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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, 1997
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 27, 1998 as reported on NYSE, was
$472,346,917.
At February 27, 1998, there were 14,405,671 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 1998 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.
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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. At December 31, 1997, the Company had total
consolidated assets of $1,977,150,000. The Company is the holding company
parent and owns 100% of the outstanding common stock of Chittenden Trust
Company ("CTC"), Flagship Bank and Trust Company ("FBT"), The Bank of Western
Massachusetts ("BWM") (collectively "The Banks") and Chittenden Connecticut
Corporation ("CCC"), a non-bank mortgage company.
Through its subsidiaries, the Company offers a variety of lending services,
with loans and leases totaling $1,399,138,000 at December 31, 1997. 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 subdivisions in the U.S. Commercial loans
amounted to 49% of the total loans outstanding at December 31, 1997. Loans
secured by residential properties, including closed-ended home equity loans
comprised 27% of total loans outstanding at December 31, 1997. The Company
underwrites substantially all of its residential mortgages based upon
secondary market standards and sells substantially all of its fixed-rate
residential mortgage loans on a servicing-retained basis. Variable or
adjustable rate mortgage loans are typically held in portfolio. The remaining
real estate loans, which are 1% of total loans outstanding at December 31,
1997, are construction loans secured by residential and commercial land under
development.
Consumer loans outstanding at December 31, 1997 were 17% of total loans.
These include direct and indirect installment loans, auto leases, and
revolving credit which accounted for 3%, 7%, 2% and 5% of total loans
respectively. Revolving home equity loans as a separate group amounted to 6%
of loans at December 31, 1997. These loans are generally underwritten based
upon the same standards as first mortgages.
The Company's lending activities are conducted primarily in Vermont and
Massachusetts, with additional activity related to nearby market areas in
Quebec, New York, New Hampshire, Maine and Connecticut. In addition to the
portfolio diversification described above, the loans are diversified by
borrowers and industry groups. In making commercial loans, the Banks
occasionally solicit the participation of other banks and other financial
investors. The Company, through its subsidiaries, also occasionally
participates in loans originated by other banks. Certain of the Company's
commercial loans are made under programs administered by the Vermont
Industrial Development Authority, the U.S. Small Business Administration, the
U.S. Farmers Home Administration or other local government agencies within the
Company's market. Loan terms include repayment guarantees by the agency
involved in varying amounts up to 90% of the original loan.
The Banks offer a wide range of banking services, including the acceptance
of demand, savings, and time deposits. As of December 31, 1997, total
interest-bearing deposits and noninterest-bearing demand deposits amounted to
$1,454,990,000 and $302,555,000 respectively. The Banks also provide 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 personal and corporate trust services. Trust
administered assets totaled $2.8 billion at December 31, 1997.
The Company 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 the Company's service area, as well as central depository, lending,
payroll, and other banking services for such customers. The Banks offer a
variety of other services including safe deposit facilities, MasterCard and
VISA credit card services, credit card processing, and certain non-deposit,
investment products through a dual-employee contractual relationship with
Fiserv Investor Services, Inc.
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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 second largest bank in Vermont, based on total assets of
$1,384,526,000 and total deposits of $1,227,624,000 at December 31, 1997.
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".
On May 31, 1997, Chittenden Bank acquired certain assets and assumed certain
liabilities of The Pomerleau Agency. The Pomerleau Agency offers various
insurance related products including: personal, commercial and life/health
policies, as well as specialized coverages and a consulting and risk
management service.
THE BANK OF WESTERN MASSACHUSETTS
BWM was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 1997, BWM had total assets of $270,484,000 and total
deposits of $235,533,000. BWM's principal offices are in Springfield,
Massachusetts and it has four additional locations in the greater Springfield,
Massachusetts area.
FLAGSHIP BANK AND TRUST COMPANY
FBT was chartered by the Commonwealth of Massachusetts as a commercial bank
in 1986. At December 31, 1997, FBT had total assets of $327,483,000 and total
deposits of $301,921,000. FBT's principal offices are in Worcester,
Massachusetts and it has five additional locations in the greater Worcester,
Massachusetts area.
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 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 based upon
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 1997.
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 banking and related financial service activities presently engaged in by
the Company and its subsidiaries.
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
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market deposit accounts and short-term flexible-maturity certificates of
deposit offered by the Banks compete with investment account offerings of
brokerage firms and with new products offered by insurance companies. The
Company also competes for personal and commercial trust business with
investment advisory firms, mutual funds, and insurance companies.
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. BWM and FBT compete with other financial
institutions in their respective franchises of Springfield and Worcester
Massachusetts.
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 corporation incorporated under Vermont law, the Company is
subject to regulation by the Secretary of the State of Vermont and the rights
of its stockholders are governed by Vermont corporate law. 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 to terminate or prevent unsafe or unsound banking practices or
violations of laws or regulations and to 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.
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, previously enacted state legislation 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
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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 unsafe and 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
subsidiaries. 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. Other types of
transactions between a bank and a bank holding company must be on market terms
and not otherwise unduly favorable to the holding company or an affiliate
thereof. 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
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Vermont, in the case of CTC, and the Commissioner of Banks of the Commonwealth
of Massachusetts in the case of BWM and FBT (individually, a Commissioner and
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 relevant
Commissioner 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 condition and 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
the Banks. Payments of dividends by the Banks 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. Payment of
dividends by BWM and FBT is subject to Massachusetts banking law restrictions
which require that the capital stock and surplus account of the bank must
amount, in the aggregate to at least 10% of the bank's deposit liability or
there shall be transferred from net profits to the surplus account (1) the
amount required to increase the surplus account so that it, together with the
capital stock, will amount to at least 10% of deposit liability or (2) the
amount required to increase the surplus account so that it shall amount to 50%
of the common stock, and thereafter, the amount , not exceeding 50% of net
profits, required to increase the surplus account so that it shall amount to
100% of capital stock.
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
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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, resulted 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 transportation 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, BWM and FBT received a rating of "Outstanding". 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.
As a result of certain amendments in 1996, current 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.
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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, 1997, the Company's consolidated Total and Tier 1 Risk-Based
Capital Ratios were 11.17% and 9.86%, respectively, and its Leverage Capital
Ratio was 7.43%. Based on the above figures and accompanying discussion, CC
exceeds all regulatory capital requirements and is considered well
capitalized.
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
7
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 undercapitalized 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 reassessed 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
capitalized, 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
8
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.
Assessment rates in 1996 ranged 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 Banks paid assessments
totaling $231,000 or 1.3 cents per $100 of deposits in 1997.
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 have not accepted 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"
9
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
10
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, since 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. The Company 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 or its subsidiaries.
EMPLOYEES
At December 31, 1997 the Company and its subsidiaries employed 986 persons,
with a full-time equivalency of 923 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.
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 an owned
facility at Two Burlington Square in Burlington, Vermont. BWM's principal
offices are in Springfield, Massachusetts and it has four additional locations
in the greater Springfield, Massachusetts. FBT's principal offices are in
Worcester, Massachusetts and it has five additional locations in the greater
Worcester, Massachusetts area. CCC operates two mortgage company facilities in
Connecticut. Except for the CTC property, all of the properties mentioned
above are leased. 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, 1997. 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
None
11
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The $1 par value common stock of Chittenden Corporation has been publicly
traded since November 14, 1974. As of December 31, 1997, there were 3,085
holders of record of the Company's common stock.
As of February 18, 1998 the Corporation's stock initiated trading on the
NYSE under the symbol "CHZ". Prior to that date, the Corporation's stock
traded on the NASDAQ, under the symbol "CNDN". The following table sets forth
the range of the high and low sales prices for the Corporation's common stock,
and the dividends declared, for each quarterly period within the past two
years:
DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED
------------- ------ ------ ---------
1997
March 31........................................ $24.00 $18.50 $0.160
June 30......................................... 27.60 21.50 0.176
September 30.................................... 31.70 25.60 0.176
December 31..................................... 36.00 30.40 0.776(1)
1996
March 31........................................ 20.48 15.36 0.088
June 30......................................... 18.20 16.48 0.160
September 30.................................... 20.60 16.60 0.160
December 31..................................... 21.00 19.10 0.160
- --------
(1) Dividends declared during the fourth quarter of 1997 included a special
cash dividend of $0.60 per share.
For a discussion of dividend restrictions on the Corporation's common stock,
see "Dividends" under the caption Regulation on page 6 of this report.
12
ITEM 6 SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Statements of income:
Interest income........ $ 150,189 $ 142,592 $ 135,103 $ 101,383 $ 93,889
Interest expense....... 59,545 58,599 56,772 36,088 34,395
----------- ----------- ----------- ----------- -----------
Net interest income.... 90,644 83,993 78,331 65,295 59,494
Provision for possible
loan losses........... 4,050 4,183 5,000 5,500 8,135
Net interest income
after provision for
possible loan losses.. 86,594 79,810 73,331 59,795 51,359
Noninterest income..... 28,210 24,920 22,040 19,352 22,793
Noninterest expense.... 70,072 64,557 61,584 51,393 54,263
----------- ----------- ----------- ----------- -----------
Income before
provision for income
taxes................. 44,732 40,173 33,787 27,754 19,889
Provision for income
taxes................. 15,326 13,452 11,656 9,717 6,387
----------- ----------- ----------- ----------- -----------
Income before
cumulative effect of
change in accounting
principle............. 29,406 26,721 22,131 18,037 13,502
Cumulative effect of
change in accounting
principle............. -- -- -- -- (575)
----------- ----------- ----------- ----------- -----------
Net income............. $ 29,406 $ 26,721 $ 22,131 $ 18,037 $ 12,927
=========== =========== =========== =========== ===========
Total assets at year-
end.................... $ 1,977,150 $ 1,988,746 $ 1,794,704 $ 1,461,419 $ 1,466,292
Long-term debt at year-
end.................... 2,239 2,540 2,484 1,528 4,377
Common shares
outstanding at year-
end.................... 14,421,585 15,345,265 14,972,359 13,581,631 14,169,201
Balance sheets--average
daily balances:
Total assets........... $ 1,934,333 $ 1,841,944 $ 1,687,803 $ 1,436,462 $ 1,379,830
Loans, net of
allowance............. 1,363,394 1,307,725 1,202,591 1,001,356 987,477
Investment securities
and interest-bearing
cash equivalents...... 417,767 385,111 348,028 328,296 278,964
Total deposits......... 1,695,953 1,627,834 1,486,500 1,268,338 1,200,778
Long-term debt......... 4,210 2,514 1,662 1,406 1,360
Total stockholders'
equity................ 167,568 162,823 138,641 115,442 105,732
Per common share:
Basic Earnings......... $ 1.99 $ 1.75 $ 1.50 $ 1.28 $ 0.93
Diluted Earnings....... 1.94 1.72 1.47 1.26 0.91
Cash dividends
declared.............. 1.29 0.57 0.32 0.22 0.10
Book value............. 11.25 11.37 10.28 8.34 7.97
Weighted average common
shares outstanding..... 14,812,208 15,228,820 14,763,133 14,087,763 13,877,032
Weighted average common
and common equivalent
shares outstanding..... 15,166,557 15,543,741 15,105,914 14,341,166 14,143,183
Selected financial
percentages:
Return on average
total assets.......... 1.52% 1.45% 1.31% 1.25% 0.84%
Return on average
stockholders' equity.. 17.55 16.41 15.96 15.62 12.23
Interest rate spread... 4.31 4.23 4.34 4.37 4.22
Net yield on earning
assets................ 5.11 4.99 5.08 4.95 4.70
Net charge-offs as a
percent of average
loans................. 0.39 0.29 0.28 0.49 0.58
Nonperforming assets
ratio (1)............. 0.56 0.99 1.19 1.03 1.87
Allowance for possible
loan losses as a
percent of year-end
loans................. 1.89 2.07 2.20 2.09 2.14
Year-end leverage
capital ratio......... 7.43 8.58 8.05 8.10 7.94
Risk-based capital
ratios:
Tier 1............... 9.86 11.71 11.16 11.40 10.91
Total................ 11.17 13.06 12.53 12.76 12.25
Average stockholders'
equity to average
assets................ 8.66 8.84 8.21 8.03 7.66
Common stock dividend
payout ratio (2)...... 64.25 32.73 21.71 17.38 11.70
- --------
(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; dividends
declared during 1997 include a special cash dividend of $0.60 per share.
13
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Overview
The following discussion and analysis of financial condition and results of
operations of the Company and its subsidiaries should be read in conjunction
with reference to the consolidated financial statements and notes thereto and
selected statistical information appearing elsewhere in this 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 1997, 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 2.0 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.
On May 31, 1997, CTC acquired certain assets and assumed certain liabilities
of The Pomerleau Agency, Inc. This transaction has been accounted for as a
purchase and accordingly, all results of operations subsequent to the
transaction have been included in the consolidated statement of income.
Chittenden recorded net income of $29.4 million or basic earnings per share
of $1.99 and diluted earnings per share of $1.94 for the year ended December
31, 1997. This compares to net income of $26.7 million and basic earnings per
share of $1.75 and diluted earnings per share of $1.72 for 1996 and net income
of $22.1 million, basic earnings per share of $1.50 and diluted earnings per
share of $1.47 in 1995. For 1997, return on average equity was 17.55% and the
return on average assets was 1.52%. These compare to returns on average equity
of 16.41% and 15.96% and returns on average assets of 1.45% and 1.31% for 1966
and 1995, respectively.
Total assets decreased slightly from $1.989 billion in 1996 to $1.977
billion in 1997. Loans receivable increased by $54.5 million, largely due to
the continued emphasis on commercial and consumer lending. This increase was
partially offset by a $71.1 million decrease in cash and cash equivalents
which was attributable to higher than usual deposits left on hand by
governmental agencies at December 31, 1996. Total deposits were $1.758 billion
at December 31, 1997 compared with $1.762 billion at December 31, 1996.
The increase in earnings during 1997 compared to 1996 was primarily
attributable to a higher level of interest earning assets as well as an
increase in the net yield from 4.99% to 5.11%. These combined factors resulted
in an increase in net interest income of $6.7 million to $90.6 million for
1997.
Noninterest income totaled $28.2 million for 1997 up from $24.9 million for
1996. Commissions from insurance sales, which commenced with the May 1997
acquisition of the Pomerleau Agency, were $1.4 million in 1997. Credit card
and merchant servicing income increased $606,000 to $4.8 million in 1997.
Service charges on deposit accounts increased $692,000 to $7.0 million and
trust income increased $509,000 to $5.4 million in 1997. Mortgage servicing
income declined slightly in 1997 as a result of increased amortization expense
related to originated mortgage-servicing rights. Gains on sales of mortgages
decreased to $2.4 million in 1997, compared to $2.7 million in 1996 due to
decreased market activity.
Noninterest expense totaled $70.1 million in 1997, up 5.5 million from the
1996 level. Salaries increased $2.4 million from $25.8 million in 1996.
Employee benefits increased by $1.8 million to $9.4 million in 1997. The
increase in salaries and benefits during 1997 was primarily due to higher
staffing levels and related recruitment expenses. FDIC insurance premiums
totaled $231,000, up from $27,000 in 1996. Included in the
14
increases of the various noninterest expense categories (except FDIC Premium)
during 1997 were administrative expenses for the insurance agency acquired
during the second quarter of 1997, totaling $1.3 million.
The $4.6 million increase in earnings from 1995 to 1996 was 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 and merchant servicing income increased 16% to $4.2
million as a result of higher processing volumes in 1996 over 1995 levels.
Total noninterest expense increased $3.0 million to $64.6 million for 1996, of
which $1.6 million was due to the completion of the BWM acquisition late in
the first quarter of 1995. Considering the effect of including BWM for the
full year, noninterest expenses were up 2% for 1996 compared to the previous
year.
FINANCIAL CONDITION
Loans
Chittenden's gross loan portfolio increased by $54.5 million during 1997, to
end the year at $1.399 billion. The overall proportions of commercial-related
and consumer types of loans increased from the mix at the end of 1996. The
Company continues to pursue its strategy of gradually shifting its loan mix
through continued focus on commercial and non-real estate consumer lending
while at the same time selling on the secondary market substantially all of
its originated fixed-rate residential mortgage loans. Growth in non-
residential consumer loans, including automobile leases, was $38.5 million or
19.0% from the previous year, while non-real estate commercial loan growth was
$44.0 million or 13.7% from year-end 1996. The total real estate portfolio,
including home equity credit lines, decreased $28.0 million or 3.4% from year-
end 1996.
The classification of the Company's loan portfolio is based on underlying
collateral. At December 31, 1997, commercial loans secured by non-real estate
business assets totaled $365.0 million or 26.1% of total loans, up from the
$321.1 million posted at year-end 1996. Commercial real estate loans,
representing 22.5% of the portfolio, stood at $314.5 million at year-end 1997,
up slightly from $304.5 million at December 31, 1996. Construction loans
amounted to $21.9 million at December 31, 1997, down slightly from $25.1
million the year before.
Residential real estate loans stood at $456.4 million at year-end 1997, down
from $491.2 million at December 31, 1996. Reflecting the shift in the
Company's strategy, this category represented 32.6% of the portfolio at year-
end 1997, compared to 36.5% at year-end 1996. In total, $219.3 million in
residential mortgages were originated during 1997, compared to $264.2 million
during 1996. Secondary market sales of mortgage loans totaled $182.4 million
in 1997, compared to $201.4 million in 1996. The Company underwrites
substantially all of its residential mortgages to secondary market standards.
During 1997, the Company continued to follow its policy of selling
substantially all of its fixed-rate residential mortgage production on a
servicing-retained non-recourse basis.
Included in the real estate portfolio are home equity credit lines, which
totaled $80.4 million at December 31, 1997, compared to $84.3 million the
previous year. The unused portion of these lines totaled $79.8 million at
December 31, 1997, compared to $80.5 million at year-end 1996.
The portfolio of residential mortgages serviced for investors totaled
$1,024.4 million at December 31, 1997, compared to $1,006.9 million at year-
end 1996. These assets are owned by investors other than Chittenden and
therefore are not included in the consolidated balance sheets of the Company.
Of the loans serviced, the
15
Company originated $876.2 million and the balance consisted of purchased
mortgage-servicing rights acquired prior to 1996.
Consumer loans increased significantly in 1997, ending the year at $241.3
million, compared with $202.8 at year-end 1996. This increase resulted from
the Company's continued development of the indirect auto lending and leasing
market, which reflects the Company's emphasis on responding to the marketplace
through dealer relationships within its existing deposit franchise area. The
Company underwrites all of its indirect automotive loans, maintaining
substantially the same credit standards as for car loans originated in its
branch offices. The Company does not originate any subprime loans. Indirect
installment lending through auto dealers was up $11.3 million from year-end
1996 to $106.0 million at the end of 1997. The Company also offers 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, 1997 were $72.6 million, up from $41.1 million a year earlier.
The Company has residual insurance through outside insurance companies which
substantially eliminates the risk associated with the residual values of its
leased vehicle portfolio. Contrary to these trends, direct installment and
credit card balances at December 31, 1997 stood at $40.4 million and $22.4
million, respectively, compared with $43.0 million and $24.0 million at the
end of 1996. By emphasizing the indirect and leasing programs as well as
limiting credit card lending to its existing retail and commercial base these
trends should continue. Unused portions of credit card lines totaled $58.0
million at the end of 1997, down from $72.5 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.
The following table shows the composition of the loan portfolio for the five
years ended December 31, 1997:
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Commercial.............. $ 365,042 $ 321,068 $ 291,651 $ 188,568 $ 165,372
Real estate:
Residential........... 375,967 406,850 388,705 372,344 362,292
Commercial............ 314,477 304,530 305,941 258,023 252,824
Construction.......... 21,900 25,084 25,796 18,813 20,994
Home equity............. 80,429 84,319 78,600 76,457 75,759
Consumer................ 168,761 161,699 147,540 143,250 125,423
Lease financing......... 72,562 41,117 12,420 -- --
---------- ---------- ---------- ---------- ----------
Total gross loans....... 1,399,138 1,344,667 1,250,653 1,057,455 1,002,664
Allowance for possible
loan losses............ (26,721) (28,096) (27,818) (22,163) (21,672)
---------- ---------- ---------- ---------- ----------
Net loans............... $1,372,417 $1,316,571 $1,222,853 $1,035,292 $ 980,992
========== ========== ========== ========== ==========
Mortgage loans held for
sale................... $ 16,433 $ 9,870 $ 14,692 $ 2,870 $ 11,646
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 that 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.
Nonaccrual loans with a related guarantee by a governmental agency are
reflected net of those guarantees in nonperforming statistics. Generally, a
loan remains on nonaccrual status until the factors which indicated
16
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, 1997:
DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- -------
(IN THOUSANDS)
Loans on nonaccrual................ $6,481 $10,601 $ 9,939 $ 8,289 $13,992
Loans not included above which are
troubled debt restructurings...... 767 638 2,502 515 1,030
Other real estate owned............ 747 2,251 2,652 2,141 3,816
------ ------- ------- ------- -------
Total nonperforming assets......... $7,995 $13,490 $15,093 $10,945 $18,838
====== ======= ======= ======= =======
Loans past due 90 days or more and
still accruing.................... $2,838 $ 966 $ 1,054 $ 1,134 $ 1,576
Percentage of nonperforming assets
to total loans and other real
estate owned...................... 0.56% 0.99% 1.19% 1.03% 1.87%
Nonperforming assets to total
assets............................ 0.40 0.68 0.84 0.75 1.28
Allowance for possible loan losses
to nonperforming loans............ 368.67 249.99 223.59 251.74 144.27
Nonaccrual loans consisted of approximately 200 loans, the largest of which
amounted to $451,000 at year-end 1997 and were diversified across a range of
industries, sectors, and geography. OREO totaled $747,000 at year-end 1997,
compared with $2.3 million at the end of 1996.
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
circumstances 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 consideration 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
has changed during the past three years. 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.
17
The following table summarizes the activity in the Company's allowance for
possible loan losses for the five years ended December 31, 1997:
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Balance of allowance for
possible loan losses at
beginning of year...... $ 28,096 $ 27,818 $ 22,163 $ 21,672 $ 19,392
BWM allowance acquired.. -- -- 4,135 -- --
Provision charged to
expense................ 4,050 4,183 5,000 5,500 8,135
---------- ---------- ---------- ---------- ----------
Balance of allowance for
possible loan losses
after provision........ 32,146 32,001 31,298 27,172 27,527
---------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial............ 3,903 1,770 1,353 1,085 2,606
Real estate:
Residential......... 780 966 1,525 878 1,220
Commercial.......... 675 791 1,596 3,160 1,639
Construction........ 204 185 -- 4 63
Home equity........... 158 167 108 51 227
Consumer.............. 2,517 2,230 1,900 1,061 1,292
---------- ---------- ---------- ---------- ----------
Total loans charged
off................ 8,237 6,109 6,482 6,239 7,047
---------- ---------- ---------- ---------- ----------
Recoveries of loans
previously charged off:
Commercial............ 859 822 1,161 555 241
Real estate:
Residential......... 118 188 57 99 201
Commercial.......... 1,168 546 1,130 158 227
Construction........ 12 91 -- -- --
Home equity........... 49 8 -- 29 51
Consumer.............. 606 549 654 389 472
---------- ---------- ---------- ---------- ----------
Total recoveries.... 2,812 2,204 3,002 1,230 1,192
---------- ---------- ---------- ---------- ----------
Net loans charged off... 5,425 3,905 3,480 5,009 5,855
---------- ---------- ---------- ---------- ----------
Balance of allowance for
possible loan losses at
year end............... $ 26,721 $ 28,096 $ 27,818 $ 22,163 $ 21,672
========== ========== ========== ========== ==========
Amount of loans
outstanding at end of
year................... $1,415,571 $1,354,537 $1,265,345 $1,060,325 $1,014,310
Average amount of loans
outstanding............ 1,391,234 1,336,185 1,228,948 1,023,399 1,008,010
Ratio of net charge-offs
during year to average
loans outstanding...... 0.39% 0.29% 0.28% 0.49% 0.58%
Allowance as a percent
of loans outstanding at
end of year............ 1.89 2.07 2.20 2.09 2.14
At December 31, 1997, the allowance for possible loan losses was $26.7
million, or 1.89% of total loans compared with $28.1 million, or 2.07% of
loans one year ago. The coverage ratio, or allowance for possible loan losses
to nonperforming loans, stood at 369% at year-end 1997, compared with 250% at
the end of 1996.
The provision for possible loan losses totaled $4.1 million in 1997,
compared to $4.2 million in 1996, and $5.0 million in 1995. The lower
provision during 1997 and 1996 was primarily attributable to the reduction in
the level of nonperforming assets and the strength of the ratios in connection
with the allowance for possible loan losses.
Commercial charge-offs for 1997 include a $1.9 million charge related to
CTC's commercial customer credit card processing business. The charge off
related to a future services company, which had contracted with,
18
and accepted deposits, from customers, prior to discontinuing operations. This
company was obligated to provide services to its customers upon the payment of
a second amount. At the time this company discontinued operations, CTC chose
to honor these obligations, leading to the charge-off of the resulting $1.9
million overdraft. The Company has assessed its merchant servicing customer
base and has evaluated the processing volumes related to similar future
services businesses. It has also taken steps to mitigate the risk of similar
charge-offs in the future.
The following table summarizes the allocation of the allowance for possible
loan losses for the five years ended December 31, 1997:
DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- ---------------------- ---------------------- ----------------------
AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT LOAN AMOUNT
ALLOCATED DISTRIBUTION ALLOCATED DISTRIBUTION ALLOCATED DISTRIBUTION ALLOCATED DISTRIBUTION ALLOCATED
--------- ------------ --------- ------------ --------- ------------ --------- ------------ ---------
(IN THOUSANDS)
Commercial....... $ 5,075 26% $ 4,494 24% $ 3,901 23% $ 2,417 18% $ 2,468
Real estate:
Residential..... 1,275 27 1,395 30 1,452 31 764 35 819
Commercial...... 6,143 23 5,960 23 6,024 25 5,692 24 6,259
Construction.... 455 1 500 2 439 2 770 2 510
Home equity...... 318 6 317 6 291 6 268 7 370
Consumer and
leasing......... 4,093 17 3,149 15 1,754 13 1,916 14 2,146
Other............ 9,362 -- 12,281 -- 13,957 -- 10,336 -- 9,100
------- --- ------- --- ------- --- ------- --- -------
$26,721 100% $28,096 100% $27,818 100% $22,163 100% $21,672
======= === ======= === ======= === ======= === =======
1993
------------
LOAN
DISTRIBUTION
------------
Commercial....... 16%
Real estate:
Residential..... 36
Commercial...... 25
Construction.... 2
Home equity...... 8
Consumer and
leasing......... 13
Other............ --
------------
100%
============
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, 1997,
the Company held investments available for sale totaling $363.3 million. This
compares with investments of $329.2 million available for sale and $35.6
million held for investment at December 31, 1996. During 1997, in order to
improve the liquidity of the investment portfolio, investments previously
classified as held to maturity with an amortized cost and market value of $6.8
million were sold. In addition, the remaining held for investment portfolio
with an amortized cost of $21.9 million and unrealized loss of $385,000 was
transferred to available for sale in accordance with Statement of Financial
Accounting Standards No. 115. At December 31, 1997, unrealized gains (net of
taxes) of $1,675,000 resulted from marking the available for sale portfolio to
market value. This compares with unrealized losses (net of taxes) of $208,000
at December 31, 1996. These amounts are reflected as an increase and as a
reduction, respectively, in stockholders' equity.
19
The following tables show the composition of the Company's investment
portfolio, at December 31, 1997 and 1996:
1997 1996
-------- --------
Securities available for sale (at market value) (IN THOUSANDS)
U.S. Treasury securities................................... $ 23,334 $109,471
U.S. government agency obligations......................... 138,203 76,707
Obligations of states and political subdivisions........... 314 --
Mortgage-backed securities................................. 91,438 51,604
Corporate bonds and notes.................................. 90,812 65,190
Government bond mutual funds............................... 9,050 10,103
Marketable equity securities............................... 10,007 16,138
Other debt securities...................................... 121 --
-------- --------
Total Securities available for sale...................... 363,279 329,213
-------- --------
Securities held for investment (at amortized cost)
U.S. government agency obligation.......................... -- $ 198
Obligations of states and political subdivisions........... -- 490
Mortgage-backed securities................................. -- 34,761
Corporate bonds and notes.................................. -- 25
Other debt securities...................................... -- 106
-------- --------
Total Securities held for investment..................... -- 35,580
-------- --------
Total Investment Securities............................ $363,279 $364,793
======== ========
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, 1997, with
comparative totals for 1996. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations:
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER NO FIXED
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
------------- -------------- ------------- ------------ ------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- ------- ----- ------ ----- ------- ----- -------- -----
Securities available for
sale (IN THOUSANDS)
US Treasury securities. $10,574 6.74% $ 12,513 6.53% $ -- --% $ -- --% $ -- --% $ 23,087 6.63%
US government agency
obligations........... 9,963 5.60 122,109 6.43 3,000 7.82 1,800 7.25 -- -- 136,872 6.40
Obligations of states
and political
subdivisions.......... 16 9.96 17 9.96 170 9.61 111 9.14 -- -- 314 9.67
Mortgage-backed
securities (1)........ 17,571 6.87 46,716 6.79 26,339 6.94 247 6.45 -- -- 90,873 6.84
Corporate bonds and
notes................. 5,991 5.74 83,861 6.61 25 7.00 -- -- -- -- 89,877 6.55
Government bond mutual
funds................. -- -- -- -- -- -- -- -- 9,526 6.91 9,526 6.91
Marketable equity
securities............ 10,000 6.14 -- -- -- -- -- -- -- -- 10,000 6.41
Other debt securities.. -- -- 89 6.25 32 10.36 -- -- -- -- 121 7.34
------- ---- -------- ---- ------- ----- ------ ---- ------- ---- -------- ----
Total available for
sale................... 54,115 6.35 265,305 6.55 29,566 7.05 2,158 7.26 9,526 6.91 360,670 6.57
------- ---- -------- ---- ------- ----- ------ ---- ------- ---- -------- ----
Comparative totals for
1996................... $85,640 6.08% $239,349 6.27% $22,350 6.98% $6,924 7.26% $10,840 5.44% $365,103 6.26%
- --------
(1) Maturities of mortgage-backed securities are based on contractual payments
and estimated mortgage loan prepayments.
Deposits
During 1997, total deposits averaged $1,696.0 million, up from $1,627.8
million in 1996. Noninterest-bearing demand deposits averaged $279.0 million,
up from $251.3 million in 1996. Average savings deposits increased $53.8
million, to $886.5 million for 1997. This category includes non-contractual
interest bearing deposit products, such as savings, money market, and N.O.W.
accounts. During 1997, time accounts (retirement and certificates of deposit)
totaling $530.4 million decreased 2% compared to $543.9 million in 1996. The
Company has a number of institutional customers whose investment needs are
frequently met by purchasing certificates of deposit over $100,000. 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.
20
The following table shows average daily balances of the Company's deposits
for the periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
Demand deposits................................ $ 279,034 $ 251,276 $ 223,800
Savings deposits............................... 886,516 832,677 760,029
Other time..................................... 413,036 430,501 388,276
Certificates of deposit $100,000 and over...... 117,367 113,380 114,395
---------- ---------- ----------
Total deposits............................... $1,695,953 $1,627,834 $1,486,500
========== ========== ==========
The Company's outstanding certificates of deposit and other time deposits in
denominations of $100,000 and over had maturities as follows:
DECEMBER 31,
--------------
1997
--------------
(IN THOUSANDS)
Three months or less....................................... $ 82,886
Over three months to six months............................ 20,935
Over six months to twelve months........................... 24,957
Over twelve months......................................... 10,698
--------
$139,476
========
BORROWINGS
During 1997, short-term borrowings averaged $33.9 million, up from the $28.2
million posted in 1996. This funding consists of: Treasury, tax and loan
deposits; securities sold under agreements to repurchase and Federal funds
purchased. Treasury borrowings averaged $22.4 million for 1997 compared with
$15.3 million during 1996. 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 $10.6 million for
1997, compared to $10.1 million posted during 1996. These borrowings have
neither reserve requirements nor FDIC insurance costs. Short-term FHLB
Borrowings averaged $194,000 for 1997 compared with $2.3 million for 1996.
U.S. Treasury and agency securities, mortgage-backed securities and corporate
notes are pledged as collateral for the Treasury borrowings and repurchase
agreements. Federal funds purchased averaged $698,000 for 1997 compared with
$382,000 for 1996. Long-term borrowings averaged $4.2 million in 1997 compared
to $2.5 million in 1996.
CAPITAL RESOURCES
The Company's capital forms the foundation for maintaining investor
confidence as well as for developing programs for growth and new activities.
Because of the Company's profitability over the past several years, total
capital increased from $111.7 million at December 31, 1993 to $174.4 million
at December 31, 1996. During 1997, the Company adopted measures to maintain a
capital level consistent with the needs for its activities. The quarterly
dividend rate was increased from $0.16 to $0.18 per share in the second
quarter and an additional special $0.60 per share dividend was paid in the
fourth quarter of 1997. Additionally, a share repurchase plan was implemented,
in which up to 1,250,000 shares could be repurchased during 1997 and 1998. At
December 31, 1997, capital stood at $162.3 million, a reduction of $12.1
million from $174.4 million at December 31, 1996. Repurchases of 1,043,000
shares of the Company's stock totaling $26.0 million and dividend payments
totaling $18.9 million reduced the capital position during 1997. These
reductions were partially offset by earnings of $29.4 million, $1.4 million of
common stock issued in connection with benefit plans and a change in the net
unrealized gain on securities available for sale of $1.9 million.
The capital position increased during 1996 by $20.5 million. 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.
21
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, 1997, the Company's leverage capital
ratio (which is calculated pursuant to the FRB's regulations) was 7.43%,
CTC's, BWM's, and FBT's leverage capital ratios (which are calculated pursuant
to the FDIC's regulations) were 7.05%, 7.31% and 6.65%, respectively. The
ratios in 1996 were 8.58% for the Company, 8.42% for CTC, 7.85% for BWM, and
6.85% 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, 1997, the Company's risk-
based capital ratio was 11.17% and its Tier 1 capital, consisting entirely of
common stock, was 9.86% of risk-weighted assets. This compares with year-end
1996 ratios of 13.06% and 11.71%, 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, 1997, CTC's leverage capital ratio was 7.05%, its Tier 1 risk-
based capital ratio was 9.30%, and its total risk-based capital ratio was
10.60%; BWM's ratios were 7.31 %, 8.79%, and 10.14%, respectively, while FBT's
ratios were 6.65%, 9.70%, and 10.98%, respectively. These ratios placed the
Banks in the FDIC's highest capital category of well capitalized. Capital
ratios in excess of minimum requirements indicate capacity to take advantage
of profitable and credit-worthy opportunities as well as the potential to
respond to unforeseen adverse conditions.
The following table presents capital components and ratios of the Company at
December 31, 1997, 1996, and 1995:
DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
LEVERAGE
Stockholders' equity........................ $ 146,434 $ 163,513 $ 141,453
Total average assets (1).................... 1,969,822 1,906,114 1,757,002
Leverage capital ratio...................... 7.43% 8.58% 8.05%
RISK-BASED
Capital components:
Tier 1..................................... $ 146,434 $ 163,513 $ 141,453
Tier 2..................................... 18,570 17,449 15,873
---------- ---------- ----------
Total..................................... $ 165,004 $ 180,962 $ 157,326
========== ========== ==========
Risk-weighted assets:
On-balance sheet........................... $1,407,074 $1,331,203 $1,216,807
Off-balance sheet.......................... 92,441 75,308 62,347
---------- ---------- ----------
$1,499,515 $1,406,511 $1,279,154
========== ========== ==========
Ratios:
Tier 1..................................... 9.86% 11.71% 11.16%
Total (including Tier 2)................... 11.17 13.06 12.53
- --------
(1) Total average assets for the most recent quarter.
22
LIQUIDITY AND RATE SENSITIVITY
The Company's liquidity and rate sensitivity are monitored by the asset and
liability committee, based upon policies approved by the Board of Directors.
Strategies are implemented by the Banks' asset and liability committee. This
committee meets periodically 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, 1997, the Company maintained
cash balances and short-term investments of approximately $143.4 million,
compared with $214.5 million at December 31, 1996. Cash on hand at December
31, 1996 was higher than usual due to a change in the timing of certain
payments to municipalities by the State of Vermont. In addition, repurchases
of the Company's stock totaling $26.0 million and dividend payments totaling
$18.9 million reduced the Company's cash position during the year. During
1997, the Company continued to be an average daily net seller of Federal
Funds.
Interest-rate risk is the sensitivity of income to variations in interest
rates over both short-term and long-term horizons. The primary goal of
interest-rate management is to control this risk within limits approved by the
Board of Directors. These limits and guidelines reflect the Company's
tolerance for interest-rate risk. The Company attempts to control interest-
rate risk by identifying exposures, quantifying them and taking appropriate
actions. The Company quantifies its interest-rate risk exposure using
sophisticated simulation and valuation models, as well as simpler gap
analyses.
The Company uses simulation analyses to measure the exposure of net interest
income to changes in interest rates over a relatively short (i.e., within one
year) time horizon. Simulation analysis involves projecting future interest
income and expense from the Company's assets and liabilities under various
scenarios.
The Company's limits on interest-rate risk specify that if interest rates
were to shift immediately up or down 200 basis points, estimated net interest
income for the next 12 months should decline by less than 10%. The following
table reflects the Company's estimated exposure, as a percentage of estimated
net interest income for the next 12 months, assuming an immediate shift in
interest rates:
RATE CHANGE ESTIMATED EXPOSURE AS A
(BASIS POINTS) % OF NET INTEREST INCOME
-------------- ------------------------
+200 4.33%
-200 (4.77)
As noted above, 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 Company's limits on
interest-rate risk specify that the cumulative one-year gap should be less
than 15% of total assets. As of December 31, 1997, the estimated exposure was
2.7% asset-sensitive.
23
The following table shows the amounts of interest-earning assets and
interest-bearing liabilities at December 31, 1997 that reprice during the
periods indicated:
REPRICING DATE
--------------------------------------------------
OVER
ONE DAY OVER SIX ONE YEAR OVER
TO SIX MONTHS TO TO FIVE FIVE
MONTHS ONE YEAR YEARS YEARS TOTAL
-------- --------- -------- --------- ----------
(IN THOUSANDS)
Interest-earning assets:
Loans....................... $823,893 $178,474 $352,743 $ 60,461 $1,415,571
Investment securities (1)... 35,772 27,775 273,661 31,662 368,870
Interest-bearing cash
equivalents................ 60,801 -- -- -- 60,801
-------- -------- -------- --------- ----------
Total interest-earning
assets.................... 920,466 206,249 626,404 92,123 1,845,242
-------- -------- -------- --------- ----------
Interest-bearing
liabilities:
Deposits.................... 897,557 152,939 141,300 263,194 1,454,990
Borrowings.................. 22,250 1,000 2,239 -- 25,489
-------- -------- -------- --------- ----------
Total interest-bearing
liabilities............... 919,807 153,939 143,539 263,194 1,480,479
-------- -------- -------- --------- ----------
Net interest rate
sensitivity gap............ $ 659 $ 52,310 $482,865 $(171,071) $ 364,763
======== ======== ======== ========= ==========
Cumulative gap at December
31, 1997................... $ 659 $ 52,969 $535,834 $ 364,763
Cumulative gap at December
31, 1996................... $(12,922) $ 31,228 $382,924 $ 321,201
- --------
(1) Amounts are based on amortized cost balances.
The following table shows scheduled maturities of selected loans at December
31, 1997:
LESS THAN ONE YEAR TO OVER FIVE
ONE YEAR FIVE YEARS YEARS TOTAL
--------- ----------- --------- --------
(IN THOUSANDS)
Predetermined rates:
Commercial........................... $ 13,751 $ 69,827 $ 26,570 $110,148
Commercial real estate and
construction........................ 7,351 67,605 40,969 115,925
-------- -------- -------- --------
21,102 137,432 67,539 226,073
======== ======== ======== ========
Floating or adjustable rates:
Commercial........................... 95,286 98,835 60,773 254,894
Commercial real estate and
construction........................ 24,281 99,856 96,315 220,452
-------- -------- -------- --------
119,567 198,691 157,088 475,346
======== ======== ======== ========
RESULTS OF OPERATIONS
Comparison of Years Ended December 31, 1997 and 1996
NET INTEREST INCOME
The primary source of recurring income for the Company is the net interest
income of the Banks, which is the difference between interest income on loans
and investments and interest paid on deposits and borrowings. Net interest
income is affected by the change in interest rates and the volumes of interest
earning assets and interest bearing liabilities.
For 1997, net interest income was $90.6 million, up $6.7 million from the
1996 level. On a fully taxable equivalent basis, net interest income increased
$6.6 million from 1996, to $92.4 million in 1997. These improvements resulted
from higher levels of interest earning assets and an increase in the net yield
on interest bearing liabilities. Average interest-earning assets totaled
$1,809.0 million for 1997, up $87.7 million from the 1996 level. The taxable
equivalent net yield on earning assets was 5.11% in 1997, an increase of 12
basis points from 4.99% in 1996.
24
The following table presents an analysis of average rates and yields on a
fully taxable equivalent basis for the years indicated:
1997 1996 1995
--------------------------------- -------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE (1) RATE (1) BALANCE EXPENSE (1) RATE (1) BALANCE EXPENSE (1) RATE (1)
---------- ------------ -------- ---------- ----------- -------- ---------- ----------- --------
(IN THOUSANDS)
ASSETS
Interest-earning
assets:
Loans................. $1,386,772 $125,076 9.02% $1,331,199 $120,362 9.04% $1,222,790 $114,358 9.35%
Industrial revenue
bonds (2)............ 4,462 522 11.70 4,986 571 11.45 6,158 718 11.66
Investments:
Taxable............... 360,284 22,992 6.38 327,099 20,232 6.19 292,495 18,313 6.26
Tax-favored debt
securities........... 379 39 10.29 1,112 111 9.98 1,596 157 9.84
Tax-favored equity
securities........... 21,475 1,417 6.60 28,488 1,684 5.91 19,927 1,289 6.47
Interest-bearing
deposits in banks.... 100 3 3.25 100 3 3.00 100 3 3.00
Federal funds sold.... 35,529 1,936 5.45 28,312 1,524 5.38 33,910 1,988 5.86
---------- -------- ---------- -------- ---------- --------
Total interest-earning
assets............... 1,809,001 151,985 8.40 1,721,296 144,487 8.39 1,576,976 136,826 8.68
-------- -------- --------
Noninterest-earning
assets............... 153,172 149,108 137,184
Allowance for possible
loan losses.......... (27,840) (28,460) (26,357)
---------- ---------- ----------
Total assets.......... $1,934,333 $1,841,944 $1,687,803
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings and interest-
bearing transactional
accounts............. $ 886,516 $ 29,637 3.34 $ 832,677 $ 27,268 3.27 $ 760,029 $ 26,211 3.45
Certificates of
deposit $100,000 and
over................. 117,367 6,267 5.34 113,380 6,259 5.52 114,395 7,144 6.25
Other time deposits... 413,036 21,193 5.13 430,501 22,988 5.34 388,276 20,416 5.26
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits............. 1,416,919 57,097 4.03 1,376,558 56,515 4.11 1,262,700 53,771 4.26
Short-term borrowings. 33,930 2,225 6.56 28,165 1,887 6.70 42,628 2,858 6.70
Long-term debt........ 4,210 223 5.30 2,514 197 7.84 1,662 143 8.60
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
liabilities.......... 1,455,059 59,545 4.09 1,407,237 58,599 4.16 1,306,990 56,772 4.34
-------- -------- --------
Noninterest-bearing
liabilities:
Demand deposits....... 279,034 251,276 223,800
Other liabilities..... 32,672 20,608 18,372
---------- ---------- ----------
Total liabilities..... 1,766,765 1,679,121 1,549,162
Stockholders' equity.. 167,568 162,823 138,641
---------- ---------- ----------
Total liabilities and
stockholders' equity. $1,934,333 $1,841,944 $1,687,803
========== ========== ==========
Net interest income... $ 92,440 85,888 $ 80,054
======== ======== ========
Interest rate spread 4.31% 4.23% 4.34%
(3)..................
Net yield on earning
assets (4)........... 5.11 4.99 5.08
- --------
(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.
25
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 relationship of the absolute dollar amounts of the change in each.
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
----------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGE IN: TOTAL DUE TO CHANGE IN: TOTAL
---------------------- ----------- --------------------- ----------
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
RATE ^BALANCE (DECREASE) RATE BALANCE (DECREASE)
--------- ---------- ----------- ---------- --------- ----------
(IN THOUSANDS)
Interest income:
Loans, including fees.. $ (298) $ 5,012 $4,714 $ (3,798) $ 9,802 $6,004
Industrial revenue
bonds................. 12 (61) (49) (13) (134) (147)
Investments:
Taxable............... 642 2,118 2,760 (221) 2,140 1,919
Tax-favored debt
securities........... 3 (75) (72) 2 (48) (46)
Tax-favored equity
securities........... 196 (463) (267) (111) 506 395
Federal funds sold..... 19 393 412 (163) (301) (464)
--------- --------- ------ ---------- --------- ------
Total interest income. 574 6,924 7,498 (4,304) 11,965 7,661
--------- --------- ------ ---------- --------- ------
Interest expense:
Savings and interest-
bearing transactional
accounts.............. 569 1,800 2,369 (1,366) 2,423 1,057
Certificates of deposit
$100,000 and over..... (205) 213 8 (822) (63) (885)
Other time deposits.... (899) (896) (1,795) 322 2,250 2,572
--------- --------- ------ ---------- --------- ------
Total deposits........ (535) 1,117 582 (1,866) 4,610 2,744
Short-term borrowings.. (40) 378 338 (2) (969) (971)
Long-term debt......... (64) 90 26 (14) 68 54
--------- --------- ------ ---------- --------- ------
Total interest
expense.............. (639) 1,585 946 (1,882) 3,709 1,827
--------- --------- ------ ---------- --------- ------
Change in net interest
income................. $ 1,264 $ 5,288 $6,552 $ (2,391) $ 8,225 5,834
========= ========= ====== ========== ========= ======
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 $4.1 million in 1997 compared to $4.2 million in 1996.
(See "Allowance for Possible Loan Losses)
26
NONINTEREST INCOME AND NONINTEREST EXPENSE
Noninterest income was $28.2 million in 1997, up $3.3 million from the $24.9
million reported in 1996. Trust income was up $509,000 from the 1996 level, to
$5.4 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 the
advances in the stock and bond markets during the year.
Service charges on deposit accounts increased in 1997, rising to $7.0
million from $6.3 million in the previous year. This was partially
attributable to CTC's new deposit fee schedule, which was implemented during
the second quarter of 1997.
Net 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
commercial customers. The Company has emphasized development of this business
in recent years which has expanded to include local and national customers
involved in retail, service, and mail order businesses. These activities
generated net income of $4.8 million in 1997, up from $4.2 million in the
prior year. This increase resulted primarily from an increase in the number of
commercial customers serviced, and consequently, significantly higher levels
of credit card processing volume; $1.137 billion was processed in 1997,
compared with $800 million in 1996.
Net insurance commissions generated by the insurance agency acquired in May
1997 totaled $1.4 million. In addition, the Company posted a total of $4.9
million in other noninterest income compared to $4.4 million in 1996. This
category represents over thirty categories of fee income.
Noninterest expense totaled $70.1 million in 1997, up $5.5 million from the
1996 level. Salaries increased $2.4 million from $25.8 million in 1996.
Employee benefits increased by $1.8 million to $9.4 million in 1997. The
increases in salaries and benefits during 1997 were primarily attributable to
an increase of approximately $1.6 million resulting from higher staffing
levels and related recruitment expenses and a $808,000 increase in accruals
for incentive compensation plans due to stronger profits.
FDIC insurance premiums totaled $231,000, up from $27,000 in 1996. The Banks
paid minimal insurance assessments in 1996 as compared to 1997, when
assessment rates were increased to 1.3 cents per $100 of deposits.
In 1997 expenses associated with OREO were more than offset by recoveries on
OREO properties sold, so that a net credit of $136,000 was posted. Net OREO
expenses were $153,000 for 1996.
Total other noninterest expense for 1997 totaled $22.9 million, up from
$21.9 million in 1996. The components of other noninterest expense for the
years presented are as follows:
1997 1996
------- -------
(IN THOUSANDS)
Data processing.......................................... $ 5,424 $ 5,023
Amortization of intangible assets........................ 1,310 1,223
Legal and professional................................... 1,443 1,453
Marketing................................................ 2,164 2,154
Other.................................................... 12,579 12,023
------- -------
$22,920 $21,876
======= =======
27
Included in the increases of the various noninterest expense categories
(except FDIC Premium) during 1997 were administrative expenses for The
Pomerleau Insurance Agency acquired during the second quarter of 1997.
Excluding the effects of Pomerleau total noninterest expenses increased 8.1%
over 1996.
INCOME TAXES
The Company and the Banks are taxed on income by the IRS at the Federal
level and by various states in which they do business. The majority of the
Company's income is generated in the State of Vermont, which levies franchise
taxes on banking institutions based upon average deposit levels in lieu of
taxing income. On August 1, 1997, the franchise tax rate increased from $0.04
to $.096 per $1,000 of deposits. This increased franchise tax expense from
approximately $47,000 per month prior to August 1, 1997 to approximately
$113,000 per month thereafter. For the year ended December 31, 1997, total
franchise taxes of $898,000 were approximately $335,000 higher than in 1996.
Franchise taxes are included in income tax expense in the consolidated
statements of income.
For 1997, the Federal and state income tax provisions amounted to $15.3
million. This compares with an income tax provision of $13.5 million for 1996.
The effective tax rates for 1997 and 1996 were 34.3% and 33.5%, respectively.
During 1997 and 1996, the Company's statutory Federal corporate tax rate was
35%. The Company's effective tax rates differed from the statutory rates
primarily because of 1) the proportion of interest income from state and
municipal securities and corporate dividend income which are partially exempt
from Federal taxation and 2) tax credits on investments in qualified low
income housing projects.
YEAR 2000
The Year 2000 problem, which is common to most corporations, concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. The Company has commenced an assessment of the majority of its
systems and is in the process of developing a specific workplan to address
this issue. The Company currently believes it will be able to modify or
replace its affected systems in time to minimize any detrimental effect on
operations. While it is not possible, at present, to give an accurate estimate
of the cost of this work, these costs may be material to the Company's results
of operations in one or more fiscal quarters or years, but are not expected to
have material adverse impact on the long-term results of operations,
liquidity, or consolidated financial position of the Company.
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 that 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.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses totaled $4.2 million in 1996 and $5.0
million in 1995. 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.
28
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 the
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. 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.
Net 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
commercial customers. These activities generated net 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 customers serviced, and consequently,
significantly higher levels of credit card processing 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 $25.8 million from $23.7 million in 1995.
Employee benefits declined by $610,000 to $7.6 million in 1996 due to reduced
pension expense at CTC 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 FBT ($195,000) and by the
inclusion of BWM for the entire year ($203,000).
Occupancy expense was $9.1 million for 1996, up from $8.1 million in 1995.
Additional depreciation at CTC, related to the 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 approximately $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 ranged 23 cents to 4 cents per
$100 of deposits. 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 noninterest expense for 1996 totaled $21.9 million, up from $20.3 in
1995. This increase was spread across several areas; including data processing
costs of $560,000, marketing of $357,000, professional fees of $199,000 and
travel and training of $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 1) the proportion of interest income from state and
municipal securities and corporate dividend income which are partially exempt
from Federal taxation and 2) tax credits on investments in qualified low
income housing projects.
29
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHITTENDEN CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
1997 1996
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and cash equivalents.............................. $ 143,394 $ 214,459
Securities available for sale.......................... 363,279 329,213
Securities held for investment (market value
$35,405,000 in 1996).................................. -- 35,580
Federal Home Loan Bank stock........................... 5,591 5,591
Mortgage loans held for sale........................... 16,433 9,870
Loans.................................................. 1,399,138 1,344,667
Less: Allowance for possible loan losses............... (26,721) (28,096)
---------- ----------
Net loans............................................ 1,372,417 1,316,571
Accrued interest receivable............................ 14,431 14,179
Other real estate owned................................ 747 2,251
Net deferred tax asset................................. 1,857 10,647
Other assets........................................... 17,736 15,797
Premises and equipment, net............................ 27,412 24,297
Intangible assets...................................... 13,853 10,291
---------- ----------
Total assets......................................... $1,977,150 $1,988,746
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand............................................... $ 302,555 $ 286,932
Savings.............................................. 924,846 951,989
Other time........................................... 409,055 418,363
Certificates of deposit $100,000 and over............ 121,089 104,295
---------- ----------
Total deposits..................................... 1,757,545 1,761,579
Short-term borrowings.................................. 23,250 23,992
Accrued expenses and other liabilities................. 31,843 26,234
Long-term debt......................................... 2,239 2,540
---------- ----------
Total liabilities.................................... 1,814,877 1,814,345
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--
15,929,661 in 1997 and 15,848,281 in 1996............. 15,930 15,848
Surplus................................................ 72,611 71,537
Retained earnings...................................... 102,553 92,039
Treasury stock, at cost--1,508,076 shares in 1997 and
503,016 shares in 1996................................ (30,084) (4,770)
Net unrealized gain (loss) on securities available for
sale, net of taxes of
$934,000 in 1997 and ($102,000) in 1996............... 1,675 (208)
Unearned portion of employee restricted stock.......... (412) (45)
---------- ----------
Total stockholders' equity........................... 162,273 174,401
---------- ----------
Total liabilities and stockholders' equity........... $1,977,150 $1,988,746
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
30
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTEREST INCOME:
Interest on loans................ $124,201 $119,432 $113,675
Investment securities:
Mortgage-backed securities..... 7,730 6,062 5,666
Taxable........................ 15,262 14,170 12,647
Tax-favored debt............... 28 81 99
Tax-favored equity............. 1,029 1,320 1,025
Short-term investments........... 1,939 1,527 1,991
------------- ------------- -------------
Total interest income.......... 150,189 142,592 135,103
------------- ------------- -------------
INTEREST EXPENSE:
Deposits:
Savings........................ 29,637 27,268 26,211
Time........................... 27,460 29,247 27,560
------------- ------------- -------------
Total interest on deposits... 57,097 56,515 53,771
Short-term borrowings............ 2,225 1,887 2,858
Long-term debt................... 223 197 143
------------- ------------- -------------
Total interest expense......... 59,545 58,599 56,772
------------- ------------- -------------
Net interest income................ 90,644 83,993 78,331
Provision for possible loan losses. 4,050 4,183 5,000
------------- ------------- -------------
Net interest income after provision
for possible loan losses.......... 86,594 79,810 73,331
------------- ------------- -------------
NONINTEREST INCOME:
Trust income..................... 5,385 4,876 4,456
Service charges on deposit
accounts........................ 6,952 6,260 5,860
Mortgage servicing income........ 2,314 2,454 2,427
Gains on sales of mortgage loans,
net............................. 2,434 2,720 1,282
Credit card income, net.......... 4,818 4,212 3,634
Insurance commissions, net....... 1,372 -- --
Other............................ 4,935 4,398 4,381
------------- ------------- -------------
Total noninterest income....... 28,210 24,920 22,040
------------- ------------- -------------
NONINTEREST EXPENSE:
Salaries......................... 28,180 25,802 23,701
Employee benefits................ 9,365 7,574 8,184
Net occupancy expense............ 9,512 9,125 8,096
FDIC deposit insurance........... 231 27 1,580
Other real estate owned, income
and expense, net................ (136) 153 (243)
Other............................ 22,920 21,876 20,266
------------- ------------- -------------
Total noninterest expense...... 70,072 64,557 61,584
------------- ------------- -------------
Income before income taxes......... 44,732 40,173 33,787
Provision for income taxes......... 15,326 13,452 11,656
------------- ------------- -------------
Net income......................... $ 29,406 $ 26,721 $ 22,131
============= ============= =============
Basic earnings per share........... $ 1.99 $ 1.75 $ 1.50
Diluted earning per share.......... 1.94 1.72 1.47
Dividends per share................ 1.29 0.57 0.32
The accompanying notes are an integral part of these consolidated financial
statements.
31
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
NET UNREALIZED
GAIN (LOSS) UNEARNED
ON SECURITIES PORTION OF TOTAL
AVAILABLE EMPLOYEE STOCK-
COMMON RETAINED TREASURY FOR SALE, RESTRICTED HOLDERS'
STOCK SURPLUS EARNINGS STOCK NET OF TAXES STOCK EQUITY
------- ------- -------- -------- -------------- ---------- --------
(IN THOUSANDS)
BALANCE AT DECEMBER 31,
1994................... $14,692 $58,522 $ 56,737 (9,586) $(6,941) $ (103) $113,321
Net income.............. -- -- 22,131 -- -- -- 22,131
Cash dividends declared
($0.32 per share)...... -- -- (4,803) -- -- -- (4,803)
Shares issued in
conjunction with
acquisition of The Bank
of Western
Massachusetts.......... 588 8,174 -- 5,514 -- -- 14,276
Shares issued/forfeited
under various stock
plans, net............. 152 1,041 -- -- -- -- 1,193
Amortization of deferred
compensation for
restricted stock
earned................. -- -- -- -- -- 35 35
Issuance of treasury
stock.................. -- (18) -- 105 -- -- 87
Change in net unrealized
gain on securities
available for sale..... -- -- -- -- 7,709 -- 7,709
------- ------- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31,
1995................... 15,432 67,719 74,065 (3,967) 768 (68) 153,949
Net income.............. -- -- 26,721 -- -- -- 26,721
Cash dividends declared
($0.57 per share)...... -- -- (8,747) -- -- -- (8,747)
Shares issued/forfeited
under various stock
plans, net............. 416 3,835 -- (853) -- -- 3,398
Amortization of deferred
compensation for
restricted stock
earned................. -- -- -- -- -- 23 23
Issuance of treasury
stock.................. -- (17) -- 50 -- -- 33
Change in net unrealized
gain/loss on securities
available for sale..... -- -- -- -- (976) -- (976)
------- ------- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31,
1996................... 15,848 71,537 92,039 (4,770) (208) (45) 174,401
Net income.............. -- -- 29,406 -- -- -- 29,406
Cash dividends declared
($1.29 per share)...... -- -- (18,892) -- -- -- (18,892)
Shares issued/forfeited
under various stock
plans, net............. 82 1,363 -- -- -- (444) 1,001
Amortization of deferred
compensation for
restricted stock
earned................. -- -- -- -- -- 77 77
Purchase of treasury
stock.................. -- -- -- (25,956) -- -- (25,956)
Issuance of treasury
stock.................. -- (262) -- 642 -- -- 380
Cash paid for fractional
shares................. -- (27) -- -- -- -- (27)
Change in net unrealized
gain/loss on securities
available for sale..... -- -- -- -- 1,883 -- 1,883
------- ------- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31,
1997................... $15,930 $72,611 $102,553 $(30,084) $ 1,675 $(412) $162,273
======= ======= ======== ======== ======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
CHITTENDEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 29,406 $ 26,721 $ 22,131
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses......... 4,050 4,183 5,000
Depreciation and amortization.............. 3,581 3,551 2,840
Amortization of intangible assets.......... 1,311 1,223 1,031
Amortization of premiums, fees, and
discounts, net............................ (1,119) (1,570) (622)
Investment securities (gains) losses....... (53) 98 (205)
Deferred (prepaid) income taxes............ 7,759 (133) (43)
Loans originated and purchased for sale.... (186,773) (193,833) (159,895)
Proceeds from sales of loans............... 182,393 201,375 150,771
Gains on sales of loans.................... (2,434) (2,720) (1,282)
Increase in Federal Home Loan Bank stock... -- -- (374)
Gains on sales of premises and equipment... -- -- (225)
Changes in assets and liabilities, net of
effect from purchase of acquired companies:
Accrued interest receivable................ (252) (1,299) (108)
Other assets............................... (3,775) (2,721) 1,474
Accrued expenses and other liabilities..... 5,957 896 (1,042)
--------- --------- ---------
Net cash provided by operating
activities.............................. 40,051 35,771 19,451
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired (paid) in relation to
acquisitions................................ 721 -- (3,455)
Proceeds from sales of securities available
for sale.................................... 199,497 9,291 9,473
Proceeds from maturing securities and
principal payments on securities available
for sale.................................... 208,729 256,506 160,505
Purchases of securities available for sale... (417,301) (329,832) (164,287)
Proceeds from sales of securities held for
investment.................................. 6,843 -- --
Proceeds from principal payments on
securities held for investment.............. 6,960 4,352 6,054
Purchases of securities held for investment.. (199) (321) (5,464)
Loans originated, net of principal
repayments.................................. (60,611) (91,207) (38,007)
Purchases of premises and equipment.......... (6,696) (2,901) (4,254)
Proceeds from sales of premises and
equipment................................... -- -- 488
--------- --------- ---------
Net cash used in investing activities...... (62,057) (154,112) (38,947)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.......... (4,049) 173,653 115,637
Net decrease in short-term borrowings........ (742) (1,033) (24,884)
Net increase (decrease) in long term
borrowings.................................. (301) 56 54
Proceeds from issuance of treasury and
common stock................................ 908 3,431 1,280
Dividends on common stock.................... (18,892) (8,747) (4,803)
Repurchase of common stock................... (25,983) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities................................ (49,059) 167,360 87,284
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. (71,065) 49,019 67,788
Cash and cash equivalents at beginning of
year......................................... 214,459 165,440 97,652
--------- --------- ---------
Cash and cash equivalents at end of year...... $ 143,394 $ 214,459 $ 165,440
========= ========= =========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest................................... $ 59,861 $ 58,201 $ 56,410
Income taxes............................... 8,882 9,950 11,668
Non-cash investing and financing activities:
Securities transferred from held for
investment to held for sale............... 21,920 -- --
Loans transferred to other real estate
owned..................................... 1,810 2,444 5,152
Mortgage loans securitized................. -- -- 3,665
Issuance of treasury and restricted stock.. 502 3,216 1,280
Assets acquired and liabilities assumed
through acquisitions:
Fair value of assets acquired.............. 7,937 -- 229,971
Liabilities assumed........................ (3,182) -- (203,518)
Debt issued................................ (3,700) -- --
Common stock issued........................ -- -- (14,276)
Cash paid.................................. 1,055 -- 12,177
The accompanying notes are an integral part of these consolidated financial
statements.
33
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) and its subsidiary The Pomerleau Agency (Pomerleau); The Bank of
Western Massachusetts (BWM); Flagship Bank & 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 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 Brattleboro, Vermont and Southbury, Connecticut. The
Pomerleau Agency is an independent insurance agency with offices in
Burlington, Vermont.
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.
Securities transferred between categories are accounted for at market value.
Unrealized holding gains and losses on trading securities are included in
earnings; unrealized holding gains and losses on securities available for sale
or on securities transferred into the available for sale category from the
held for investment category are reported as a separate component of
stockholders' equity, net of applicable income taxes. 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, unearned net loan origination fees and net any government agency
guarantees. Such fees and discounts are accreted using methods that
approximate the effective-interest method.
34
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
circumstances 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.
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 and had no impact on the Company's income recognition policy for
nonaccrual loans. Further, adoption of SFAS 114 did not affect the Company's
provision for possible loan losses for the year ended December 31, 1995.
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 $542,000 and $1,121,000 at December 31, 1997
and 1996, 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 regularly 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.
35
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 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.
As of January 1, 1997, the Company adopted Statement of Financial Accounting
Standards No. 125, Accounting For Transfers And Servicing Of Financial Assets
And Extinguishment Of Liabilities ("SFAS 125"), which superseded SFAS 122,
Accounting For Mortgage Servicing Rights. 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 sales from transfers that are secured borrowings.
SFAS 125 did not have a significant impact on the Company's financial position
or results of operations.
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 acquisitions of BWM and
Pomerleau, as well as a core deposit intangible (see Note 2).
36
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Earnings Per Share
In March 1997, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
128"), which established new standards for calculating and presenting earnings
per share. The Company has adopted this new standard for the current and prior
periods in its financial statements as of December 31, 1997. The standard
requires the reporting of basic earnings per share and diluted earnings per
share.
The calculation of basic earnings per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted
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 Company's Directors' Deferred Compensation Plan.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks,
interest-bearing deposits and certain money market mutual fund investments.
Cash equivalents are accounted for at cost, which approximates fair value.
Trust
Trust administered assets of approximately $2.8 billion and $2.6 billion at
December 31, 1997 and 1996, 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 Company, and merchant discount income. Merchant discount
income consists of the fees charged on credit card receipts submitted by the
Company's commercial 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 the noninterest income section of the statement of
operations.
37
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 amount an employee must pay to acquire the
stock.
Reclassifications
Certain amounts in the 1996 and 1995 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 BWM. The Company issued 1,225,635 shares at a price of $11.65
per share; 638,429 of the shares issued were from 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.
Following is supplemental information reflecting selected pro forma results
for the Company as if this acquisition had been consummated Prior to January
1, 1995:
1995
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue............................. $103,037
Income before income taxes................ 33,379
Net income................................ 21,804
Basic earnings per share.................. 1.48
Diluted earnings per share................ 1.44
Total revenue includes net interest income and noninterest income.
Flagship Bank and Trust Company
On February 29, 1996, the Company acquired FBT for stock. Under the
agreement, FBT shareholders received 1.5 shares of the Company's common stock
for each share of FBT stock. Total shares outstanding of the Company's stock
increased by 2.0 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 have
been restated to include Flagship.
38
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Total revenue, income before income taxes, net income, and earnings per
share data of the separate companies for the periods preceding the acquisition
were:
1995
---------------------------------------------
CHITTENDEN FLAGSHIP
CORPORATION BANK & TRUST COMBINED
------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total Revenue........... $86,176 $14,195 $100,371
Income before income
taxes.................. 31,178 2,609 33,787
Net Income.............. 20,885 1,246 22,131
Basic earnings per
share.................. 1.66 0.61 1.50
Diluted earnings per
share.................. 1.62 0.61 1.47
Total revenue includes net interest income and noninterest
income.
The Pomerleau Agency
On May 31, 1997, CTC acquired certain assets and assumed certain liabilities
of Pomerleau. This transaction has been accounted for as a purchase and,
accordingly, all results of operations subsequent to the transaction have been
included in the Company's consolidated statement of income. 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 has been recorded as goodwill.
The impact of the acquisition was not material to consolidated operations and
therefore, pro forma disclosures have been omitted.
39
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3 SECURITIES
Investment securities at December 31, 1997 and 1996 are as follows:
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(IN THOUSANDS)
1997
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities............. $ 23,087 $ 247 $ -- $ 23,334
U.S. government agency obligations... 136,872 1,348 (17) 138,203
Obligations of states and political
subdivisions........................ 314 -- -- 314
Mortgage-backed securities........... 90,873 987 (422) 91,438
Corporate bonds and notes............ 89,877 956 (21) 90,812
Government bond mutual funds......... 9,526 -- (476) 9,050
Marketable equity securities......... 10,000 7 -- 10,007
Other debt securities................ 121 -- -- 121
-------- ------ ------- --------
Total securities available for sale... $360,670 $3,545 $ (936) $363,279
======== ====== ======= ========
1996
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities............. $109,606 $ 440 $ (575) $109,471
U.S. government agency obligations... 76,179 695 (167) 76,707
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......... 16,035 103 -- 16,138
-------- ------ ------- --------
Total securities available for sale... $329,523 $1,616 $(1,926) $329,213
======== ====== ======= ========
SECURITIES HELD FOR INVESTMENT:
U.S. government agency obligation.... $ 198 $ -- $ -- $ 198
Obligations of states and political
subdivisions........................ 490 -- -- 490
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.. $ 35,580 $ 77 $ (252) $ 35,405
======== ====== ======= ========
Proceeds from sales of debt securities amounted to $206,340,000, $9,291,000
and $9,473,000 in 1997, 1996, and 1995, respectively. Realized losses on sales
of debt securities were $532,000, $98,000 and $73,000 in 1997, 1996, and 1995,
respectively. Realized gains on sales of debt securities were $529,000 and
$13,000 in 1997 and 1995, respectively. The Company sold marketable equity
securities for gains of $114,000 in 1997 and $265,000 in 1995. During 1997,
the Company sold government bond mutual funds at a loss of $58,000.
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 $101,932,000 and $179,642,000 at
December 31, 1997 and 1996, respectively.
The following table shows the maturity distribution of the amortized cost of
the Company's investment securities at December 31, 1997, with a comparative
total for 1996. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations:
40
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AFTER AFTER
ONE BUT FIVE BUT
WITHIN WITHIN WITHIN AFTER
ONE FIVE TEN TEN NO FIXED
YEAR YEARS YEARS YEARS MATURITY TOTAL
------- -------- -------- ------ --------- --------
(IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. Treasury securities.. $10,574 $ 12,513 $ -- $ -- $ -- $ 23,087
U.S. government agency
obligations.............. 9,963 122,109 3,000 1,800 -- 136,872
Obligations of states and
political subdivisions... 16 17 170 111 -- 314
Mortgage-backed securities
(1)...................... 17,571 46,716 26,339 247 -- 90,873
Corporate bonds and notes. 5,991 83,861 25 -- -- 89,877
Government bond mutual
funds.................... -- -- -- -- 9,526 9,526
Marketable equity
securities............... 10,000 -- -- -- -- 10,000
Other debt securities..... -- 89 32 -- -- 121
------- -------- ------- ------ ------- --------
Total investment
securities................ $54,115 $265,305 $29,566 $2,158 $ 9,526 $360,670
======= ======== ======= ====== ======= ========
Comparative totals for
1996...................... $85,640 $239,349 $22,350 $6,924 $10,840 $365,103
(1) Maturities of mortgage-backed securities are based on contractual
payments and estimated mortgage loan prepayments.
The following table shows the maturity distribution of the fair value of the
Company's investment securities at December 31, 1997, with a comparative total
for 1996. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations:
AFTER AFTER
ONE BUT FIVE BUT
WITHIN WITHIN WITHIN AFTER
ONE FIVE TEN TEN NO FIXED
YEAR YEARS YEARS YEARS MATURITY TOTAL
------- -------- -------- ------ --------- --------
(IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. Treasury
securities............ $10,662 $ 12,672 $ -- $ $ -- $ 23,334
U.S. government agency
obligations........... 9,954 123,363 3,085 1,801 -- 138,203
Obligations of states
and political
subdivisions.......... 16 17 170 111 -- 314
Mortgage-backed
securities (1)........ 17,680 47,006 26,503 249 -- 91,438
Corporate bonds and
notes................. 5,986 84,801 25 -- -- 90,812
Government bond mutual
funds................. -- -- -- -- 9,050 9,050
Marketable equity
securities............ 10,000 -- -- -- 7 10,007
Other debt securities.. -- 89 32 -- -- 121
------- -------- ------- ------ ------- --------
Total investment
securities............. $54,298 $267,948 $29,815 $2,161 $ 9,057 $363,279
======= ======== ======= ====== ======= ======== ===
Comparative totals for
1996................... $85,580 $239,582 $22,139 $6,876 $10,441 $364,618
(1) Maturities of mortgage-backed securities are based on contractual
repayments and estimated mortgage loan prepayments.
41
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 LOANS
Major classifications of loans at December 31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
(IN THOUSANDS)
Commercial.............................................. $ 365,042 $ 321,068
Real estate:
Residential........................................... 375,967 406,850
Commercial............................................ 314,477 304,530
Construction.......................................... 21,900 25,084
---------- ----------
Total real estate................................... 712,344 736,464
Home equity............................................. 80,429 84,319
Consumer................................................ 168,761 161,699
Lease financing......................................... 72,562 41,117
---------- ----------
Total gross loans................................... 1,399,138 1,344,667
Allowance for possible loan losses...................... (26,721) (28,096)
---------- ----------
Net loans............................................... $1,372,417 $1,316,571
========== ==========
Mortgage loans held for sale............................ $ 16,433 $ 9,870
========== ==========
Lease financing receivable includes the estimated residual value of leased
vehicles of approximately $46,295,000 and $24,207,000 at December 31, 1997 and
1996, respectively, and is net of unearned interest income of approximately
$10,829,000 and $5,855,000 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 greater 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:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Balance at beginning of year......................... $28,096 $27,818 $22,163
Allowance of BWM at acquisition...................... -- -- 4,135
Provision for possible loan losses................... 4,050 4,183 5,000
Loan recoveries...................................... 2,812 2,204 3,002
Loans charged off.................................... (8,237) (6,109) (6,482)
------- ------- -------
Balance at end of year............................... $26,721 $28,096 $27,818
======= ======= =======
The principal amount of loans on nonaccrual status was $6,481,000 and
$10,601,000 at December 31, 1997 and 1996, respectively. Loans whose terms
have been substantially modified in troubled debt restructurings amounted to
$767,000 and $638,000 at December 31, 1997 and 1996, respectively.
42
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
Interest income in accordance with original loan terms..... $1,164 $1,668 $1,007
Interest income recognized................................. 353 721 513
------ ------ ------
Reduction in interest income............................... $ 811 $ 947 $ 494
====== ====== ======
At December 31, 1997, the Banks were not committed to lend any additional
funds to borrowers with loans whose terms have been restructured.
At December 31, 1997, the recorded investment in loans that are considered
to be impaired under SFAS 114 was $2,977,000 (all such loans, except troubled
debt restructurings, were on a nonaccrual basis). Included in this amount is
$2,647,000 of impaired loans for which the related allowance for possible loan
losses is $960,000 and $330,000 of impaired loans for which no specific
allowance for possible loan losses has been allocated. The average recorded
investment in impaired loans during the year ended December 31, 1997 was
approximately $3,704,000. For the year ended December 31, 1997, interest
income on impaired loans totaled $54,000, of which $13,000 was recognized on a
cash basis.
Residential mortgage loans serviced for others, which are not reflected in
the consolidated balance sheets, totaled approximately $1,024.4 million and
$1,006.9 million at December 31, 1997 and 1996, respectively. No 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 years ended December 31, 1997 and 1996 (in
thousands):
PURCHASED ORIGINATED TOTAL
--------- ---------- ------
(IN THOUSANDS)
Balance at December 31, 1995....................... $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
Additions........................................ -- 1,250 1,250
Amortization..................................... (286) (422) (708)
------ ------ ------
Balance at December 31, 1997....................... $1,550 $2,017 $3,567
====== ====== ======
SFAS 125 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, 1997 and 1996, no allowance for
impairment in the Company's mortgage servicing rights was necessary.
43
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5 PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
ESTIMATED ORIGINAL
1997 1996 USEFUL LIVES
-------- -------- ------------------
(IN THOUSANDS)
Land.................................... $ 3,158 $ 3,162 --
Buildings and improvements.............. 10,906 9,430 25-50 years
Leasehold improvements.................. 15,050 12,962 2-50 years
Furniture and equipment................. 23,848 20,802 3-15 years
Construction in progress................ 883 593 --
-------- --------
53,845 46,949
Accumulated depreciation and
amortization........................... (26,433) (22,652)
-------- --------
$ 27,412 $ 24,297
======== ========
The Company is obligated under various noncancelable operating leases for
premises and equipment expiring in various years through the year 2008. Total
lease expense, less income from subleases, amounted to approximately
$2,225,000, $2,031,000 and $1,849,000 in 1997, 1996, and 1995, respectively.
Future minimum rental commitments for noncancelable operating leases on
premises and equipment with initial or remaining terms of one year or more at
December 31, 1997 are as follows:
YEAR CAPITAL LEASES OPERATING LEASES
- ---- -------------- ----------------
(IN THOUSANDS)
1998............................................ $ 87 $ 2,013
1999............................................ 1,754 1,930
2000............................................ -- 1,776
2001............................................ -- 1,435
2002............................................ -- 1,154
Thereafter...................................... -- 4,986
------ -------
Total minimum lease payments.................... 1,841 $13,294
====== =======
Amounts representing interest................... 208
------
Present value of net minimum lease payments..... $1,633
======
NOTE 6 BORROWINGS
Short-term borrowings at December 31, 1997 and 1996 consist of the
following:
1997 1996
------- -------
(IN THOUSANDS)
Securities sold under agreements to repurchase:
Due through January 6, 1997, weighted average rate of 9.20%.. $ -- $10,000
Due through January 5, 1998, weighted average rate of 9.20%.. 10,000 --
U.S. Treasury borrowings, 5.27% in 1997 and 5.18% in 1996, due
on demand..................................................... 12,044 13,894
FHLB Term Advances, 5.81% due on October 18, 1998.............. 1,000 --
FHLB Affordable Housing Program Advance, no fixed maturity,
4.43% in 1997 and 5.79% in 1996............................... 206 98
======= =======
$23,250 $23,992
======= =======
44
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $27,474,000 and $27,848,000,
respectively, at December 31, 1997, and $28,019,000 and $28,006,000,
respectively, at December 31, 1996.
The following information relates to securities sold under agreements to
repurchase:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Average balance outstanding during the year.......... $10,596 $10,097 $11,304
Average interest rate during the year................ 8.99% 9.18% 8.83%
Maximum amount outstanding at any month-end.......... $10,000 $10,000 $20,000
The following information relates to U.S. Treasury borrowings:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Average balance outstanding during the year.......... $22,442 $15,282 $19,556
Average interest rate during the year................ 5.28% 5.16% 5.73%
Maximum amount outstanding at any month-end.......... $62,381 $62,858 $70,669
The following information relates to short-term FHLB borrowings:
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
Average balance outstanding during the year............ $ 194 $2,307 $ 7,162
Average interest rate during the year.................. 4.60% 5.77% 5.96%
Maximum amount outstanding at any month-end............ $1,348 $3,000 $12,725
The following information relates to long-term debt:
1997 1996
------- -------
(IN THOUSANDS)
FHLB Term Advance, 5.81%, due on October 19, 1998.............. $ -- $ 1,000
Note Payable, 5.90%, due on June 1, 1999....................... 642 --
Capitalized lease obligation................................... 1,597 1,540
------- -------
$ 2,239 $ 2,540
======= =======
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.
45
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7 INCOME TAXES
The provision for income taxes consists of the following:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Current payable
Federal............................................ $ 6,001 $12,414 $10,713
State.............................................. 1,566 1,171 986
------- ------- -------
7,567 13,585 11,699
Deferred (prepaid)
Federal............................................ 7,920 (147) (45)
State.............................................. (161) 14 2
------- ------- -------
7,759 (133) (43)
------- ------- -------
Provision for income taxes........................... $15,326 $13,452 $11,656
======= ======= =======
Current income taxes receivable, included in other assets, were $2,445,000
and $993,000, at December 31, 1997 and 1996, respectively. Current income
taxes payable, included in accrued expenses and other liabilities, was
$219,000 at December 31, 1997.
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 $898,000, $562,000, and $530,000 in 1997, 1996, and 1995,
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, to the recorded provision for income taxes:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Computed tax at statutory Federal rate............... $15,656 $14,061 $11,826
Increase (decrease) in taxes from:
Amortization of intangible assets (1).............. 166 166 142
Tax-exempt interest, net........................... (908) (992) (1,109)
Dividends received deduction....................... (187) (238) (214)
State taxes, net of Federal Tax benefit............ 1,018 770 449
Other, net......................................... (419) (315) 562
------- ------- -------
Total.............................................. $15,326 $13,452 $11,656
======= ======= =======
Effective income tax rate............................ 34.3% 33.5% 34.5%
- --------
(1) The goodwill expense related to the acquisition of Pomerleau is tax
deductible and therefore not included in this reconciliation.
46
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net deferred tax asset at December 31, 1997 and 1996
are as follows:
1997 1996
------- -------
(IN THOUSANDS)
Allowance for possible loan losses............................ $ 9,077 $ 9,209
Deferred compensation and pension............................. 1,409 2,332
Other real estate owned writedowns............................ 26 94
Depreciation.................................................. (287) (535)
Accrued liabilities........................................... 1,920 294
Unrealized (gain) loss on securities available for sale....... (934) 102
Basis differences, purchase accounting........................ 356 387
Core deposit intangible....................................... (1,364) (1,614)
Leasing program............................................... (7,336) --
Mortgage servicing............................................ (706) 38
Other......................................................... (304) 340
------- -------
$ 1,857 $10,647
======= =======
NOTE 8 STOCKHOLDERS' EQUITY
Treasury Stock
On January 16, 1997, the Company's Board of Directors authorized the
repurchase of up to 1.25 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. During 1997, the
Company repurchased 1,043,000 shares of its common stock at a total cost of
$26.0 million.
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 paid dividends of $18,892,000, $8,747,000, and $4,803,000 during
1997, 1996, and 1995, respectively. These amounts represented $1.29, $0.57,
and $0.32 per share. Included in dividends for 1997 was a special cash
dividend of $8,675,000 or $0.60 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 percentage of deposits and other liabilities
exceeds 10%.
The payments of dividends by BWM and FBT are subject to Massachusetts
banking law restrictions which require that the capital stock and surplus
account of the bank must amount, in the aggregate, to at least 10% of the
bank's deposit liability or there shall be transferred from net profits to the
surplus account: (1) the amount required to increase the surplus account so
that it, together with the capital stock, will amount to at least 10% of
deposit liability or; (2) the amount required to increase the surplus account
so that it shall amount to 50% of the common stock, and thereafter, the amount
, not exceeding 50% of net profits, required to increase the surplus account
so that it shall amount to 100% of capital stock. Because one or both of these
tests were met at the individual banks, no transfers were made during the
year.
47
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Splits
On December 12, 1997, 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.
Earnings Per Share
The following table summarizes the calculation of basic and diluted earnings
per share:
1997 1996 1995
-------------- -------------- --------------
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
Net Income..................... $ 29,406 $ 26,721 $ 22,131
Weighted average common shares
outstanding................... 14,812,208 15,228,820 14,763,133
Common stock equivalents of
dilutive stock options........ 354,349 314,921 342,781
-------------- -------------- --------------
Weighted average common and
common equivalent shares
outstanding................... 15,166,557 15,543,741 15,105,914
============== ============== ==============
Basic earnings per share....... $ 1.99 $ 1.75 $ 1.50
Effect of dilutive stock
options....................... (0.05) (0.03) (0.03)
-------------- -------------- --------------
Diluted earnings per share..... 1.94 1.72 1.47
============== ============== ==============
For 1996 and 1995 options that could potentially dilute earnings per share
in the future were not included in the computation of the common stock
equivalents because to do so would have been antidilutive. There were 125,000
and 21,973 of these options with weighted average exercise prices of $22.52
and $15.31 at December 31, 1996 and 1995, respectively. There were no
antidilutive options excluded from the 1997 calculation.
NOTE 9 STOCK PLANS
The Company has two stock option plans: a 1988 Employee Stock Option plan
and a 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 plans, 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. At December 31, 1997 and 1996
there were a total of 1,540,528 and 915,528 shares, respectively, allocated to
the plans. Of these shares, 905,421 and 867,609 shares were reserved at
December 31, 1997 and 1996, respectively.
During 1997, 18,125 shares of restricted stock, with a weighted average
grant-date fair value of $24.67 per share, were issued. During 1995, 18,080
shares of restricted stock were issued, with a weighted average grant-date
fair value of $12.10 per share. These shares vest five years from the grant
date. There were no similar shares issued during 1996.
48
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables summarize information regarding the Company's stock
option plans:
WEIGHTED AVERAGE
PRICE PER SHARE OPTIONS
---------------- --------
December 31, 1994.................................... 6.14 716,342
Granted............................................ 11.37 243,519
Exercised.......................................... 7.86 (133,481)
Expired............................................ 8.58 (12,781)
----- --------
December 31, 1995.................................... 7.50 813,599
Granted............................................ 20.38 221,916
Exercised.......................................... 4.70 (405,060)
Expired............................................ 14.10 (32,380)
----- --------
December 31, 1996.................................... 13.82 598,075
Granted............................................ 25.71 22,756
Exercised.......................................... 9.92 (92,076)
Expired............................................ 21.00 (1,250)
----- --------
December 31, 1997.................................... 15.00 527,505
===== ========
OPTIONS OUTSTANDING AND EXERCISABLE
DECEMBER 31, 1997 OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------- --------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE OPTIONS REMAINING AVERAGE EXERCISE OPTIONS AVERAGE EXERCISE
PRICES: OUTSTANDING CONTRACTUAL LIFE PRICE OUTSTANDING PRICE
- ----------------- ----------- ---------------- ---------------- ----------- ----------------
$2.56-$8.76 72,536 3.90 $ 5.55 72,536 $ 3.90
$10.10-$19.65 311,901 6.37 13.67 256,282 13.79
$21.00-$25.85 143,068 6.37 22.70 18,068 25.80
------- ---- ------ ------- ------
$2.56-$25.85 527,505 6.03 $15.00 346,886 $12.65
------- ---- ------ ------- ------
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:
1997 1996 1995
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net Income:
As Reported............................ $29,406 $26,721 $22,131
Pro Forma.............................. 28,989 26,434 22,049
Earnings Per Share:
Basic:
As Reported............................ $1.99 $1.75 $1.50
Pro Forma.............................. 1.96 1.74 1.49
Diluted:
As Reported............................ 1.94 1.72 1.47
Pro Forma.............................. 1.91 1.70 1.46
The SFAS 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
49
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1997, 1996 and 1995:
1997 1996 1995
------- ------- -------
Expected life (years)................................... 7.75 7.75 7.75
Interest rate........................................... 5.97% 6.75% 6.50%
Volatility.............................................. 29.0 25.4 25.4
Dividend yield.......................................... 2.74 3.60 5.61
Using these assumptions, the weighted average fair value of options granted
was $8.22, $4.62 and $2.19 in 1997, 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 the final years of employment. 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, 1997 and 1996:
1997 1996
------- -------
(IN THOUSANDS)
Vested benefits................................ $15,138 $13,851
Nonvested benefits............................. 215 195
------- -------
Accumulated benefit obligation................. 15,353 14,046
Additional benefits related to future
compensation levels........................... 2,376 1,680
------- -------
Projected benefit obligation................... 17,729 15,726
Fair value of plan assets, invested primarily
in equity securities and bonds................ 18,122 16,036
------- -------
Plan assets in excess of (less than) projected
benefit obligation............................ $ 393 $ 310
======= =======
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, 1997 and 1996 are shown below:
1997 1996
------- -------
(IN THOUSANDS)
Plan assets in excess of projected benefit obligation........ $ 393 $ 310
Unrecognized net transition asset being amortized over
participants' period of service............................. (105) (118)
Prior service cost not yet recognized in net periodic pension
cost........................................................ (2,376) (2,659)
Unrecognized net (gain) loss from past experience different
from that assumed........................................... (193) 278
------- -------
Accrued pension cost included in accrued expenses and other
liabilities................................................. $(2,281) $(2,189)
======= =======
50
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense, included in employee benefits in the consolidated
statements of income, includes the following components:
1997 1996 1995
------ ------ -------
(IN THOUSANDS)
Service cost--benefits attributable to service during
the period........................................... $ 589 $ 441 $ 814
Interest cost on projected benefit obligation ........ 1,208 1,112 1,297
Actual return on plan assets.......................... (2,855) (1,947) (2,301)
Net amortization and deferral......................... 1,150 419 1,257
------ ------ -------
Net pension expense................................... $ 92 $ 25 $ 1,067
====== ====== =======
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0%, 7.5%, and 7.0% in 1997,
1996 and 1995, respectively. Future compensation levels were estimated using
average salary increases of 5.0%, 5.25%, and 5.0% in 1997, 1996 and 1995,
respectively. The expected long-term rate of return on plan assets was 9.0% in
1997, 1996, and 1995.
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 and $92,000 in 1997. Management expects future annual
pension expenses to level off at 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 $660,000 and $772,000 at December 31, 1997 and 1996,
respectively.
The Company has established a supplemental executive retirement plan (SERP)
for members of the executive management group. This plan is intended to cover
only those benefits excluded from coverage under the Bank's qualified defined
benefit pension plan as a result of IRS regulations. The design elements of
this SERP mirror those of the Bank's qualified plan. In addition to the SERP,
the Company has a separate arrangement with its Chief Executive Officer under
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 SERPs, included in
accrued expenses and other liabilities, was $678,000 and $379,000 at December
31, 1997 and 1996, respectively.
Postretirement and Postemployment Benefits
In addition to providing pension benefits, CTC provides certain
postretirement health care benefits to retirees and to current employees who
meet certain age and length of service criteria.
The Company accounts for postretirement and post employment 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.
51
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table reconciles the plan's funded status to the accrued
postretirement health care liability as reflected in the balance sheets at
December 31, 1997 and 1996:
1997 1996
------- -------
(IN THOUSANDS)
Accumulated postretirement benefit obligation:
Retirees................................................... $ 667 $ 725
Other fully eligible participants.......................... 175 157
Other active participants.................................. 317 274
------- -------
$ 1,159 $ 1,156
Unrecognized actuarial gain................................. 273 340
Unrecognized transition obligation.......................... (1,205) (1,286)
------- -------
Accrued postretirement health care liability................ $ 227 $ 210
======= =======
Net postretirement health care expense includes the
following components:
Service cost--benefits attributed to service during the
period.................................................... $ 11 $ 11
Interest cost on accumulated postretirement benefit
obligation................................................ 83 83
Net amortization and deferral.............................. 43 48
------- -------
Net postretirement health care expense ..................... $ 137 $ 142
======= =======
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation at December 31, 1997 and 1996 was 7.0% and
7.5%, respectively. For measurement purposes, 6.0% and 7.0% 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 six 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 1997, 1996, and 1995, 74,631,
49,422 and 38,580 shares, respectively, of the Company's common stock were
purchased through the incentive savings and profit sharing plan; $330,000,
$290,000, and $274,000, respectively, were charged to expense for
contributions and payments made or to be made under the plan. In 1997, the
Company established a supplemental executive savings plan. This plan is
intended to cover only those benefits excluded from coverage under the Bank's
qualified defined benefit pension plan as a result of IRS regulations. Under
this plan, participants agree to elect a reduction in their earnings and the
Company credits their retirement account in the amount of the reduction. This
contribution, when combined with the regular pre-tax contributions, shall not
exceed 16% of the individual's earnings. Expenses related to this plan were
$9,000 in 1997 and are included in the contribution expenses above.
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 $345,000, $319,000, and $364,000, in 1997, 1996, and 1995,
respectively.
52
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the subsequent three
years. Expenses for this plan totaled $1,099,000, $769,000, and $599,000 in
1997, 1996, and 1995, 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 $519,000, $365,000, and $183,000 for 1997, 1996, and 1995,
respectively. Included in the expenses for 1997 was $116,000 related to the
$0.60 per share special dividend paid in during the year. Shares which will be
issued under the plan totaled 217,396 at December 31, 1997.
BWM and FBT have separate 401(k) plans under which those banks contributed
$222,000, $178,000 and $157,000 in 1997, 1996 and 1995 respectively. Pomerleau
has a separate 401(k) under which $40,000 was contributed by that company in
1997.
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.
53
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial instruments whose contractual amounts represent off-balance sheet
risk at December 31, 1997 and 1996 are as follows:
1997 1996
-------- --------
(IN THOUSANDS)
Commitments to originate loans............................... $ 54,834 $ 33,450
Unused lines of credit....................................... 188,570 172,240
Standby letters of credit.................................... 25,665 24,231
Unadvanced portions of construction loans ................... 16,658 11,635
Equity commitments to limited partnerships................... 675 675
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 $14,265,000 and $27,189,000 at
December 31, 1997 and 1996, 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 term of the contract are approximately $2,666,000. 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 the Chief Executive
Officer and several members of senior management. These agreements are
triggered by a change of control and subsequent termination of employment
under certain circumstances. Payments are equal to 2.99 times annual salary
for the Chief Executive Officer and from 1 to 2 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, 1997. 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 the financial condition or
results of operations of the Company.
NOTE 13 OTHER NONINTEREST EXPENSE
The components of other noninterest expense for the years presented are as
follows:
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
Data processing........................................ $ 5,424 $ 5,023 $ 4,463
Amortization of intangible assets...................... 1,310 1,223 1,031
Legal and professional................................. 1,443 1,453 1,254
Marketing.............................................. 2,164 2,154 1,797
Other.................................................. 12,579 12,023 11,721
------- ------- -------
$22,920 $21,876 $20,266
======= ======= =======
54
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1997, is as follows (in thousands):
BALANCE AT BALANCE AT
DECEMBER 31 1996 ADDITIONS REDUCTIONS DECEMBER 31, 1997
---------------- --------- ----------- -----------------
$8,860 1,043 1,897 $8,006
====== ===== ===== ======
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 $461,000, $439,000 and $370,000 in 1997, 1996 and
1995, respectively. All transactions are done at arms-length.
FBT purchases loans from a finance company controlled by a member of its
Board of Directors. Prepaid interest advanced to this company totaled
$2,689,000, $1,205,000, and $238,000 in 1997, 1996, and 1995, respectively.
NOTE 15 QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of quarterly financial data for 1997 and 1996 is presented below:
THREE MONTHS ENDED
1997 ------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Total interest income.......... $36,178 $37,507 $38,189 $38,315
Total interest expense......... 14,236 14,690 15,295 15,324
---------- ---------- ---------- ----------
Net interest income............ 21,942 22,817 22,894 22,991
Provision for possible loan
losses ....................... 1,013 1,012 1,013 1,012
Noninterest income (1)......... 6,411 7,209 7,137 7,453
Noninterest expense (1)........ 16,942 17,630 17,504 17,996
---------- ---------- ---------- ----------
Income before income taxes..... 10,398 11,384 11,514 11,436
Provision for income taxes..... 3,514 3,867 3,978 3,967
---------- ---------- ---------- ----------
Net income..................... $ 6,884 $ 7,517 $ 7,536 $ 7,469
========== ========== ========== ==========
Basic earnings per share....... $ 0.45 $ 0.50 $ 0.52 $ 0.52
Dilutive earnings per share.... 0.44 0.49 0.50 0.50
Dividends declared per share... 0.160 0.176 0.176 0.776
(1) Includes the operations of The Pomerleau Agency as of its acquisition in
May 1997.
55
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
THREE MONTHS ENDED
1996 ------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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
========== ========== ========== ==========
Basic earnings per share....... $ 0.40 $ 0.44 $ 0.45 $ 0.47
Dilutive earnings per share.... 0.39 0.43 0.44 0.46
Dividends declared per share... 0.088 0.160 0.160 0.160
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. 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, lease financing receivables 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 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 municipal loans estimated to be equal to amortized cost
since most of these loans mature within six months. The fair value of home
equity, credit card, lease financing receivables and other consumer loans is
estimated based on secondary market prices for asset-backed securities with
similar characteristics.
56
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
57
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments are as
follows:
DECEMBER 31,
-------------------------------------------
1997 1996
--------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS:
Cash and cash equivalents........ $ 143,394 $ 143,394 $ 214,459 $ 214,459
Securities available for sale.... 363,279 363,279 329,213 329,213
Securities held for investment... -- -- 35,580 35,405
Federal Home Loan Bank Stock..... 5,591 5,591 5,591 5,591
Loans, net ...................... 1,372,417 1,385,437 1,316,571 1,319,238
Mortgage loans held for sale..... 16,433 16,433 9,870 9,870
Mortgage servicing rights........ 3,567 3,959 3,025 3,938
FINANCIAL LIABILITIES:
Deposits:
Demand......................... 302,555 302,555 286,932 286,932
Savings........................ 924,846 924,846 951,989 951,989
Time:
Certificates of deposit
$100,000 and over........... 121,089 121,282 104,295 104,346
Other time deposits.......... 409,055 409,996 418,363 419,216
Short-term borrowings............ 23,250 23,250 23,992 23,992
Long-term debt................... 2,239 2,239 2,540 2,540
Commitments...................... 152 135 121 105
NOTE 17 PARENT COMPANY FINANCIAL STATEMENTS
CHITTENDEN CORPORATION (PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
ASSETS:
Cash and cash equivalents..................................... $ 7,586 $ 9,732
Investment securities......................................... -- 330
Investment in bank subsidiaries at equity in net assets....... 153,589 164,240
Other assets.................................................. 1,493 376
-------- --------
Total assets................................................ $162,668 $174,678
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accrued expenses and other liabilities........................ $ 395 $ 277
-------- --------
Total liabilities........................................... 395 277
-------- --------
Total stockholders' equity.................................... 162,273 174,401
-------- --------
Total liabilities and stockholders' equity.................. $162,668 $174,678
======== ========
58
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
Operating income:
Dividends from bank subsidiaries................... $ 42,250 $10,383 $17,324
Dividends from investment securities............... 12 11 10
Interest income.................................... 163 92 135
Gain on sale of securities......................... 114 -- --
-------- ------- -------
Total operating income........................... 42,539 10,486 17,469
-------- ------- -------
Operating expense.................................... 782 929 610
-------- ------- -------
Total operating expense.......................... 782 929 610
-------- ------- -------
Income before income taxes and equity in
undistributed earnings of subsidiaries.............. 41,757 9,557 16,859
Income tax benefit................................... 155 260 143
-------- ------- -------
Income before equity in undistributed earnings of
subsidiaries........................................ 41,912 9,817 17,002
Equity in undistributed earnings of bank
subsidiaries........................................ (12,506) 16,904 5,129
-------- ------- -------
Net income........................................... $ 29,406 $26,721 $22,131
======== ======= =======
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income..................................... $ 29,406 $ 26,721 $ 22,131
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of bank
subsidiaries................................ 12,506 (16,904) (5,129)
Gain on sale of securities................... (114) -- --
(Increase) decrease in other assets............ (280) (136) 404
Decrease in accrued expenses and other
liabilities................................... (100) (29) (96)
-------- -------- --------
Net cash provided by operating activities.... 41,418 9,652 17,310
-------- -------- --------
Cash flows from investing activities:
Proceeds form the sale of securities........... 345 -- --
Purchase of The Bank of Western Massachusetts.. -- -- (12,177)
-------- -------- --------
Net cash used in investing activities........ 345 -- (12,177)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of treasury and common
stock......................................... 966 2,206 1,280
Dividends on common stock...................... (18,892) (8,747) (4,803)
Repurchase of common stock..................... (25,983) -- --
-------- -------- --------
Net cash used in financing activities........ (43,909) (6,541) (3,523)
Net increase (decrease) in cash and cash
equivalents................................... (2,146) 3,111 1,610
Cash and cash equivalents at beginning of year. $ 9,732 6,621 5,011
-------- -------- --------
Cash and cash equivalents at end of year....... $ 7,586 $ 9,732 $ 6,621
======== ======== ========
59
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Company and 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, 1997,
that the Company and the Banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 1997, 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 notification 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:
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS:
-------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ---------- -------- ---------- --------
AS OF DECEMBER 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated.......... $165,004 11.17% $118,201 8.00% N/A N/A
Chittenden Trust
Company.............. 111,312 10.60 84,016 8.00 $105,050 10.00%
Bank of Western
Massachusetts........ 21,181 10.14 16,708 8.00 20,885 10.00
Flagship Bank & Trust. 23,983 10.98 17,480 8.00 21,850 10.00
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated.......... 146,434 9.86 59,426 4.00 N/A N/A
Chittenden Trust
Company.............. 98,118 9.30 42,221 4.00 63,332 6.00
Bank of Western
Massachusetts........ 18,543 8.79 8,443 4.00 12,664 6.00
Flagship Bank & Trust. 21,244 9.70 8,764 4.00 13,146 6.00
Tier 1 Capital (to
Average Assets):
Consolidated.......... 146,434 7.43 78,793 4.00 N/A N/A
Chittenden Trust
Company.............. 98,118 7.05 55,680 4.00 69,600 5.00
Bank of Western
Massachusetts........ 18,543 7.31 10,141 4.00 12,676 5.00
Flagship Bank & Trust. 21,244 6.65 12,773 4.00 15,967 5.00
60
CHITTENDEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS:
-------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ----- ---------- -------- ---------- --------
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated.......... $180,962 13.06% $110,822 8.00% N/A N/A
Chittenden Trust
Company.............. 126,285 12.51 80,736 8.00 $100,920 10.00%
Bank of Western
Massachusetts........ 21,270 11.44 14,878 8.00 18,598 10.00
Flagship Bank & Trust. 23,364 12.21 15,302 8.00 19,128 10.00
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated.......... 163,513 11.71 55,837 4.00 N/A N/A
Chittenden Trust
Company.............. 113,577 11.17 40,666 4.00 60,999 6.00
Bank of Western
Massachusetts........ 18,918 10.05 7,528 4.00 11,292 6.00
Flagship Bank & Trust. 20,961 10.90 7,690 4.00 11,534 6.00
Tier 1 Capital (to
Average Assets):
Consolidated.......... 163,513 8.58 76,245 4.00 N/A N/A
Chittenden Trust
Company.............. 113,577 8.42 53,968 4.00 67,460 5.00
Bank of Western
Massachusetts........ 18,918 7.85 9,642 4.00 12,053 5.00
Flagship Bank & Trust. 20,961 6.85 12,238 4.00 15,297 5.00
NOTE 19 RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenue, expense, gains and losses) in a full set of general purpose
financial statements. Comprehensive income is the total of net income and all
other nonowner changes in equity. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS 130 shall be
effective for fiscal years beginning after December 15, 1997.
61
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, 1997 and 1996, 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, 1997.
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Chittenden
Corporation and its subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
LOGO
Boston, Massachusetts
January 20, 1998
62
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The consolidated financial statements contained in this annual report on Form
10-K have been prepared in accordance with generally accepted accounting
principles and, where appropriate, include amounts based upon management's best
estimates and judgements. Management is responsible for the integrity and the
fair presentation of the consolidated financial statements and related
information.
Management maintains an extensive system of internal controls to provide
reasonable assurance that the Company's assets are safeguarded against loss and
that financial information is reliable. These internal controls include the
establishment and communication of policies and procedures, the selection and
training of qualified personnel and an internal auditing program that evaluates
the adequacy and effectiveness of such internal controls, policies and
procedures.
The Audit Committee, which is comprised entirely of non-employee directors,
is responsible for ensuring that management, internal auditors and the
independent public accountants fulfill their respective responsibilities with
regard to the consolidated financial statements. The Audit Committee meets
periodically with management, internal auditors, and the independent public
accountants to assure that each is carrying out its responsibilities. The
internal auditors and the independent public accountants have full and free
access to the Audit committee and meet with it, with and without management
being present, to discuss the scope and results of their audits and any
recommendations regarding the system of internal controls.
The responsibility of the Company's independent public accountants, Arthur
Andersen LLP, is limited to an expression of their opinion as to the fairness
of the consolidated financial statements presented. Their opinion is based on
an audit conducted in accordance with generally accepted auditing standards as
described in the second paragraph of their report.
LOGO LOGO
[Signature of Paul A. Perrault]
[Signature of Kirk W. Walters]
Paul A. Perrault Kirk W. Walters
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
63
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 of the Registrant is included in the
Company's definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders at pages 6-9, and is specifically incorporated herein by
reference.
At December 31, 1997, 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, 70 1990 Chair of the Company and CTC
Paul A. Perrault, 46 1990 President and Chief Executive Officer of the
Company and CTC
Lawrence W. DeShaw, 51 1990 Executive Vice President of the Company and
CTC
John W. Kelly, 48 1990 Executive Vice President of the Company and
CTC
Kirk W. Walters, 42 1996 Executive Vice President, Chief Financial
Officer, and Treasurer
of the Company and CTC
John P. Barnes, 42 1990 Executive Vice President of the Company and
CTC
Danny H. O'Brien, 47 1990 Executive Vice President of the Company and
CTC
F. Sheldon Prentice, 47 1985 Senior Vice President, General Counsel, and
Secretary of the Company and CTC
Howard L. Atkinson, 53 1996 Chief Auditor of the Company and CTC
All of the current officers, except Mr. Walters and Mr. Atkinson, have been
principally employed in executive positions with CTC for more than six 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 1998
Annual Meeting of Stockholders at pages 10-17 and is specifically incorporated
herein by reference.
64
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,
1998, is included in the Company's definitive Proxy Statement for its 1998
Annual Meeting of Stockholders, at pages 4-9, and is specifically incorporated
herein by reference.
There are no arrangements known to the registrant that 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 1998 Annual Meeting of Stockholders at page 18, 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 are included in
Part II, Item 8 hereof and are incorporated herein by reference.
(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 and restated as of October 18, 1997.
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.
65
10.2 Amended and Restated Pension Plan, incorporated herein by reference to
the Company's Annual Report on Form 10-Q for the period ended September
30, 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, incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.
10.10 The Company's Stock Incentive Plan, restated and amended January 1,
1997, incorporated herein by reference to the Company's Proxy Statement
for the 1997 Annual Meeting of Stockholders.
10.11 Compensation plan of Paul A. Perrault, incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
10.12 Supplemental Executive Retirement Plan of Paul A. Perrault, incorporated
herein by reference to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
10.13 Supplemental Executive Cash Balance Restoration Plan
10.14 Supplemental Executive Savings Plan
10.15 The 1998 Directors' Omnibus Long-Term Incentive Plan, incorporated
herein by reference to the Company's Proxy Statement for the 1998
Annual Meeting of Stockholders.
21. List of subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP
27. Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
66
EXHIBITS
(C)
EXHIBIT 10.13 SUPPLEMENTAL EXECUTIVE CASH BALANCE RESTORATION PLAN
EXHIBIT 10.14 SUPPLEMENTAL EXECUTIVE SAVINGS PLAN
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 FINANCIAL DATA SCHEDULE HAS BEEN FILED AS AN EXHIBIT
67
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, thereto duly authorized.
Date: February 18, 1998
Chittenden Corporation
/s/ Paul A. Perrault
By___________________________________
President, Chief Executive Officer
And Director
68
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 February 18, 1998
____________________________________ Directors
Barbara W. Snelling
/s/ Paul A. Perrault President, Chief Executive February 18, 1998
____________________________________ Officer
Paul A. Perrault and Director
/s/ Kirk W. Walters Executive Vice President, February 18, 1998
____________________________________ Chief
Kirk W. Walters Financial Officer and
Treasurer
(principal accounting
officer)
/s/ Frederic H. Bertrand Director February 18, 1998
____________________________________
Frederic H. Bertrand
/s/ David M. Boardman Director February 18, 1998
____________________________________
David M. Boardman
/s/ Paul J. Carrara Director February 18, 1998
____________________________________
Paul J. Carrara
/s/ Richard D. Driscoll Director February 18, 1998
____________________________________
Richard D. Driscoll
* Director February 18, 1998
____________________________________
Lyn Hutton
/s/ Philip A. Kolvoord Director February 18, 1998
____________________________________
Philip A. Kolvoord
/s/ James C. Pizzagalli Director February 18, 1998
____________________________________
James C. Pizzagalli
/s/ Pall D. Spera Director February 18, 1998
____________________________________
Pall D. Spera
* Director February 18, 1998
____________________________________
Martel D. Wilson, Jr.
69
CHITTENDEN CORPORATION