittenden Trust Company 67,460 5.00
Bank of Western Massachusetts 12,053 5.00
Flagship Bank & Trust 15,297 5.00
<PAGE 38>
<TABLE>
For Capital
Actual Adequacy Purposes
----------------------------------------
Amount Ratio Amount Ratio
----------------------------------------
<CAPTION>
As of December 31, 1995 (unaudited):
Total Capital (to Risk Weighted Assets):
<S> <C> <C> <C> <C>
Consolidated $157,326 12.53% $100,437 8.00%
Chittenden Trust Company 112,665 12.42 72,559 8.00
Bank of Western Massachusetts 18,512 10.54 14,048 8.00
Flagship Bank & Trust 19,347 11.21 13,810 8.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated 141,453 11.16 50,697 4.00
Chittenden Trust Company 101,215 11.05 36,639 4.00
Bank of Western Massachusetts 16,290 9.16 7,112 4.00
Flagship Bank & Trust 17,149 9.89 6,937 4.00
Tier 1 Capital (to Average Assets):
Consolidated 141,453 8.05 70,280 4.00
Chittenden Trust Company 101,215 8.01 50,572 4.00
Bank of Western Massachusetts 16,290 7.18 9,080 4.00
Flagship Bank & Trust 17,149 6.43 10,675 4.00
To Be Well
Capitalized Under
Prompt Correction
Action Provisions:
--------------------
Amount Ratio
--------------------
As of December 31, 1995 (unaudited):
Total Capital (to Risk Weighted Assets):
Consolidated N/A N/A
Chittenden Trust Company $ 90,698 10.00%
Bank of Western Massachusetts 17,560 10.00
Flagship Bank & Trust 17,263 10.00
Tier 1 Capital (to Risk Weighted Assets):
Consolidated N/A N/A
Chittenden Trust Company 54,958 6.00
Bank of Western Massachusetts 10,667 6.00
Flagship Bank & Trust 10,406 6.00
Tier 1 Capital (to Average Assets):
Consolidated N/A N/A
Chittenden Trust Company 63,215 5.00
Bank of Western Massachusetts 11,350 5.00
Flagship Bank & Trust 13,344 5.00
</TABLE>
NOTE 19 SUBSEQUENT EVENT
On January 16, 1997, the Company s Board of Directors authorized the repurchase
of up to one million shares of the Company s common stock in negotiated
transactions or open market purchases. The authorized repurchases may be made
over a period of up to two years and will be used to fund obligations for
employee and director stock ownership plans.
<PAGE 39>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CHITTENDEN CORPORATION:
We have audited the accompanying consolidated balance sheets of Chittenden
Corporation and its subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders equity and
cash flows for each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Chittenden Corporation and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective January 1, 1996,
the Company changed its method of accounting for originated mortgage servicing
rights.
S/ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 16, 1997
<PAGE 40>
<TABLE>
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY
<CAPTION>
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
(in thousands, except share amounts)
Statements of income:
<S> <C> <C> <C>
Interest income $142,592 $135,103 $101,383
Interest expense 58,599 56,772 36,088
----------------------------------------
Net interest income 83,993 78,331 65,295
Provision for possible loan losses 4,183 5,000 5,500
Net interest income after provision for
possible loan losses 79,810 73,331 59,795
Noninterest income 24,920 22,040 19,352
Noninterest expense 64,557 61,584 51,393
----------------------------------------
Income before provision for income
taxes 40,173 33,787 27,754
Provision for income taxes 13,452 11,656 9,717
-----------------------------------------
Income before cumulative effect of
change in accounting principle 26,721 22,131 18,037
Cumulative effect of change in
accounting principle - - -
------------------------------------------
Net income $ 26,721 $ 22,131 $ 18,037
==========================================
Total assets at year-end $1,988,746 $1,794,704 $1,461,419
Long-term debt at year-end 2,540 2,484 1,528
Balance sheets - average daily balances:
Total assets $1,841,944 $1,687,803 $1,436,462
Loans, net of allowance 1,241,166 1,146,239 960,807
Investment securities and interest-
bearing cash equivalents 451,670 404,380 362,510
Total deposits 1,627,834 1,486,500 1,268,338
Long-term debt 2,514 1,662 1,406
Total stockholders equity 162,823 138,641 115,439
Per common share:
Net income $2.14 $1.83 $1.57
Cash dividends declared 0.71 0.40 0.27
Book value 14.21 12.85 10.43
Weighted average shares outstanding 12,468,200 12,084,731 11,472,933
Selected financial percentages:
Return on average total assets 1.45% 1.31% 1.25%
Return on average stockholders' equity 16.41 15.96 15.62
Interest rate spread 4.23 4.34 4.37
Net yield on earning assets 4.99 5.08 4.95
Net charge-offs as a percent of average
loans 0.31 0.30 0.51
Nonperforming assets ratio1 1.04 1.25 1.08
Allowance for possible loan losses as a
percent of year-end loans 2.17 2.30 2.18
Year-end leverage capital ratio 8.58 8.05 8.10
Risk-based capital ratios:
Tier 1 11.71 11.16 11.40
Total 13.06 12.53 12.76
Average stockholders equity to average
assets 8.84 8.21 8.03
Common stock dividend payout ratio(2) 32.73 21.71 17.38
Years Ended December 31,
----------------------------
1993 1992
----------------------------
(in thousands, except share amounts)
Statements of income:
Interest income $93,889 $101,877
Interest expense 34,395 47,421
----------------------------
Net interest income 59,494 54,456
Provision for possible loan losses 8,135 11,096
Net interest income after provision for
possible loan losses 51,359 43,360
Noninterest income 22,793 19,983
Noninterest expense 54,263 52,059
----------------------------
Income before provision for income 19,889 11,284
taxes
Provision for income taxes 6,387 2,865
----------------------------
Income before cumulative effect of
change in accounting principle 13,502 8,419
Cumulative effect of change in
accounting principle (575) -
----------------------------
Net income $12,927 $ 8,419
============================
Total assets at year-end $1,466,292 $1,397,552
Long-term debt at year-end 4,377 7,384
Balance sheets - average daily balances:
Total assets $1,379,830 $1,361,189
Loans, net of allowance 975,027 976,083
Investment securities and interest-
bearing cash equivalents 291,414 267,698
Total deposits 1,200,778 1,188,535
Long-term debt 1,360 3,336
Total stockholders equity 105,732 95,008
Per common share:
Net income $1.14 $0.74
Cash dividends declared 0.13 0.07
Book value 9.96 8.78
Weighted average shares outstanding 11,314,546 11,328,386
Selected financial percentages:
Return on average total assets 0.94% 0.62%
Return on average stockholders equity 12.23 8.86
Interest rate spread 4.22 3.87
Net yield on earning assets 4.70 4.43
Net charge-offs as a percent of average
loans 0.59 0.92
Nonperforming assets ratio1 1.92 2.98
Allowance for possible loan losses as a
percent of year-end loans 2.22 1.92
Year-end leverage capital ratio 7.94 7.14
Risk-based capital ratios:
Tier 1 10.91 9.55
Total 12.25 10.91
Average stockholders equity to average
assets 7.66 6.98
Common stock dividend payout ratio2 11.70 9.81
__________________________
(1) The sum of nonperforming assets (nonaccrual loans, restructured loans, and other real
estate owned) divided by the sum of total loans and other real estate owned
(2) Common stock cash dividends declared divided by net income
(3) All information for the years 1992-1995 has been restated to include FBT, which was
acquired on February 29, 1996, and accounted for as a pooling of interests.
</TABLE>
<PAGE 41>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995, and 1994
OVERVIEW
The following discussion and analysis of financial condition and results of
operations of Chittenden Corporation ( Chittenden or the Company ) and its
subsidiaries, Chittenden Trust Company (CTC), The Bank of Western Massachusetts
(BWM), Flagship Bank and Trust Company (FBT), (collectively, the Banks ), and
Chittenden Connecticut Corporation should be read in conjunction with the
consolidated financial statements and notes thereto and selected statistical
information appearing in this annual report.
On March 17, 1995, the Company acquired all of the outstanding shares of BWM for
a combination of cash and common stock of the Company. The transaction has been
accounted for as a purchase and, accordingly, the consolidated statements of
income for 1996 and 1995 include BWM s results of operations for the period from
the acquisition date.
On February 29, 1996, the Company acquired all of the outstanding shares of FBT
in exchange for 1.6 million shares of Chittenden stock. The transaction has been
accounted for as a pooling of interests and, accordingly, all historical
financial information has been restated to reflect the acquired bank.
Chittenden reported net income of $26.7 million for 1996, up from $22.1 million
for 1995, and $18.0 million in 1994. Total assets at December 31, 1996 were
$2.0 billion, up from $1.8 billion at year-end 1995. The return on average
assets was 1.45% for 1996, up from 1.31% in 1995 and 1.25% in 1994. The return
on average stockholders' equity was 16.41% for 1996, compared with 15.96% for
1995 and 15.62% for 1994.
The growth in total assets of the Company from year-end 1995 to year-end 1996
was distributed across all three banks and was concentrated in loans as well as
investments. Earnings continued their upward trend in 1996 due to several
factors. Net interest income increased $5.7 million to $84.0 million due to the
higher level of average earning assets, which offset a decrease in the net yield
from 5.08% to 4.99%. The provision for possible loan losses was $4.2 million,
down $817,000 from the 1995 level reflecting continued strength in asset
quality. Revenues from noninterest sources were $24.9 million, up $2.9
million, led by higher gains on sales of mortgage loans and by higher net credit
card processing revenues. The increase in mortgage gains was attributable to the
adoption of SFAS No. 122, effective January 1, 1996, which requires the
capitalization of originated servicing rights related to loans sold on a
servicing retained basis. An additional $1.3 million in gains representing the
value of the mortgage servicing rights were recognized in 1996. Net credit card
revenue increased 16% to $4.2 million as a result of higher processing volumes
in 1996 over 1995 levels. Noninterest expense, at $64.6 million, increased by
$3.0 million. Total noninterest expenses were $1.6 million higher in 1996
than in the previous year due to the completion of the BWM acquisition late in
the first quarter of 1995. Considering the effect of including The Bank of
Western Massachusetts for the full year, noninterest expenses were up 2% for
1996 compared to the previous year.
The $4.1 million increase in net income from 1994 to 1995 resulted from
improvements in several elements of earnings. Net interest income increased
$13.0 million to $78.3 million due to the higher level of average earning assets
contributed by the BWM acquisition, as well as to an increase in the net yield.
The provision for possible loan losses was $5.0 million, down $500,000 from the
1994 level reflecting continued strength in asset quality. Revenues from
noninterest sources were $22.0 million, up $2.7 million, led by higher credit
card processing revenues and higher service charges on deposit accounts.
Noninterest expense, at $61.6 million, increased by $10.2 million, owing
primarily to increased salaries and employee benefits costs of $4.7 million
approximately half of which resulted from the inclusion of the Bank of Western
Massachusetts since its March 17, 1995 acquisition date. Other increases in
noninterest expense included transaction costs related to the acquisition of FBT
totalling $1.8 million in 1995 and increased amortization of intangible assets
relating to the BWM acquisition totalling $1.0 million. Despite a lower
effective tax rate, the 1995 income tax provision of $11.7 million exceeded the
1994 provision by $1.9 million, as the level of taxable income increased.
<PAGE 42>
FINANCIAL CONDITION
LOANS
Chittenden's gross loan portfolio increased by $89.0 million during 1996, to end
the year at $1,296.6 million. In addition, the overall proportions of
commercial-related and consumer types of loans changed from the mix at the end
of 1995. The Company continues to pursue its strategy of gradually shifting the
loan mix through continued focus on commercial and non-real estate consumer
lending simultaneous with secondary market sales of originated fixed-rate
residential mortgage loans. Growth in non-residential consumer loans, including
leases, was $42.9 million or 27% from the previous year, while non-real estate
commercial loan growth was $24.4 million or 10% from year-end 1995. More modest
growth was seen in the real estate portfolio, which increased $16.0 million or
2.2%.
The classification of the Company s loan portfolio is based on underlying
collateral. At December 31, 1996, commercial loans secured by non-real estate
business assets totaled $273.0 million, or 21% of total loans, up from the
$248.6 million, or 21% of total loans, posted at year-end 1995. Commercial real
estate loans, representing slightly less than one quarter of the portfolio,
stood at $304.5 million at year-end 1996, down slightly from $305.9 million at
December 31, 1995. Construction loans amounted to $25.1 million at December 31,
1996, down slightly from $25.8 million the year before.
Residential real estate loans stood at $406.9 million at year-end 1996, up from
$388.7 million at December 31, 1995. Reflecting the shift in the Company s loan
mix noted above, this category represented 31% of the portfolio at year-end
1996, down from 32% at year-end 1995. In total, $264.2 million in mortgages were
originated during 1996, up from $193.0 million during 1995. Secondary market
sales of mortgage loans totaled $201.4 million in 1996, up from $150.8 million
in 1995. The Company underwrites substantially all of its residential mortgages
to secondary market standards. During 1996, the Company continued to follow its
policy of selling substantially all of its fixed-rate residential mortgage
production on a servicing-retained basis.
The portfolio of residential mortgages serviced for investors continued to grow,
totaling $1,006.9 million at December 31, 1996, up from $960.2 million at year-
end 1995. These assets are owned by investors other than Chittenden and there-
fore are not included in the consolidated balance sheets of the Company. Of the
loans serviced, $838.2 million were originated by the Company. During 1995, the
Company acquired substantially all of the servicing portfolio of CUMEX, a
Massachusetts mortgage company. For $1.8 million, the Company purchased rights
to service a portfolio of $130.2 million in residential mortgages in its market
area.
The outstanding balances on home equity lines totaled $84.3 million at December
31, 1996, up from $78.6 million the previous year. The unused portion of these
lines totaled $80.5 million at December 31, 1996, up from $75.2 million at year-
end 1995.
Consumer loans increased significantly again in 1996, ending the year at $202.8
million, compared with $160.0 million at year-end 1995. This increase resulted
from the Company's movement into the indirect auto lending and leasing market,
which reflects the Company's emphasis on responding to the marketplace through
the development of correspondent bank and dealer relationships. Under the
arrangements with smaller correspondent banks, the Company acquires indirect
installment loans which the smaller banks do not have balance sheet capacity to
retain. The Company underwrites all its indirect automotive loans, maintaining
the same credit standards as for car loans originated in its branch offices.
Indirect installment lending through auto dealers was up $15.0 million from
year-end 1995 to $94.7 million at the end of 1996. During 1995, the Company
began offering auto leases through its dealer base. This product is underwritten
and priced similarly to indirect installment auto loans. Lease financing
receivables outstanding at December 31, 1996 were $41.1 million, up from $12.4
million a year earlier. Contrary to these trends, direct installment and credit
card balances at December 31, 1996 stood at $43.0 million and $24.0 million,
respectively, compared with $42.4 million and $25.4 million at the end of 1995.
Unused portions of credit card lines totaled $72.5 million at the end of 1996,
up from $66.4 million one year earlier.
The Company s lending activities are conducted in market areas focused in
Vermont and western and central Massachusetts, with additional activity related
to nearby trading areas in Quebec, New York, New Hampshire, Maine, and
Connecticut. In addition to the portfolio diversification described above, the
loans are widely diversified by borrowers and industry groups.
<PAGE 43>
The following table shows the composition of the loan portfolio for the five
years ended December 31, 1996:
<TABLE>
December 31,
--------------------------------------
1996 1995 1994
--------------------------------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 272,969 $ 248,604 $ 146,982
Real estate:
Residential 406,850 388,705 372,344
Commercial 304,530 305,941 258,023
Construction 25,084 25,796 18,813
Home equity 84,319 78,600 76,457
Consumer 161,699 147,540 143,250
Leases 41,117 12,420
--------------------------------------------
Total gross loans 1,296,568 1,207,606 1,015,779
Allowance for possible loan losses (28,096) (27,818) (22,163)
--------------------------------------------
Net loans $1,268,472 $1,179,788 $ 993,616
============================================
Mortgage loans held for sale $9,870 $14,692 $2,870
December 31,
----------------------
1993 1992
----------------------
(in thousands)
Commercial $ 139,963 $ 156,203
Real estate:
Residential 362,292 382,672
Commercial 252,824 239,607
Construction 20,994 24,483
Home equity 75,759 83,219
Consumer 125,423 124,778
Leases - -
--------------------------
Total gross loans 977,255 1,010,962
Allowance for possible loan losses (21,672) (19,392)
--------------------------
Net loans $ 955,583 $ 991,570
==========================
Mortgage loans held for sale $ 11,646 $7,971
</TABLE>
NONPERFORMING ASSETS
Loans on which the accrual of interest has been discontinued are designated as
nonaccrual loans. Management classifies loans, except consumer and residential
loans, as nonaccrual loans when they become 90 days past due as to principal or
interest, unless they are adequately secured and are in the process of
collection. In addition, loans which have not met this delinquency test may be
placed on nonaccrual at management's discretion. Consumer and residential loans
are included when management considers it to be appropriate. Generally, a loan
remains on nonaccrual status until the factors which indicated doubtful
collectibility no longer exist or the loan is determined to be uncollectible and
is charged off against the allowance for possible loan losses.
A loan is classified as a restructured loan when the interest rate is reduced
and/or other terms are modified because of the inability of the borrower to
service debt at current market rates and terms. Other real estate owned ( OREO )
is real estate that has been formally acquired through foreclosure.
The following table shows the composition of nonperforming assets and loans past
due 90 days or more and still accruing for the five years ended December 31,
1996:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
(in thousands)
<S> <C> <C> <C>
Loans on nonaccrual $10,601 $ 9,939 $ 8,289
Loans not included above which are troubled debt
restructurings 638 2,502 515
Other real estate owned 2,251 2,652 2,141
-----------------------------------
Total nonperforming assets $13,490 $15,093 $10,945
===================================
Loans past due 90 days or more and still accruing $ 966 $ 1,054 $ 1,134
Percentage of nonperforming assets to total loans
and other real estate owned 1.04% 1.25% 1.08%
Nonperforming assets to total assets 0.68 0.84 0.75
Allowance for possible loan losses to
nonperforming loans 249.99 223.59 251.74
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------
1993 1992
--------------------
(in thousands)
<S> <C> <C>
Loans on nonaccrual $13,992 $20,953
Loans not included above which are troubled debt
restructurings 1,030 218
Other real estate owned 3,816 9,222
---------------------
Total nonperforming assets $18,838 $30,393
=====================
Loans past due 90 days or more and still accruing $1,576 $2,340
Percentage of nonperforming assets to total loans
and other real estate owned 1.92% 2.98%
Nonperforming assets to total assets 1.28 2.17
Allowance for possible loan losses to
nonperforming loans 144.27 91.60
</TABLE>
Total nonperforming assets stood at $13.5 million, or 0.68% of total assets, at
year-end 1996, down from $15.1 million, or 0.84% of total assets at the previous
year-end. Nonaccrual loans stood at $10.6 million at December 31, 1996, up from
$9.9 million the year before. The nonaccrual loans consist of more than 214
loans, the largest of which amounted to $1.8 million at year-end 1996. Troubled
debt restructurings stood at $638,000 on December 31, 1996, down from $2.5
million the year before. The nonaccrual loans and restructured debt were
diversified across a range of industries, sectors, and geography. OREO totaled
$2.3 million at year-end 1996, compared with $2.7 million at the end of 1995.
<PAGE 44>
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 114, as amended, Accounting by Creditors for
Impairment of a Loan (SFAS 114). The Company adopted the new standard January 1,
1995. In addition to the credit evaluation of the loan portfolios described
above, and the evaluation of the allowance for possible loan losses discussed
later in this report, the Company also undertakes an analysis of the portfolios
and allowance using the impairment approach prescribed in SFAS 114. In this
analysis, the Company considers all consumer and residential real estate
loans to be smaller balance, homogeneous loans. This evaluation category also
includes commercial and commercial real estate loans with balances under
$100,000. All other loans are evaluated for impairment according to the
Company's normal loan review process, including overall credit evaluation and
rating, nonaccrual status, and payment experience. Loans identified as impaired
are further evaluated to determine the estimated extent of impairment. For
collateral-based loans, the extent of impairment is the shortfall, if any,
between the collateral value less costs to dispose of such collateral and the
carrying value of the loan. For other loans, the impairment is the shortfall,
if any, between the discounted cash flow and the carrying value of the loan. The
results of this SFAS 114 analysis are disclosed in the accompanying notes to the
consolidated financial statements. Adopting SFAS 114 had no material effect on
the Company's financial condition or results of operations.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The following table summarizes the activity in the Company s allowance for
possible loan losses for the five years ended December 31, 1996:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
(in thousands)
Balance of allowance for possible loan
<S> <C> <C> <C>
losses at beginning of year $27,818 $22,163 $21,672
BWM allowance acquired 4,135
Provision charged to expense 4,183 5,000 5,500
-----------------------------------------
Balance of allowance for possible loan
losses after provision 32,001 31,298 27,172
-----------------------------------------
Loans charged off:
Commercial 1,770 1,353 1,085
Real estate:
Residential 966 1,525 878
Commercial 791 1,596 3,160
Construction 185 4
Home equity 167 108 51
Consumer 2,230 1,900 1,061
----------------------------------------
Total loans charged off 6,109 6,482 6,239
----------------------------------------
Recoveries of loans previously charged
off:
Commercial 822 1,161 555
Real estate:
Residential 188 57 99
Commercial 546 1,130 158
Construction 91
Home Equity 8 29
Consumer 549 654 389
---------------------------------------
Total recoveries 2,204 3,002 1,230
---------------------------------------
Net loans charged off 3,905 3,480 5,009
---------------------------------------
Balance of allowance for possible loan
losses at end of year $28,096 $27,818 $22,163
=======================================
Amount of loans outstanding at end
of year $1,296,568 $1,207,606 $1,015,779
Average amount of loans outstanding 1,269,626 1,172,596 982,961
Ratio of net charge-offs during year to 0.31% 0.30% 0.51%
average loans outstanding
Allowance as a percent of loans 2.17 2.30 2.18
outstanding at end of year
December 31,
---------------------------
1993 1992
---------------------------
(in thousands)
Balance of allowance for possible loan
losses at beginning of year $19,392 $17,415
BWM allowance acquired
Provision charged to expense 8,135 11,096
---------------------------
Balance of allowance for possible loan
losses after provision 27,527 28,511
---------------------------
Loans charged off:
Commercial 2,606 3,173
Real estate:
Residential 1,220 1,121
Commercial 1,639 3,681
Construction 63 87
Home equity 227 338
Consumer 1,292 1,521
----------------------------
Total loans charged off 7,047 9,921
----------------------------
Recoveries of loans previously charged
off:
Commercial 241 332
Real estate:
Residential 201 74
Commercial 227 11
Construction
Home Equity 51 53
Consumer 472 332
----------------------------
Total recoveries 1,192 802
----------------------------
Net loans charged off 5,855 9,119
----------------------------
Balance of allowance for possible loan
losses at end of year $21,672 $19,392
============================
Amount of loans outstanding at end
of year $977,255 $1,010,962
Average amount of loans outstanding 995,743 995,156
Ratio of net charge-offs during year to
average loans outstanding 0.59% 0.92%
Allowance as a percent of loans
outstanding at end of year 2.22 1.92
</TABLE>
<PAGE 45>
The provision for possible loan losses totaled $4.2 million in 1996, down from
$5.0 million in 1995 and $5.5 million in 1994. The provision was reduced due to,
among other things, the reduction in the level of net losses experienced in the
loan portfolio and the strength of the ratios in connection with the allowance
for possible loan losses, as well as an improving economy.
The allowance for possible loan losses is based on management s estimate of the
amount required to reflect the risks in the loan portfolio, based on circum-
stances and conditions known or anticipated at each reporting date. In addition
to evaluating the collectibility of specific loans when determining the adequacy
of the allowance for possible loan losses, management also takes into considera-
tion other factors such as changes in the mix and volume of the loan portfolio,
historic loss experience, the amount of delinquencies and loans adversely
classified, and economic trends. The adequacy of the allowance for possible loan
losses is assessed by an allocation process whereby specific loss allocations
are made against adversely classified loans, and general loss allocations are
made against segments of the loan portfolio which have similar attributes. As
previously mentioned, the mix of the Company s loan portfolio changed during
1995, and this trend continued in 1996. This, and uncertainties concerning how
changing interest rates and unclear, or contradictory economic indicators will
affect the local and regional economy also were considered by management in
determining the adequacy of the allowance for possible loan losses.
The following table summarizes the allocation of the allowance for possible loan
losses for the five years ended December 31, 1996:
<TABLE>
December 31,
--------------------------------------------------------------
1996 1995
--------------------------------------------------------------
Amount Loan Amount Loan
Allocated Distribution Allocated Distribution
--------------------------------------------------------------
(in thousands)
<CAPTION>
<S> <C> <C> <C> <C>
Commercial $ 4,494 21% $ 3,901 19%
Real estate:
Residential 1,395 31 1,452 33
Commercial 5,960 23 6,024 25
Construction 500 2 439 1
Home equity 317 7 291 7
Consumer
and leasing 3,149 16 1,754 15
Other 12,281 - 13,957 -
-----------------------------------------------------------
$28,096 100% $27,818 100%
===========================================================
December 31,
-------------------------------------------------------------
1994 1993
-------------------------------------------------------------
Amount Loan Amount Loan
Allocated Distribution Allocated Distribution
--------------------------------------------------------------
(in thousands)
Commercial $ 2,417 14% $ 2,468 14%
Real estate:
Residential 764 37 819 37
Commercial 5,692 25 6,259 26
Construction 770 2 510 2
Home equity 268 8 370 8
Consumer
and leasing 1,916 14 2,146 13
Other 10,336 - 9,100 -
--------------------------------------------------------------
$22,163 100% $21,672 100%
==============================================================
December 31,
--------------------------
1992
--------------------------
Amount Loan
Allocated Distribution
---------------------------
(in thousands)
Commercial $ 2,965 16%
Real estate:
Residential 1,034 38
Commercial 5,662 24
Construction 701 2
Home equity 399 8
Consumer
and leasing 1,912 12
Other 6,719 -
----------------------------
$ 19,392 100%
=============================
</TABLE>
Notwithstanding the foregoing analytical allocations, the entire allowance for
possible loan losses is available to absorb charge-offs in any category of
loans. (See "Provision for Possible Loan Losses.")
INVESTMENT SECURITIES
The investment portfolio is used to meet liquidity demands, mitigate interest
rate sensitivity, and generate interest income. At December 31, 1996, the
Company held investments totaling $358.5 million in the available for sale
category and $38.6 million in the held for investment category. This compares
with $278.3 million available for sale and $43.2 million held for investment at
December 31, 1995. At December 31, 1996, net unrealized losses (net of taxes)
of $208,000 resulted from marking to market value the available for sale port-
folio. This compares with net unrealized gains (net of taxes) of $768,000 at
December 31, 1995. These amounts are reflected in stockholders' equity.
The mix of securities held changed little during 1996, with continued emphasis
on U.S. Treasury securities. Obligations of U. S. government agencies,
municipalities, and corporations continued to represent significant, balanced
portions of the portfolio.
<PAGE 46>
<TABLE>
The following tables show the composition of the Company s investment portfolio,
at amortized cost, at December 31, 1996 and 1995:
<CAPTION>
December 31,
---------------------------
1996 1995
---------------------------
Securities available for sale (in thousands)
<S><C> <S> <C> <C>
U.S. Treasury securities $109,606 $ 81,625
U.S. government agency obligations 76,179 60,448
Obligations of states and political subdivisions 45,123 44,853
Mortgage-backed securities 51,850 49,187
Corporate bonds and notes 65,248 30,072
Government bond mutual funds 10,605 10,605
Marketable equity securities 235 231
---------------------------
$358,846 $277,021
===========================
Securities held for investment
U.S. government agency obligation $ 198 $ 298
Obligations of states and political subdivisions 3,466 5,119
Mortgage-backed securities 34,761 37,747
Corporate bonds and notes 25 -
Other debt securities 106 -
--------------------------
$38,556 $ 43,164
==========================
The following table shows the maturity distribution of the amortized cost of the Company's
investment securities and weighted average yields of such securities on a fully taxable
equivalent basis, at December 31, 1996, with comparative totals for 1995:
After One
Within But Within
One Year Five Years
---------------------------------------------------
Amount Yield Amount Yield
---------------------------------------------------
Securities available for sale (in thousands)
US Treasury securities $ 24,265 6.11% $ 80,297 5.85%
US government agency
obligations 7,439 7.10 63,940 6.33
Obligations of states and
political subdivisions 42,587 6.18 2,130 8.34
Mortgage-backed securities (1) 8,663 6.85 29,129 6.80
Corporate bonds and notes 17,297 5.67 47,951 6.33
Government bond mutual funds - - - -
Marketable equity securities - - - -
--------- ----- -------- ------
Total available for sale 100,251 6.20 223,447 6.24
--------- --------
Securities held for investment
U.S. Government agency obligations 198 4.99
Obligations of states and
political subdivisions 2,549 5.92 605 7.54
Mortgage-backed securities (1) 11,944 5.88 17,868 6.90
Corporate bonds & notes - - - -
Other debt securities - - 20 5.00
-------- ---------
Total held for investment 14,691 5.87 18,493 6.92
-------- ---------
Total securities $114,942 6.16% $241,940 6.29%
======== =========
Comparative amounts at
December 31, 1995 $116,649 6.24% $155,707 6.26%
After Five
But Within After
Ten Years Ten Years
-------------------------------------------------
Amount Yield Amount Yield
-------------------------------------------------
Securities available for sale (in thousands)
US Treasury securities $ 5,044 5.58% $ - -%
US government agency
obligations 3,000 7.82 1,800 7.25
Obligations of states and
political subdivisions 406 13.25 - -
Mortgage-backed securities (1) 11,529 7.23 2,529 6.78
Corporate bonds and notes - - - -
Government bond mutual funds - - - -
Marketable equity securities - - - -
-------- --------
Total available for sale 19,979 7.02 4,329 6.98
-------- --------
Securities held for investment
U.S. Government agency obligations - - - -
Obligations of states and
political subdivisions 312 9.55 - -
Mortgage-backed securities (1) 2,389 7.39 2,560 7.75
Corporate bonds & notes 25 7.00 - -
Other debt securities 51 5.78 35 7.50
------- ---------
Total held for investment 2,777 7.60 2,595 7.74
------- ---------
Total securities $22,756 7.09% $6,924 7.26%
======= =========
Comparative amounts at
December 31, 1995 $29,222 6.63% $7,771 6.77%
No Fixed
Maturity Total
------------------------------------------------
Amount Yield Amount Yield
------------------------------------------------
Securities available for sale (in thousands)
US Treasury securities $- -% $109,606 5.90%
US government agency
obligations - - 76,179 6.47
Obligations of states and
political subdivisions - - 45,123 6.35
Mortgage-backed securities (1) - - 51,850 6.92
Corporate bonds and notes - - 65,248 6.15
Government bond mutual funds 10,609 5.45 10,609 5.45
Marketable equity securities 231 4.90 231 4.90
------ ------
Total available for sale 10,840 5.44 358,846 6.25
====== =======
Securities held for investment
U.S. Government agency obligations - - 198 4.99
Obligations of states and
political subdivisions - - 3,466 6.53
Mortgage-backed securities (1) - - 34,761 6.95
Corporate bonds & notes - - 25 7.00
Other debt securities - - 106 6.20
------ --------
Total held for investment - - 38,556 6.62
------ --------
Total securities $10,840 5.44% $397,402 6.29%
====== =========
Comparative amounts at
December 31, 1995 $10,836 5.28% $320,185 6.27%
__________________________
(1) Maturities of mortgage-backed securities are based on forecasted mortgage loan
prepayments.
</TABLE>
<PAGE 47>
DEPOSITS
During 1996, total deposits averaged $1,627.8 million, up from $1,486.5 million
in 1995. Noninterest-bearing demand deposits averaged $251.3 million, up from
$223.8 million in 1995. Savings and time deposits under $100,000 increased
$114.9 million, to $1,263.2 million for 1996. Within this category,
noncontractual interest bearing deposit products, such as savings, money market,
and N.O.W. accounts had the most growth, increasing 11% over 1995. During 1996,
time accounts (retirement and certificates of deposit) totaling $543.9 million
increased 7% compared to $508.7 million in 1995. The Company has a number of
institutional customers whose investment needs frequently are met by purchasing
certificates of deposit over $100,000. During 1996, the average balance in this
category decreased to $113.4 million, from $114.4 million for 1995. Depositors
in this category tend to seek bids regularly, and the Company raises or lowers
the interest rates it offers depending on its liquidity needs and on its
investment opportunities.
The following table shows average daily balances of the Company s deposits for
the periods indicated:
<TABLE>
Years Ended in December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
(in thousands)
<CAPTION>
<S> <C> <C> <C>
Demand deposits $ 251,276 $ 223,800 $ 200,352
Savings and time deposits under $100,000 1,263,178 1,148,305 1,000,276
Certificates of deposit $100,000 and over 113,380 114,395 67,710
-----------------------------------------
$1,627,834 $1,486,500 $1,268,338
=========================================
The Company's outstanding certificates of deposit and other time deposits in denominations
of $100,000 and over had maturities as follows:
December 31,
---------------
1996
---------------
(in thousands)
Three months or less $ 73,043
Over three months to six months 15,421
Over six months to twelve months 15,831
Over twelve months 8,303
--------------
$112,598
==============
</TABLE>
BORROWINGS
During 1996, short-term borrowings averaged $28.2 million, down from the $42.6
million posted in 1995. This funding consists of borrowings from the U.S.
Treasury, securities sold under agreements to repurchase, and Federal funds
purchased. Treasury borrowings averaged $15.3 million for 1996 compared with
$19.6 million during 1995. Treasury funding is attractive to the Company because
the rate of interest paid on borrowings floats at 25 basis points below the
Federal funds rate, there are no reserve requirements, and there are no FDIC
insurance costs. Repurchase agreements averaged $10.1 million for 1996, down
from the $11.3 million posted during 1995. These borrowings have neither reserve
requirements nor FDIC insurance costs. FHLB borrowings averaged $2.3 million for
1996 compared with $7.2 million for 1995. U.S. Treasury and agency securities,
mortgage-backed securities, corporate notes and residential mortgage loans are
pledged as collateral for the Treasury borrowings and repurchase agreements.
Federal funds purchased averaged $382,000 for 1996 compared with $4.5 million
for 1995.
Long-term borrowings averaged $2.5 million in 1996 compared with $1.7 million in
1995.
CAPITAL RESOURCES
The Company s capital forms the foundation for maintaining investor confidence
as well as for developing programs for growth and new activities. The Company
continued to maintain and build on its capital position during 1996. At
December 31, 1996, capital stood at $174.4 million, up $20.5 million from $153.9
million at December 31, 1995. Earnings of $26.7 million and $3.5 million of
common stock issued in connection with benefit plans added to capital during the
year. Dividend payments totaling $8.7 million reduced the capital position, as
did a change in the net unrealized gain on securities available for sale of
$976,000.
The capital position increased during 1995 by $40.6 million. Earnings of $22.1
million, $14.3 million of stock issued in connection with the acquisition of
BWM, $1.3 million of stock issued in connection with benefit plans, and a $7.7
million improvement in the valuation allowance for unrealized losses on
available for sale securities, were reduced by dividend payments of $4.8
million.
<PAGE 48>
Both the Board of Governors of the Federal Reserve System (the FRB ) and the
Federal Deposit Insurance Corporation (the FDIC ) have defined leverage capital
requirements. At December 31, 1996, the Company s leverage capital ratio (which
is calculated pursuant to the FRB s regulations) was 8.58%, CTC's, BWM's, and
FBT's leverage capital ratios (which are calculated pursuant to the FDIC s
regulations) were 8.42%, 7.85% and 6.85%, respectively. The ratios in 1995 were
8.05% for the Company, 8.01% for CTC, 7.18% for BWM, and 6.43% for FBT.
Additionally, the FRB and the FDIC have a risk-based capital standard. Under
this measure of capital, banks are required to hold more capital against certain
assets perceived as more-risky, such as commercial loans, than against other
assets perceived as less-risky, such as residential mortgage loans and U.S.
Treasury securities. Further, off-balance sheet items such as unfunded loan
commitments and standby letters of credit, are included for the purposes of
determining risk-weighted assets. Commercial banking organizations are
required to have total capital equal to 8% of risk-weighted assets, and Tier 1
capital consisting of common stock and certain types of preferred stock equal to
at least 4% of risk-weighted assets. Tier 2 capital, included in total capital,
includes the allowance for possible loan losses up to a maximum of 1.25% of
risk-weighted assets. At December 31, 1996, the Company s risk-based capital
ratio was 13.06% and its Tier 1 capital, consisting entirely of common stock,
was 11.71% of risk-weighted assets. This compares with year-end 1995 ratios of
12.53% and 11.16%, respectively.
FDIC regulations pertaining to capital adequacy, which apply to the Banks,
require a minimum 3% leverage capital ratio for those institutions with the most
favorable composite regulatory examination rating. In addition, a 4% Tier 1
risk-based capital ratio, and an 8% total risk-based capital ratio are required
for a bank to be considered adequately capitalized. Leverage, Tier 1 risk-based
and total risk-based capital ratios exceeding 5%, 6%, and 10%, respectively,
qualify a bank for the well-capitalized designation. At December 31, 1996,
CTC's leverage capital ratio was 8.42%, its Tier 1 risk-based capital ratio was
11.17%, and its total risk-based capital ratio was 12.51%; BWM s ratios were
7.85%, 10.05%, and 11.44%, respectively, while FBT s ratios were 6.85%, 10.90%,
and 12.21%, respectively. These ratios placed the Banks in the FDIC s highest
capital category. Capital ratios in excess of minimum requirements indicate
capacity to take advantage of profitable and credit-worthy opportunities as they
occur in the future.
The following table presents capital components and ratios of the Company at
December 31, 1996, 1995, and 1994:
<TABLE>
December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
<CAPTION>
(in thousands)
Leverage
<S> <C> <C> <C>
Stockholders equity $ 163,513 $ 141,453 $ 119,568
Total average assets (1) 1,906,114 1,757,002 1,475,612
Leverage capital ratio 8.58% 8.05% 8.10%
Risk-based
Capital components:
Tier 1 $ 163,513 $ 141,453 $ 119,568
Tier 2 17,449 15,873 13,133
--------------------------------------------
Total $ 180,962 $ 157,326 $ 132,701
============================================
Risk-weighted assets:
On-balance sheet $1,331,203 $1,216,807 $983,346
Off-balance sheet 75,308 62,347 65,764
--------------------------------------------
$1,406,511 $1,279,154 $1,049,110
============================================
Ratios:
Tier 1 11.71% 11.16% 11.40%
Total (including Tier 2) 13.06 12.53 12.76
__________________________
(1) Total average assets are for the most recent quarter.
</TABLE>
LIQUIDITY AND RATE SENSITIVITY
The Company s liquidity and rate sensitivity are monitored by the asset and
liability committee. Strategies are imple-mented by the Banks asset and
liability committees. These committees meet on a regular basis to review and
direct the Banks' lending and deposit-gathering functions. Investment and
borrowing activities are managed by the Company's Treasury function.
The measure of an institution s liquidity is its ability to meet its cash
commitments at all times with available cash or by conversion of other assets to
cash at a reasonable price. At December 31, 1996, the Company maintained cash
and cash equivalents of $230.3 million, compared with $197.1 million at the end
of 1995. During 1996, the Company continued to be an average daily net seller of
Federal funds.
<PAGE 49>
Interest rate sensitivity is managed by the asset and liability committee whose
goals include achieving adequate and stable interest income. One of the tools
used to measure rate sensitivity is the funds gap. The funds gap is defined as
the amount by which a bank's rate sensitive assets exceed its rate sensitive
liabilities. A positive gap exists when rate sensitive assets exceed rate
sensitive liabilities. This indicates that a greater volume of assets than
liabilities will reprice during a given period. This mismatch will improve
earnings in a rising rate environment and inhibit earnings when rates decline.
Conversely, when rate sensitive liabilities exceed rate sensitive assets,
the gap is referred to as negative and indicates that a greater volume of
liabilities than assets will reprice during the period. In this case, a rising
rate environment will inhibit earnings and declining rates will improve
earnings. Notwithstanding this general description of the effect on income of
the gap position, it may not be an accurate predictor of changes in net income.
The following table shows the amounts of interest-earning assets and interest-
bearing liabilities at December 31, 1996 which reprice during the periods
indicated:
<TABLE>
<CAPTION>
Repricing Date
-------------------------------------------------------------
Over
One Day Over Six One Year Over
To Six Months To To Five Five
Months One Year Years Years Total
-------------------------------------------------------------
Interest-earning assets: (in thousands)
Loans:
<S> <C> <C> <C> <C> <C>
Commercial $218,826 $5,787 $32,288 $16,068 $272,969
Real estate:
Commercial and
construction 237,814 7,612 51,457 32,731 329,614
Residential 124,629 91,510 91,282 99,429 406,850
Home equity 71,519 924 11,876 - 84,319
Consumer 74,432 25,904 95,484 6,996 202,816
--------------------------------------------------------------
Total loans 727,220 131,737 282,387 155,224 1,296,568
Investment securities (1) 68,691 51,584 252,495 24,322 397,092
Interest-bearing cash
equivalents 128,722 - - - 128,722
---------------------------------------------------------------
Total interest-earning
assets 924,633 183,321 534,882 179,546 1,822,382
---------------------------------------------------------------
Interest-bearing
liabilities:
Certificates of deposit
$100,000 and over 85,297 12,909 6,089 104,295
Other time deposits (2) 765,855 116,462 90,659 278 973,254
Short-term borrowings 23,894 - 98 - 23,992
Long-term borrowings - - 1,000 1,540 2,540
----------------------------------------------------------------
Total interest-bearing
liabilities 875,046 129,371 97,846 1,818 1,104,081
----------------------------------------------------------------
Net interest rate
sensitivity gap $49,587 $53,950 $437,036 $177,728 $718,301
================================================================
Cumulative gap at
December 31, 1996 $49,587 $103,537 $540,573 $718,301
Cumulative gap at
December 31, 1995 $184,883 $227,557 $486,128 $642,113
___________________________
(1) Amounts are based on amortized cost balances.
(2) Regular savings deposits and N.O.W. accounts of $397.1 million at December 31, 1996,
and $394.9 million at December 31, 1995, are not included because repricing of these
liabilities is neither required nor defined.
The following table shows scheduled maturities of selected loans at December 31, 1996:
Less One Year Over
Than One To Five Five
Year Years Years Total
-----------------------------------------------------
(in thousands)
Predetermined rates:
Commercial $13,577 $31,752 $16,019 $61,348
Commercial real estate and
construction 15,547 43,460 35,319 94,326
------------------------------------------------------
$29,124 $75,212 $51,338 $155,674
======================================================
Floating or adjustable rates:
Commercial $ 92,409 $ 92,374 $26,838 $211,621
Commercial real estate and
construction 62,911 101,262 71,115 235,288
------------------------------------------------------
$155,320 $193,636 $97,953 $446,909
=======================================================
</TABLE>
<PAGE 50>
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1996 and 1995
NET INTEREST INCOME
For 1996, net interest income was $84.0 million, up $5.7 million from the 1995
level. On a fully taxable equivalent basis, net interest income increased $5.8
million from 1995, to $85.9 million in 1996. These improvements resulted from
higher levels of interest-earning assets which outpaced a decrease in the net
yield on earning assets. Average interest-earning assets totaled $1,721.3
million for 1996, up $144.3 million from the 1995 level. The taxable equivalent
net yield on earning assets was 4.99% in 1996, down nine basis points from 5.08%
in 1995. Because the reduction in the average yield on earning assets was
greater than the reduction in the cost of interest-bearing liabilities, the net
yield on earning assets declined from the year before, although growth in net
earning assets produced a higher net interest income on a tax equivalent basis
than a year ago.
The following table presents an analysis of average rates and yields on a fully
taxable equivalent basis for the years indicated:
<TABLE>
<CAPTION>
1996
--------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense(1) Rate(1)
---------------------------------------
Assets (in thousands)
Interest-earning assets:
<S> <C> <C> <C>
Loans $1,264,640 $116,168 9.19%
Industrial revenue bonds2 4,986 571 11.45
Investments:
Taxable 332,690 20,589 6.19
Tax-favored debt securities 67,671 4,307 6.36
Tax-favored equity securities 22,897 1,325 5.79
Interest-bearing deposits in banks 100 3 3.00
Federal funds sold 28,312 1,524 5.38
------------------------
Total interest-earning assets 1,721,296 144,487 8.39
---------
Noninterest-earning assets 149,108
Allowance for possible loan losses (28,460)
-----------
Total assets $1,841,944
===========
Liabilities and stockholders equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $832,677 27,268 3.27
Certificates of deposit
$100,000 and over 113,380 6,259 5.52
Other time deposits 430,501 22,988 5.34
------------------------
Total interest-bearing deposits 1,376,558 56,515 4.11
Short-term borrowings 28,165 1,887 6.70
Long-term debt 2,514 197 7.84
------------------------
Total interest-bearing liabilities 1,407,237 58,599 4.16
-------
Noninterest-bearing liabilities:
Demand deposits 251,276
Other liabilities 20,608
----------
Total liabilities 1,679,121
Stockholders' equity 162,823
----------
Total liabilities and
stockholders' equity $1,841,944
==========
Net interest income $85,888
========
Interest rate spread(3) 4.23%
Net yield on earning assets(4) 4.99
1995
---------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense(1) Rate(1)
----------------------------------------
Assets (in thousands)
Interest-earning assets:
Loans $1,166,438 $110,591 9.48%
Industrial revenue bonds2 6,158 718 11.66
Investments:
Taxable 297,189 18,638 6.27
Tax-favored debt securities 57,948 3,924 6.77
Tax-favored equity securities 15,233 964 6.33
Interest-bearing deposits in banks 100 3 3.00
Federal funds sold 33,910 1,988 5.86
-------------------------
Total interest-earning assets 1,576,976 136,826 8.68
---------
Noninterest-earning assets 137,184
Allowance for possible loan losses (26,357)
-----------
Total assets $1,687,803
===========
Liabilities and stockholders' equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $760,029 26,211 3.45
Certificates of deposit
$100,000 and over 114,395 7,144 6.25
Other time deposits 388,276 20,416 5.26
-------------------------
Total interest-bearing deposits 1,262,700 53,771 4.26
Short-term borrowings 42,628 2,858 6.70
Long-term debt 1,662 143 8.60
-------------------------
Total interest-bearing liabilities 1,306,990 56,772 4.34
--------
Noninterest-bearing liabilities:
Demand deposits 223,800
Other liabilities 18,372
-----------
Total liabilities 1,549,162
Stockholders' equity 138,641
-----------
Total liabilities and
stockholders' equity $1,687,803
===========
Net interest income $80,054
=========
Interest rate spread(3) 4.34%
Net yield on earning assets(4) 5.08
1994
----------------------------------
Interest Average
Average Income/ Yield/
Balance Expense(1) Rate(1)
----------------------------------
Assets (in thousands)
Interest-earning assets:
Loans $973,240 $81,757 8.40%
Industrial revenue bonds2 9,721 939 9.66
Investments:
Taxable 278,579 15,786 5.67
Tax-favored debt securities 44,756 2,460 5.50
Tax-favored equity securities 16,609 728 4.38
Interest-bearing deposits in banks 1,045 35 3.35
Federal funds sold 21,521 959 4.46
-------------------------
Total interest-earning assets 1,345,471 102,664 7.63
---------
Noninterest-earning assets 113,145
Allowance for possible loan losses (22,154)
-----------
Total assets $1,436,462
===========
Liabilities and stockholders equity
Interest-bearing liabilities:
Savings and interest-bearing
transactional accounts $675,352 18,351 2.72
Certificates of deposit
$100,000 and over 67,710 2,724 4.02
Other time deposits 324,924 12,768 3.93
-------------------------
Total interest-bearing deposits 1,067,986 33,843 3.17
Short-term borrowings 38,682 2,118 5.48
Long-term debt 1,406 127 9.03
-------------------------
Total interest-bearing liabilities 1,108,074 36,088 3.26
--------
Noninterest-bearing liabilities:
Demand deposits 200,352
Other liabilities 12,597
----------
Total liabilities 1,321,023
Stockholders' equity 115,439
----------
Total liabilities and
stockholders' equity $1,436,462
==========
Net interest income $66,576
=========
Interest rate spread(3) 4.37%
Net yield on earning assets(4) 4.95
___________________________
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of
35%. Loan income includes fees.
(2) Industrial revenue bonds are included in loans in the financial statements.
(3) Interest rate spread is the average rate earned on total interest-earning assets less
the average rate paid on interest-bearing liabilities.
(4) Net yield on earning assets is net interest income divided by total interest-earning
assets.
</TABLE>
<PAGE 51>
The following table attributes changes in the Company s net interest income (on
a fully taxable equivalent basis) to changes in either average daily balances or
average rates. Changes due to both interest rate and volume have been allocated
to change due to balance and change due to rate in proportion to the relation-
ship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1996 Compared with 1995
------------------------------------
Increase (Decrease)
Due to Change in: Total
--------------------
Average Average Increase
Rate Balance (Decrease)
----------------------------------------
(in thousands)
Interest income:
<S> <C> <S> <C> <C> <C>
Loans, including fees $(3,522) $9,099 $5,577
Industrial revenue bonds (13) (134) (147)
Investments:
Taxable (249) 2,200 1,951
Tax-favored debt securities (246) 629 383
Tax-favored equity securities (89) 450 361
Interest-bearing deposits in banks
Federal funds sold (154) (310) (464)
---------------------------------------
Total interest income (4,273) 11,934 7,661
---------------------------------------
Interest expense:
Savings and interest-bearing
transactional accounts (1,366) 2,423 1,057
Certificates of deposit $100,000 and over (822) (63) (885)
Other time deposits 322 2,250 2,572
--------------------------------------
Total deposits (1,866) 4,610 2,744
Short-term borrowings (2) (969) (971)
Long-term debt (14) 68 54
--------------------------------------
Total interest expense (1,882) 3,709 1,827
--------------------------------------
Change in net interest income $(2,391) $8,225 $5,834
======================================
1995 Compared with 1994
--------------------------------------
Increase (Decrease)
Due to Change in:
------------------- Total
Average Average Increase
Rate Balance (Decrease)
---------------------------------------
(in thousands)
Interest income:
Loans, including fees $11,339 $17,496 $28,835
Industrial revenue bonds 169 (389) (221)
Investments:
Taxable 1,754 1,097 2,852
Tax-favored debt securities 645 819 1,464
Tax-favored equity securities 301 (65) 236
Interest-bearing deposits in banks (3) (29) (32)
Federal funds sold 364 665 1,029
-------------------------------------
Total interest income 14,569 19,594 34,163
-------------------------------------
Interest expense:
Savings and interest-bearing
transactional accounts 5,362 2,498 7,860
Certificates of deposit $100,000 and over 1,966 2,454 4,420
Other time deposits 4,851 2,797 7,648
--------------------------------------
Total deposits 12,179 7,749 19,928
Short-term borrowings 509 231 740
Long-term debt (6) 22 16
-------------------------------------
Total interest expense 12,682 8,002 20,684
-------------------------------------
Change in net interest income $(1,887) $11,592 $13,479
=====================================
</TABLE>
PROVISION FOR POSSIBLE LOAN LOSSES
The Company provides for possible loan losses using the allowance method. The
allowance for possible loan losses is increased by provisions charged against
current earnings. Loan losses are charged against the allowance when management
believes that the collectibility of the loan principal is unlikely. Recoveries
on loans previously charged off are credited to the allowance.
The allowance is the amount management believes is necessary to absorb possible
loan losses based on evaluations of collectibility and prior loan loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, specific problem loans, and current and anticipated economic
conditions that may affect the borrowers ability to pay.
Management believes that the allowance for possible loan losses is adequate.
While management uses available information to assess possible losses on loans,
future additions to the allowance may be necessary. In addition, various
regulatory agencies periodically review the Company s allowance for possible
loan losses as an integral part of their examination process. Such agencies may
require the Company to recognize additions to the allowance based on judgements
different from those of management.
The provision for possible loan losses totaled $4.2 million in 1996 and $5.0
million in 1995. (See Allowance for Possible Loan Losses. )
NONINTEREST INCOME AND NONINTEREST EXPENSE
Noninterest income was $24.9 million in 1996, up $2.9 million from the $22.0
million reported in 1995. Trust income was up $420,000 from the 1995 level, to
$4.9 million. The effects of an increase in the number of trust clients served
and higher levels of administered assets were enhanced by the impact of advances
in the stock and bond markets during the year.
Service charges on deposit accounts increased again in 1996, rising to $6.3
million from $5.9 million in the previous year.
<PAGE 52>
Mortgage banking activity was strong throughout 1996, as generally favorable
interest rates impacted the business. Mortgage servicing income rose slightly
to $2.5 million. The January 1, 1996 adoption of Financial Accounting Standards
Board Statement No. 122, Accounting for Mortgage Servicing Rights, which
requires the capitalization of mortgage servicing rights which relate to loans
which have been originated and sold on a servicing retained basis, led to a $1.4
million increase in gain on sale of mortgages.
Income related to credit card activities includes fees and costs related to the
issuance of credit cards and revenue generated (net of processing costs) when
credit card transactions are processed through the Company s merchant customers.
The Company has emphasized development of the merchant business in recent years.
This business has expanded to include local and national customers involved in
retail, service, and mail order businesses. These activities generated income of
$4.2 million in 1996, up from $3.6 million in the prior year. This increase
resulted primarily from an increase in the number of merchants serviced, and
consequently, significantly higher levels of merchant volume; $800 million was
processed in 1996, compared with $477 million in 1995.
The Company posted a total of $4.5 million in other noninterest income, up
$320,000 from the 1995 level. This category represents over thirty categories of
fee income.
Noninterest expense totaled $64.6 million in 1996, up $3.0 million from the 1995
level. Salaries increased to $25.5 million from $23.4 million in 1995 resulting
from the opening of a new branch at each of the Massachusetts banks in 1996, as
well as additional full time equivalents at CTC in the non-deposit fee-based
businesses. Employee benefits declined by $651,000 to $7.5 million in 1996 due
to reduced pension expense at Chittenden Bank resulting from the conversion to a
cash balance plan effective January 1, 1996. This $1.1 million savings was
offset by higher performance-based incentive compensation expenses at Flagship
Bank and Trust ($195,000) and by the inclusion of The Bank of Western
Massachusetts for the entire year ($203,000).
Occupancy expense was $9.5 million for 1996, up from $8.4 million in 1995.
Additional depreciation at CTC related to a branch automation project completed
in the second half of 1995 accounted for approximately $400,000 of the increase
while the inclusion of BWM for the entire year in 1996 accounted for approxi-
mately $300,000.
FDIC insurance premiums totaled $27,000, down from $1.6 million in 1995. The
Banks paid minimal insurance assessments in 1996 as compared to 1995, when
assessment rates were reduced from 23 cents to 4 cents per $100 of deposits.
Based upon federal legislation enacted in the third quarter of 1996, the Company
anticipates that the Banks will pay assessments of 1.3 cents per $100 of
deposits in 1997, which would amount to approximately $275,000 of expense for
that year.
In 1996, expenses associated with OREO, net of recoveries on OREO properties
sold, were $153,000. Net OREO recoveries of $243,000 were recorded in 1995.
Total other noninterest expense for 1996 totaled $21.9 million, up from $20.3
million in 1995. This increase was spread across several areas including data
processing costs ($560,000) due to increases in contract costs based on
inflation and volume of activity, and software expenses ($284,000) due to
ongoing upgrades. Also included were increases in marketing ($357,000),
professional fees ($199,000), and travel and training ($173,000) due to the
expanded scope of the consolidated operations.
INCOME TAXES
For 1996, the Federal and state income tax provisions amounted to $13.4 million.
This compares with an income tax provision of $11.7 million for 1995. The
effective tax rates for 1996 and 1995 were 33.5% and 34.5%, respectively. During
1996 and 1995, the Company's statutory Federal corporate tax rate was 35%. The
Company's effective tax rates differed from the statutory rates primarily
because of the proportion of interest income from state and municipal securities
and corporate dividend income which are partially exempt from Federal taxation.
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1995 and 1994
NET INTEREST INCOME
For 1995, net interest income was $78.3 million, up $13.0 million from the 1994
level. On a fully taxable equivalent basis, net interest income increased $13.5
million from 1994, to $80.1 million in 1995. These improvements resulted from
higher levels of interest-earning assets, attributable primarily to the
acquisition of BWM, as well as to an increase in the net yield on earning
assets. The taxable equivalent yield on earning assets was 5.08% in 1995, up
thirteen basis points from 4.95% in 1994. Although the 108-basis points increase
in the cost of interest-bearing liabilities was greater than the 105-basis
points increase in the yield on earning assets, the effect of non-interest
bearing liabilities more than offset this to result in the improvement in the
net yield.
<PAGE 53>
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses totaled $5.0 million in 1995, down from
$5.5 million in 1994. The reduction was in response to stable net charge-offs
and lower levels of nonaccrual loans.
NONINTEREST INCOME AND NONINTEREST EXPENSE
Noninterest income was $22.0 million in 1995, up $2.7 million from the $19.4
million reported in 1994. Trust income increased $418,000 from the 1994 level,
to $4.5 million. The effects of an increase in the number of trust clients
served and higher levels of administered assets were enhanced by the impact of
advances in the stock and bond markets during the year. Service charges on
deposit accounts increased in 1995, rising to $5.9 million from $5.3 million in
the previous year. Two-thirds of the increase was contributed by BWM, the
remainder reflected higher levels of transaction activity at CTC. During 1995,
a net gain of $205,000 was realized on the sale of securities, compared with a
net loss of $362,000 posted in 1994.
Mortgage banking activity varied throughout 1995, as generally declining rates
impacted the business. Mortgage servicing income rose 4.6% to $2.4 million. The
increase was due to higher levels of serviced loans, including the servicing
purchased from CUMEX. Continued refinancing activity combined with slightly
narrower spreads on sold loans in 1995 netted a modest increase in gains on
sales of mortgage loans. For 1995, gains totaled $1.3 million, up from $1.2
million in 1994.
Income related to credit card activities includes fees and costs related to the
issuance of credit cards and revenue (net of processing expenses) generated when
credit card transactions are processed through the Company s merchant customers.
These activities generated income of $3.5 million in 1995, up $805,000 million
from the prior year. The Company posted a total of $4.2 million in other non-
interest income, unchanged from the 1994 level. This category represents over
thirty categories of fee income.
Noninterest expense totaled $61.6 million in 1995, up $10.2 million from the
1994 level. BWM's noninterest expense of $5.9 million accounted for more than
half of the increase. Salaries increased to $23.4 million from $19.9 million in
1994. Of this increase, $1.9 million was expensed at BWM. Employee benefits
rose by $1.2 million to $8.2 million in 1995. This category includes accruals
for performance-based incentive compensation amounting to $2.5 million, up from
$1.6 million in 1994. Occupancy expense was $8.4 million, up from $7.1 million
in 1994 primarily due to the acquisition of BWM.
FDIC insurance premiums totaled $1.6 million, down $1.2 million from the 1994
level. Higher deposit balances on premium assessment dates were more than
offset by lower premium rates owing to the statutory recapitalization of the
Bank Insurance Fund and the Banks' qualifying for the lowest possible FDIC
insurance premium rates throughout 1995.
In 1995, expenses associated with OREO were more than offset by recoveries on
OREO properties sold, so that a net credit of $243,000 was posted. Net OREO
recoveries of $215,000 were recorded in 1994.
Total other noninterest expense for 1995 totaled $20.3 million, up $5.3 million
from 1994. This increase was primarily attributable to the purchase of BWM and
the amortization of the related intangibles, and to merger expenses related to
the FBT acquisition which totaled $1.8 million.
INCOME TAXES
For 1995, Federal and state income tax provisions amounted to $11.7 million,
compared with $9.7 million in 1994. The effective tax rates for 1995 and 1994
were 34.5% and 35.0%, respectively. During 1995 and 1994, the Company's
statutory Federal corporate tax rate was 35%. The Company s effective tax rates
differed from the statutory rates primarily because of the proportion of
interest income from state and municipal securities and corporate dividend
income which are partially exempt from Federal taxation.
<PAGE 54>
DIRECTORS AND OFFICERS
CHITTENDEN CORPORATION AND CHITTENDEN BANK
Directors
Frederic H. Bertrand
David M. Boardman
Paul J. Carrara
Lyn Hutton
Philip A. Kolvoord
Paul A. Perrault
President and
Chief Executive Officer
James C. Pizzagalli
Barbara W. Snelling
Chair
Pall D. Spera
Martel D. Wilson, Jr.
Directors Emeriti
Howard A. Allen, Jr.
Edward R. Eurich
William W. Freeman
Edwin B. Gage
Marvin B. Gameroff
J. Robert Goodrich
Norman H. Greenberg
Frank J. Heinrich
Robert D. Horton
George E. Little, Jr.
Maureen A. McNamara
H. Gordon Page, M.D.
Horace U. Ransom, Jr.
Webster S. Thompson
Hilton A. Wick
CHITTENDEN CORPORATION
Officers
Barbara W. Snelling
Chair,
Board of Directors
Paul A. Perrault
President and
Chief Executive Officer
Lawrence W. DeShaw
Executive Vice President
John W. Kelly
Executive Vice President
Kirk W. Walters
Executive Vice President
Chief Financial Officer
and Treasurer
F. Sheldon Prentice
Secretary
Howard L. Atkinson
Chief Auditor
Eugenie J. Fortin
Assistant Corporate Secretary
John P. Barnes
Senior Vice President
Danny H. O Brien
Senior Vice President
CHITTENDEN BANK
Officers
Barbara W. Snelling
Chair,
Board of Directors
Paul A. Perrault
President and
Chief Executive Officer
Audit
Howard L. Atkinson
Chief Auditor
Commercial Banking,
Trust and Investment
John W. Kelly
Executive Vice President
Small Business Banking
Louise C. Sandberg
Vice President
Commercial Finance
Matthew K. Durkee
Vice President
Corporate Banking
Larry D. MacKinnon
Senior Vice President
Michael L. Seaver
Vice President
Corporate Trust
Sonja R. Shaver
Vice President
Correspondent Banking, Specialized Industries
Charles J. Stone, Jr.
Senior Vice President
Credit Department
Amy J. Myers
Vice President
Employee Benefit Services
Charles C. Claudio
Vice President
Government Banking
David E. Olson
Vice President
Investment Management
Jerry R. Condon
Chief Investment Officer
Personal Trust Services
Louis J. Beaulieu
Senior Vice President
Private Banking
Sylvia T. MacKinnon
Vice President
Community Banking
Danny H. O Brien
Senior Vice President
Katharine H. Bosley
Vice President,
Branch Commercial Loan Administrator
Kim E. Lemmo
Vice President,
Branch Administrator
C. Lynn Medeiros
Assistant Vice President,
Sales Manager
Bonnie L. Rivers
Vice President,
Branch Administrator
Stuart F. Silloway, Jr.
Senior Vice President,
Business Development Administrator
Corporate Secretary
F. Sheldon Prentice
Senior Vice President,
General Counsel and
Corporate Secretary
Stephanie Barton
Vice President and Counsel
Paul A. Benoit
Vice President and Counsel
Eugenie J. Fortin
Assistant Corporate Secretary,
Stockholder Relations
Credit Policy and Administration
John P. Barnes
Senior Vice President and
Credit Policy Officer
Debra E. Cross
Vice President,
Credit Administration
Donald D. Martin
Senior Vice President,
Loan Resolution
Rachel M. Sheridan
Vice President,
Credit Collections
Sarah P. Slatter
Senior Vice President,
Credit Review
and Administration
MORTGAGE SERVICE CENTER
OF NEW ENGLAND
Richard J. Christensen
Senior Vice President
Nancy L. Dohl
Director of Correspondent Lending
Raymond M. O Connor
Director of Secondary Market
Alane G. Perkins
Vice President,
Loan Administration
and Accounting
Thomas W. Varno
Director of Operations
Gail D. Walsh
Correspondent Manager
Susan L. Williams
Director of Credit Union Lending
OPERATIONS
AND ADMINISTRATION
Lawrence W. DeShaw
Executive Vice President
Administration
Christopher D. Bishop
Senior Vice President,
Facilities Management
Robert D. Hofmann
Senior Vice President,
Marketing
Sarah P. Merritt
Senior Vice President,
Human Resources
<PAGE 55>
Chittenden Home Mortgage
Catherine S. Blackwell
Assistant Vice President,
Manager, Residential Mortgage Department
Jennie H. Buchanan
Vice President,
Manager, Secondary Market Activities
Carolyn S. Lyman
Vice President,
Manager, Mortgage Originations
COMMERCIAL SERVICES AND
CAPTIVE INSURANCE
Rand L. Stretton
Vice President,
Commercial Services and
Captive Insurance
Operations
Bruce W. Cote
Vice President,
Loan Accounting Services
Paul J. Hamlin
Senior Vice President,
Branch Operations
Florence F. Izzo
Senior Vice President,
Commercial, Deposit, and
Trust Operations Services
Payroll Services
Nancy J. Barnes
Vice President,
Payroll Services
Retail Credit
Daniel G. Alcorn
Senior Vice President,
Retail Credit Division
Ronald P. Bower
Vice President,
Automotive Financing
Mary C. Chicoine
Assistant Vice President,
Merchant Services
Treasury
Kirk W. Walters
Executive Vice President,
Chief Financial Officer,
and Treasurer
Alan A. Fay
Vice President,
Treasury Services
Timothy J. Keefe
Vice President and
Controller
HEADQUARTERS,
CHITTENDEN CORPORATION AND CHITTENDEN BANK
Chittenden Bank Building
Two Burlington Square
Burlington, Vermont 05401
Mailing Address:
P.O. Box 820
Burlington, Vermont 05402-0820
THE BANK OF WESTERN MASSACHUSETTS
Directors
John J. Cardone
Edward J. Carroll, Jr.
Martin J. Clayton
Timothy P. Crimmins, Jr.
President and
Chief Executive Officer
James J. Falcone
Frank P. Fitzgerald, Esq.
Chair
William F. Frain
John P. Isenburg
Edward C. Leavy
Carl B. Martin, III
William G. Mazeine
Paul A. Perrault
Emilio J. Sibilia, Jr.
Andrew E. Skroback, Jr.
Benjamin Surner, Jr.
THE BANK OF WESTERN MASSACHUSETTS
Officers
Frank P. Fitzgerald, Esq.
Chair,
Board of Directors
Timothy P. Crimmins, Jr.
President and
Chief Executive Officer
Branch Administration
Shirley A. Bailey
Office Manager and
Consumer Loan Officer
Gwendoline M. Briere
Office Manager and
Consumer Loan Officer
Ann M. Destromp
Office Manager and
Consumer Loan Officer
Robert Z. Garabedian
Office Manager and
Consumer Loan Officer
Kimberely Hamilton
Office Manager and
Consumer Loan Officer
Commercial Banking
Daniel M. Flynn
Vice President and
Senior Loan Officer
Pamela L. Baran
Assistant Vice President
James J. Carvalho
Vice President
William A. Fontes
Vice President
Charlene Golonka
Assistant Vice President
Rhoda A. Manoogian
Vice President,
Small Business Lending
Sylvia Nadeau-Poole
Assistant Vice President
Cheryl A. Pesto
Assistant Vice President,
Deposit Acquisition
Steven J. Robinson
Vice President
J. Jeffrey Sullivan
Vice President
Aldo F. Tiboni
Vice President,
Asset-based Lending
Consumer Lending
Pamela L. Baran
Assistant Vice President
Ronald W. Rice
Assistant Vice President,
Direct Automobile Lending
Credit Administration
Kevin M. Bowler
Asset Recovery Officer
Donna M. George-Ebbeling
Assistant Vice President
Finance
Michael J. Hinchey
Vice President and Treasurer
Joanne M. Corliss
Assistant Vice President
Lynne A. Gino
Operations Officer
Operations
Barbara J. Wallace
Vice President and
Senior Staff Development Officer
Cheryl L. Podgorski
Assistant Vice President
Ralph V. Ritchie
Assistant Vice President
Trust and
Investment Services
John S. Newton
Vice President
HEADQUARTERS,
THE BANK OF WESTERN MASSACHUSETTS
29 State Street
Springfield, Massachusetts 01103
Mailing Address:
P.O. Box 4950
Springfield, Massachusetts
01101-4950
<PAGE 56>
FLAGSHIP BANK AND TRUST COMPANY
Directors
Robert S. Agnello
Michael P. Angelini, Esq.
Gene J. DeFeudis
Robert P. Lombardi, Esq.
Francis W. Madigan, Jr.
Donald J. McGowan
President and
Chief Executive Officer
Paul A. Perrault
Alan M. Stoll
Officers
Donald J. McGowan
President and
Chief Executive Officer
Branch Administration
Andrea J. White
Vice President,
Branch Administrator
Mary Ann Donovan
Assistant Vice President,
Branch Manager
Patricia A. George
Assistant Vice President,
Branch Manager
Edward J. Glotch, Jr.
Assistant Vice President,
Branch Manager
Michael J. Quink
Assistant Vice President,
Branch Manager
Consumer Lending
Bettina M. Cullina
Vice President,
Senior Consumer Lending Officer
Susan M. Simeone
Assistant Vice President,
Mortgage Officer
Corporate Banking Services
Michael J. Hanewich
Executive Vice President,
Senior Commercial Lending Officer
Robert D. Babcock
Vice President,
Commercial Loan Officer
Donald F. Doyle
Vice President,
Commercial Loan Officer
Brenda M. Heindenreich
Vice President,
Cash Management Services
Kevin H. Kane
Vice President,
Commercial Loan Officer
Robert J. Kelley
Vice President,
Commercial Loan Officer
V. Paul Lawless
Vice President,
Commercial Loan Group Leader
Blain H. Marchand
Vice President,
SBA Loan Officer
Mary T. McAdam
Assistant Vice President,
Commercial Loan Officer
Credit Policy and Administration
Helga M. Lyons
Vice President,
Credit Manager
Keith R. Kirkland
Assistant Vice President,
Credit Officer
Finance
Denise L. Solodyna
Executive Vice President,
Chief Financial Officer
Michael P. Rooney
Vice President, Controller
Marketing
Janet L. Amorello
Vice President,
Marketing Officer
Operations
Martha A. Dean
Vice President,
Operations Manager
Retail Banking, Operations and Technology
Peter M. Buffone
Executive Vice President,
Chief Information
and Operations Officer
Technology
John A. Reil
Vice President, MIS Manager
Andrea M. Dupell
Assistant Vice President,
Senior Business Analyst
Trust and
Investment Services
Edward J. Connor, Jr.
Senior Vice President,
Senior Trust Officer
HEADQUARTERS,
FLAGSHIP BANK AND TRUST COMPANY
306 Main Street
Worcester, Massachusetts 01613
Mailing Address:
P.O. Box 487
Worcester, Massachusetts
01613-0487
<PAGE 57>
<TABLE>
The following table sets forth the range of the high and low prices for the Corporation's
common stock, for the last five years:
<CAPTION>
1996 1995 1994 1993 1992
-------------------------------------------------------------------------------------------------
Quarter High Low High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First 25.60 19.20 15.36 13.12 12.32 11.20 10.75 7.55 7.68 4.22
Second 22.75 20.60 18.40 14.56 13.92 10.88 11.26 9.73 8.45 6.53
Third 25.75 20.75 22.20 17.20 14.08 12.80 11.68 9.73 8.19 6.78
Fourth 26.25 23.88 25.60 20.00 13.76 12.80 12.16 8.32 8.32 7.17
</TABLE>
STOCKHOLDER INFORMATION
FORM 10-K
A copy of Chittenden Corporation s Annual Report for 1996 (on Form 10-K), as
filed with the Securities and Exchange Commission pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934, will be furnished free of charge
to beneficial owners of the Corporation s stock upon request.
CHITTENDEN CORPORATION STOCK
The $1 par value common stock of Chittenden Corporation has been publicly traded
on the over-the-counter market since November 14, 1974. As of December 31, 1996,
there were 3,167 record holders of the Corporation s common stock.
The Corporation's stock is listed on NASDAQ, with the symbol CNDN, is included
in additional over-the-counter securities lists, and is listed daily in the
major newspapers.
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The Dividend Reinvestment and Stock Purchase Plan for stockholders of Chittenden
Corporation gives the participants the opportunity to reinvest dividends in
additional shares of the Company s common stock and make optional cash
investments in a convenient and cost-free manner without commissions or fees.
For stockholder services and information, contact:
Stockholder Relations
Chittenden Corporation
P.O. Box 820
Burlington,VT 05402-0820
660-1412
Chittenden Corporation is a three-bank holding company registered as a Vermont
corporation. Organized in 1971 and activated in 1974, Chittenden Corporation is
the parent company of Chittenden Trust Company, The Bank of Western
Massachusetts and Flagship Bank and Trust Company. Chittenden Bank is the trade
name for Chittenden Trust Company.
ANNUAL MEETING
The Annual Meeting of the Stockholders of Chittenden Corporation will be held on
Wednesday, April 16, 1997, at 4:00 p.m. in the Emerald Ballroom in the Sheraton
Burlington Hotel and Conference Center, located at 870 Williston Road,
Burlington, Vermont.
To find out about the wide range of products offered by Chittenden Bank, please
call the Customer Information Center at 1-800-545-2236.
For products and information offered by The Bank of Western Massachusetts,
please call 1-800-331-5003.
For products and information offered by Flagship Bank and Trust Company, please
call (508) 799-4321.
Our annual report has been printed on recycled paper, containing post-consumer
fiber, with soy-based inks.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, incorporated by reference in this Form 10-K, into Chittenden
Corporation's previously filed Registration Statement File No. 33-01229.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 25, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 133159
<INT-BEARING-DEPOSITS> 2100
<FED-FUNDS-SOLD> 95000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 358536
<INVESTMENTS-CARRYING> 38556
<INVESTMENTS-MARKET> 38381
<LOANS> 1296568
<ALLOWANCE> (28096)
<TOTAL-ASSETS> 1988746
<DEPOSITS> 1761579
<SHORT-TERM> 23992
<LIABILITIES-OTHER> 26234
<LONG-TERM> 2540
0
0
<COMMON> 12679
<OTHER-SE> 161722
<TOTAL-LIABILITIES-AND-EQUITY> 1988746
<INTEREST-LOAN> 116563
<INTEREST-INVEST> 24502
<INTEREST-OTHER> 1527
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<INTEREST-INCOME-NET> 83993
<LOAN-LOSSES> 4183
<SECURITIES-GAINS> (98)
<EXPENSE-OTHER> 64557
<INCOME-PRETAX> 40173
<INCOME-PRE-EXTRAORDINARY> 40173
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26721
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 4.88
<LOANS-NON> 10601
<LOANS-PAST> 966
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<ALLOWANCE-OPEN> 27818
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