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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, 1996
or
_____Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 (No Fee Required)
for the transition period from _______to_______
Commission File Number 0-7974
CHITTENDEN CORPORATION
(Exact name of Registrant as specified in its charter)
Vermont 03-0228404
(State of Incorporation) (IRS Employer Identification No.)
Two Burlington Square
Burlington, Vermont 05401
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number: 802-658-4000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
$1.00 Par Value Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Registrant's common stock held by non-
affiliates of the Registrant, on February 28, 1997 as reported on NASDAQ, was
$337,430,170.
At February 28, 1997, there were 12,270,188 shares of the Registrant's common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of this Annual Report on Form 10-K:
1. Proxy Statement for 1997 Annual Meeting of Registrant's Stockholders:
Part III, Items 10, 11, 12, 13.
This Form 10-K contains certain statements that may be considered forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The Company s actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors, of
changes in general, national or regional economic conditions, changes in loan
default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
PART I
ITEM 1
BUSINESS
Chittenden Corporation (the "Company" or "CC"), a Vermont corporation organized
in 1971, is a registered bank holding company under the Bank Holding Company Act
of 1956, as amended. Assets of the Company were $1,988,746,000 at December 31,
1996. The Company is the holding company parent of Chittenden Trust Company
("CTC"), Flagship Bank and Trust Company ("FBT") and The Bank of Western
Massachusetts ("BWM") and, as of December 31, 1996, owned 100% of the
outstanding common stock of those banks. During 1996 the Company created and
became the holding company parent of Chittenden Connecticut Corporation ("CCC"),
a non-bank mortgage company, and owns 100% of its outstanding common stock of
that non-bank mortgage company.
The Company's principal executive offices are located at Two Burlington Square,
Burlington, Vermont 05401; telephone number: 802-658-4000.
CHITTENDEN TRUST COMPANY
CTC was chartered by the Vermont Legislature as a commercial bank in 1904. It
is the largest bank in Vermont, based on total assets of $1,425,044,000 and
total deposits of $1,258,189,000 at December 31, 1996. CTC's principal offices
are in Burlington, Vermont and it has 35 additional locations in Vermont, of
which three are free standing automated teller machines ("ATM's"). (See Item 2,
"Properties"). All of these offices use the trade name "Chittenden Bank".
CTC offers a variety of lending services, with loans and leases totaling
$919,805,000 at December 31, 1996. The largest loan category is commercial
loans, including those secured by commercial real estate, and others made to a
variety of businesses, including retail concerns, small manufacturing
businesses, larger corporations, other commercial banks, and to political sub-
divisions in the U.S. These loans amounted to 37% of the total loans
outstanding at December 31, 1996. Loans secured by residential properties,
including closed-ended home equity loans, are also substantial, and amounted to
34% of total loans outstanding at December 31, 1996. CTC underwrites
substantially all of its residential mortgages to secondary market standards and
sells substantially all of its fixed-rate residential mortgage production on a
servicing-retained basis. Variable-rate mortgage loans are typically held in
portfolio. The remaining real estate loans mortgage loans, which are 1% of
total loans outstanding at December 31, 1996, are construction loans secured by
residential and commercial land under development.
Consumer loans outstanding at December 31, 1996 were 20% of total loans. These
include direct and indirect installment loans, auto leases and revolving credit.
Revolving home equity loans as a separate group amounted to 8% of loans at
December 31, 1996. These loans are generally underwritten to the same standards
as first mortgages.
CTC's lending activities are conducted primarily in Vermont, with additional
activity related to nearby market areas in Quebec, New York, New Hampshire,
Massachusetts, Maine and Connecticut. In addition to the portfolio diversifi-
cation described above, the loans are widely diversified by borrowers and indus-
try groups. In making commercial loans, CTC occasionally solicits the
participation of other Vermont banks or correspondent banks and other financial
investors outside the State. CTC also occasionally participates in loans
originated by other banks. Certain of CTC's commercial loans are made under
programs administered by the Vermont Industrial Development Authority, the U.S.
Small Business Administration, or the U.S. Farmers Home Administration. These
loans contain repayment guarantees by the agency involved in varying amounts up
to 90% of the original loan.
CTC offers a wide range of banking services, including the acceptance of demand,
savings, and time deposits. As of December 31, 1996, total interest-bearing
deposits amounted to $1,065,084,000 or 85% of total deposits. CTC also provides
personal trust services, including services as executor, trustee, administrator,
custodian and guardian. Corporate trust services are also provided, including
services as trustee for pension and profit sharing plans. Asset management
services are provided with both the personal and corporate trust services.
CTC offers data processing services consisting primarily of payroll and
automated clearing house for several outside clients. Financial and investment
counseling is provided to municipalities and school districts within CTC's
service area, as well as, central depository, lending, payroll, and other
banking services for such customers. CTC offers a variety of other services
including safe deposit facilities, Mastercard, and VISA credit card services,
the processing of merchant credit card services, and certain non-bank,
investment products through a dual-employee contractual relationship with Link
Investment Services, Inc.
THE BANK OF WESTERN MASSACHUSETTS
BWM was chartered by the Commonwealth of Massachusetts as a commercial bank in
1986. BWM had total assets of $259,485,000 and total deposits of $225,225,000
at December 31, 1996. BWM's principal offices are in Springfield, Massachusetts
and it has 4 additional locations in the greater Springfield,Massachusetts area.
(See Item 2, "Properties").
BWM offers a variety of lending services, with loans totaling $185,849,000 at
December 31, 1996. The largest loan category is commercial loans, including
those secured by commercial real estate, and others made to a variety of
businesses, including retail concerns and small manufacturing businesses. These
loans amounted to 73% of total loans outstanding at December 31, 1996. Loans
secured by residential properties, including closed-ended home equity loans,
amounted to 19% of total loans outstanding at December 31, 1996. The remaining
real estate mortgage loans, which are 2% of total loans outstanding at December
31, 1996, are primarily construction loans.
Consumer loans outstanding at December 31, 1996 were 3% of total loans. These
include direct and indirect installment loans, and revolving credit. Revolving
home equity loans as a separate group amounted to 3% of loans at December 31,
1996. These loans are generally underwritten to the same standards as first
mortgages.
BWM's lending activities are conducted primarily in the greater Springfield,
Massachusetts area. In making commercial loans, BWM occasionally solicits the
participation of other banks, including its affiliates, CTC and FBT. BWM also
occasionally participates in loans originated by other banks. Certain of BWM's
commercial loans are made under programs administered by the U.S. Small Business
Administration, or the U.S. Farmers Home Administration. These loans have
repayment guarantees by the agency involved in varying amounts up to 90% of the
original loan.
BWM offers a wide range of banking services, including the acceptance of demand,
savings, and time deposits. As of December 31, 1996, total interest-bearing
deposits amounted to $188,773,000 or 84% of total deposits.
BWM provides personal trust services, through CTC, including services as
executor, trustee, administrator, custodian and guardian. Also through CTC, BWM
provides corporate trust services, including services as trustee for pension and
profit sharing plans.
FLAGSHIP BANK AND TRUST COMPANY
FBT was chartered by the Commonwealth of Massachusetts as a commercial bank in
1986. FBT had total assets of $312,375,000 and total deposits of $287,973,000
at December 31, 1996. FBT's principal offices are in Worcester, Massachusetts
and it has 5 additional locations in the greater Worcester, Massachusetts area.
(See Item 2, "Properties").
FBT offers a variety of lending services, with loans totaling $190,914,000 at
December 31, 1996. The largest loan category is commercial loans, including
those secured by commercial real estate, and others made to a variety of
businesses, including retail concerns and small manufacturing businesses. These
loans amounted to 53% of total loans outstanding at December 31, 1996. Loans
secured by residential properties, including closed-ended home equity loans,
amounted to 33% of total loans outstanding at December 31, 1996. The remaining
real estate mortgage loans, which are 6% of total loans outstanding at December
31, 1996, are primarily construction loans.
Consumer loans outstanding at December 31, 1996 were 5% of total loans. These
include direct and indirect installment loans, and revolving credit. Revolving
home equity loans as a separate group amounted to 3% of loans at December 31,
1996. These loans are generally underwritten to the same standards as first
mortgages.
FBT's lending activities are conducted primarily in the greater Worcester,
Massachusetts area. In making commercial loans, FBT occasionally solicits the
participation of other banks, including its affiliates, CTC and BWM. FBT also
occasionally participates in loans originated by other banks. Certain of FBT's
commercial loans are made under programs administered by the U.S. Small Business
Administration, or the U.S. Farmers Home Administration. These loans contain
repayment guarantees by the agency involved in varying amounts up to 90% of the
original loan.
FBT offers a wide range of banking services, including the acceptance of demand,
savings, and time deposits. As of December 31, 1996, total interest-bearing
deposits amounted to $230,424,000 or 80% of total deposits.
FBT provides personal trust services, through CTC, including services as
executor, trustee, administrator, custodian and guardian. Also through CTC, FBT
provides corporate trust services, including services as trustee for pension and
profit sharing plans.
CHITTENDEN CONNECTICUT CORPORATION
CCC was chartered by the State of Vermont as a mortgage company in 1996 and its
principal offices are in Burlington, Vermont. CCC has additional offices in
Brattleboro, Vermont, and in Glastonbury and Southbury, Connecticut (See Item
2, "Properties"). CCC's primary business is the origination of conforming
residential real estate mortgage loans for resale to the secondary market. CCC
originates these loans for resale through correspondent relationships with
credit unions and through other mortgage brokers in the state of Connecticut who
receive loan applications. These applications are underwritten by CTC in
Vermont to secondary market standards and then sold. In addition, CCC uses
brokers that are directly employed by and working through various financial
institutions in Connecticut.
ECONOMY
The New England economy showed signs of continued improvement in 1996. Retail
sales improved along with increases in both housing permits and new construction
contracts. New England unemployment levels also continued to decrease. The
ability and willingness of the Company's borrowers to honor their repayment
commitments are impacted by many factors, including prevailing market interest
rates and the level of overall economic activity within the borrowers'
geographic area.
COMPETITION
There is vigorous competition in the Company's marketplace for all aspects of
the banking and related financial services activities presently engaged in by
the Company and its subsidiaries.
CTC competes with Vermont banks and metropolitan banks based in southern New
England and New York City to provide commercial banking services to businesses.
Many of these out-of-state banks have greater financial resources than those of
Vermont banks and are actively seeking financial relationships with promising
Vermont enterprises. Two out-of-state banks own in-state banks or operate in-
state branches; Allbank acquired Marble Bank early in 1996 and Key Bank
operates branches throughout Vermont.
In the retail financial services market, competitors include other banks, credit
unions, finance companies, thrift institutions and, increasingly, brokerage
firms, insurance companies, and mortgage loan companies. Money market deposit
accounts and short term flexible-maturity certificates of deposit offered by CTC
compete with investment account offerings of brokerage firms and, more
recently, with new products offered by insurance companies. CTC also competes
for personal and commercial trust business with investment advisory firms,
mutual funds, and insurance companies.
BWM and FBT also operate in areas in which competition among financial
institutions is continuously increasing. BWM has focused on meeting the needs
of the smaller and medium-sized businesses and professionals in its market area,
while FBT has taken a balanced approach in serving the needs of both smaller and
medium-sized businesses, as well as retail consumers in its market.
SUPERVISION AND REGULATION
The Company and its banking subsidiaries (CTC, BWM and FBT) are subject to
extensive regulation under federal and state banking laws and regulations. The
following discussion of certain of the material elements of the regulatory
framework applicable to banks and bank holding companies is not intended to be
complete and is qualified in its entirety by the text of the relevant state and
federal statutes and regulations. A change in the applicable laws or
regulations may have a material effect on the business of the Company
and/or its banking subsidiaries.
Regulation of the Company
GENERAL. As a bank holding company, the Company is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). Under the BHC Act, bank holding companies generally may not acquire
ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board. In addition, bank holding
companies are generally prohibited under the BHC Act from engaging in non-
banking activities, subject to certain exceptions. As a bank holding company,
the Company's activities are limited generally to the business of banking and
activities determined by the Federal Reserve Board to be so closely related to
banking as to be a proper incident thereto. The Federal Reserve Board has
authority to issue cease and desist orders and assess civil money penalties
against bank holding companies and their non-bank subsidiaries, officers,
directors and other institution-affiliated parties, and to remove officers,
directors and other institution-affiliated parties to terminate or prevent
unsafe or unsound banking practices or violations of laws or regulations.
INTERSTATE ACQUISITIONS. Prior to September 29, 1995, under the BHC Act a bank
holding company was permitted to acquire a bank in another state only if the law
of the state in which the bank to be acquired was located specifically
authorized such acquisition of an in-state bank by an out-of-state bank holding
company. As described below under "Capital Requirements and FDICIA - Interstate
Banking and Branching", the BHC Act was amended, effective September 29, 1995,
to remove this prohibition. Even prior to this amendment to the BHC Act, state
legislation enacted in recent years substantially lessened prior legislative
restrictions on geographic expansion by bank holding companies from and into
Massachusetts and Vermont. For example, under nationwide reciprocal interstate
banking legislation adopted by both states which became effective in 1990, bank
holding companies whose subsidiaries' banking operations were principally
conducted in any state outside Massachusetts or Vermont were authorized to
acquire Massachusetts or Vermont banking organizations, provided that such
companies' home states afforded Massachusetts or Vermont banking organizations
reciprocal rights to acquire banks in such states.
DIVIDENDS. The Federal Reserve Board has authority to prohibit bank holding
companies from paying dividends if such payment is deemed to be an unsafe or
unsound practice. The Federal Reserve Board has indicated generally that it may
be an unsound practice for bank holding companies to pay dividends unless the
bank holding company's net income over the preceding year is sufficient to fund
the dividends and the expected rate of earnings retention is consistent with the
organization's capital needs, asset quality, and overall financial condition.
The Company's ability to pay dividends is dependent upon the flow of dividend
income to it from its banking subsidiaries, which may be affected or limited by
regulatory restrictions imposed by federal or state bank regulatory agencies.
See "- Regulation of CTC, BWM and FBT - Dividends."
CERTAIN TRANSACTIONS BY BANK HOLDING COMPANIES WITH THEIR AFFILIATES. There are
various legal restrictions on the extent to which bank holding companies and
their non-bank subsidiaries may borrow, obtain credit from or otherwise engage
in "covered transactions" with their insured depository institution sub-
sidiaries. Such borrowings and other covered transactions by an insured
depository institution subsidiary (and its subsidiaries) with its non-depository
institution affiliates are limited to the following amounts: (a) in the case
of any one such affiliate, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 10% of the
capital stock and surplus of the insured depository institution; and (b) in the
case of all affiliates, the aggregate amount of covered transactions of the
insured depository institution and its subsidiaries cannot exceed 20% of the
capital stock and surplus of the insured depository institution. "Covered
transactions" are defined by statute for these purposes to include a
loan or extension of credit to an affiliate, a purchase of or investment in
securities issued by an affiliate, a purchase of assets from an affiliate unless
exempted by the Federal Reserve Board, the acceptance of securities issued by an
affiliate as collateral for a loan or extension of credit to any person or
company, or the issuance of a guarantee, acceptance or letter of credit on
behalf of an affiliate. Covered transactions are also subject to certain
collateral security requirements. Further, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit, lease or sale of property of any kind,
or furnishing of any service.
HOLDING COMPANY SUPPORT OF SUBSIDIARY BANKS. Under Federal Reserve Board
policy, the Company is expected to act as a source of financial strength to its
subsidiary banks and to commit resources to support such subsidiaries. This
support of its subsidiary banks may be required at times when, absent such
Federal Reserve Board policy, the Company might not otherwise be inclined to
provide it. In addition, any capital loans by a bank holding company to any of
its subsidiary banks are subordinate in right of payment to deposits and certain
other indebtedness of such subsidiary banks. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
LIABILITY OF COMMONLY CONTROLLED DEPOSITORY INSTITUTIONS. Under the Federal
Deposit Insurance Act, as amended ("FDI Act"), an FDIC-insured depository
institution, such as CTC, BWM or FBT, can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (i) the "default" of a commonly controlled FDIC-insured
depository institution, or (ii) any assistance provided by the FDIC to any
commonly controlled depository institution in "danger of default." For
these purposes, the term "default" is defined generally as the appointment of a
conservator or receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur
without Federal regulatory assistance.
Regulation of CTC, BWM and FBT
GENERAL. As FDIC-insured state-chartered banks, CTC, BWM and FBT are subject to
supervision of and regulation by the Commissioner of Banking, Insurance,
Securities and Heath Care Administration of the State of Vermont, in connection
with CTC, and the Commissioner of Banks of the Commonwealth of Massachusetts in
connection with BWM and FBT (collectively, the "Commissioners") and, for all
three banks, by the FDIC. This supervision and regulation is for the protection
of depositors, the BIF (as hereinafter defined), and consumers, and is not for
the protection of the Company's stockholders. The prior approval of the FDIC
and the Commissioners is required for CTC, BWM or FBT to establish or relocate
an additional branch office, assume deposits, or engage in any merger,
consolidation or purchase or sale of all or substantially all of the assets of
any bank or savings association.
EXAMINATIONS AND SUPERVISION. The FDIC and the Commissioners regularly examine
the operations of CTC, BWM and FBT, including (but not limited to) their capital
adequacy, reserves, loans, investments, earnings, liquidity, compliance with
laws and regulations, record of performance under the Community Reinvestment Act
and management practices. In addition, CTC, BWM and FBT are required to furnish
quarterly and annual reports of income and condition to the FDIC and periodic
reports to the Commissioners. The enforcement authority of the FDIC includes
the power to impose civil money penalties, terminate insurance coverage, remove
officers and directors and issue cease-and-desist orders to prevent unsafe or
unsound practices or violations of laws or regulations. In addition, under
recent federal banking legislation, the FDIC has authority to impose additional
restrictions and requirements with respect to banks that do not satisfy
applicable regulatory capital requirements. See "- Capital Requirements and
FDICIA - Prompt Corrective Action" below.
DIVIDENDS. The principal source of the Company's revenue is dividends from CTC,
one of its bank subsidiaries. Payment of dividends by CTC, BWM and FBT are
subject to certain Vermont and Massachusetts banking law restrictions. Payment
of dividends by CTC is subject to Vermont banking law restrictions which require
that, except when surplus and paid-in capital together amount to 10% or more of
deposits and other liabilities (not including surplus, paid-in capital, capital
notes and debentures, and funds held in a fiduciary capacity), at least one-
tenth of its net profits must be set aside annually and added to surplus.
The FDIC has authority to prevent CTC, BWM and FBT from paying dividends if such
payment would constitute an unsafe or unsound banking practice or reduce the
respective bank's capital below safe and sound levels. In addition, federal
legislation prohibits FDIC-insured depository institutions from paying dividends
or making capital distributions that would cause the institution to fail to meet
minimum capital requirements. See "Capital Requirements and FDICIA - Prompt
Corrective Action" below.
AFFILIATE TRANSACTIONS. As noted above, banks are subject to restrictions
imposed by federal law on extensions of credit to, purchases of assets from, and
certain other transactions with, affiliates, and on investments in stock or
other securities issued by affiliates. Such restrictions prevent CTC, BWM and
FBT from making loans to affiliates unless the loans are secured by collateral
in specified amounts and have terms at least as favorable to the bank as the
terms of comparable transactions between the bank and non-affiliates. Further,
federal and applicable state laws significantly restrict extensions of credit by
CTC, BWM and FBT to directors, executive officers and principal stockholders and
related interests of such persons.
DEPOSIT INSURANCE. CTC's, BWM's and FBT's deposits are insured by the Bank
Insurance Fund ("BIF") of the FDIC to the legal maximum of $100,000 for each
insured depositor. The FDI Act provides that the FDIC shall set deposit
insurance assessment rates on a semi-annual basis at a level sufficient to
increase the ratio of BIF reserves to BIF-insured deposits to at least 1.25%
over a 15-year period commencing in 1991, and to maintain that ratio. Although
the established framework of risk-based insurance assessments accomplished
this increase in May 1995, and the FDIC has made a substantial reduction in the
assessment rate schedule, the BIF insurance assessments may be increased in the
future if necessary to maintain BIF reserves at the required level. In addition,
legislation enacted in 1996 to recapitalize the Savings Association Insurance
Fund ("SAIF"), which insures the deposits of savings associations and certain
savings banks, will result in increased BIF assessments. See "Capital
Requirements and FDICIA - Risk-Based Deposit Insurance and FICO Assessments"
below.
FEDERAL RESERVE BOARD POLICIES. The monetary policies and regulations of the
Federal Reserve Board have had a significant effect on the operating results of
banks in the past and are expected to continue to do so in the future. Federal
Reserve Board Policies affect the levels of bank earnings on loans and
investments and the levels of interest paid on bank deposits through the Federal
Reserve System's open-market operations in United States government securities,
regulation of the discount rate on bank borrowings from Federal Reserve Banks
and regulation of non-earning reserve requirements applicable to bank deposit
account balances.
CONSUMER PROTECTION REGULATION; BANK SECRECY ACT. Other aspects of the lending
and deposit business of CTC, BWM and FBT that are subject to regulation by the
FDIC and the Commissioners include disclosure requirements with respect to
interest, payment and other terms of consumer and residential mortgage loans and
disclosure of interest and fees and other terms of, and the availability of,
funds for withdrawal from consumer deposit accounts. In addition, CTC, BWM and
FBT are subject to federal and state laws and regulations prohibiting certain
forms of discrimination in credit transactions, and imposing certain record
keeping, reporting and disclosure requirements with respect to residential
mortgage loan applications. In addition, CTC, BWM and FBT are subject to
federal laws establishing certain record keeping, customer identification, and
reporting requirements with respect to certain large cash transactions, sales of
travelers checks or other monetary instruments and the international transpor-
tation of cash or monetary instruments.
CRA Regulations
The Community Reinvestment Act ("CRA") requires lenders to identify the
communities served by the institution's offices and to identify the types of
credit the institution is prepared to extend within such communities. The FDIC
conducts examinations of insured institutions' CRA compliance and rates such
institutions as "Outstanding", "Satisfactory", "Needs to Improve" and
"Substantial Noncompliance". As of their last CRA examinations, CTC and FBT
received a rating of "Outstanding" and BWM received a rating of "Satisfactory."
Failure of an institution to receive at least a "Satisfactory" rating could
inhibit such institution's undertaking certain activities, including
acquisitions of other financial institutions, which require regulatory approval
based, in part, on CRA compliance considerations. The Federal Reserve Board
must take into account the record of performance of banks in meeting the credit
needs of the entire community served, including low and moderate income
neighborhoods.
The federal bank regulatory agencies have jointly issued amendments to the
regulations implementing the CRA that revised the CRA framework effective
January 1, 1996. These amended CRA regulations rely more than the former CRA
regulations upon objective criteria of the performance of institutions under
three key assessment tests: a lending test, a service test and an investment
test. CTC, BWM and FBT are committed to meeting the existing or anticipated
credit needs of their entire communities, including low and moderate income
neighborhoods, consistent with safe and sound operations.
Capital Requirements and FDICIA
GENERAL. The FDIC has established guidelines with respect to the maintenance of
appropriate levels of capital by FDIC-insured banks. The Federal Reserve Board
has established substantially identical guidelines with respect to the
maintenance of appropriate levels of capital, on a consolidated basis, by bank
holding companies. If a banking organization's capital levels fall below the
minimum requirements established by such guidelines, a bank or bank holding
company will be expected to develop and implement a plan acceptable to the
FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of
capital within a reasonable period, and may be denied approval to acquire or
establish additional banks or non-bank businesses, merge with other institutions
or open branch facilities until such capital levels are achieved. Federal
legislation requires federal bank regulators to take "prompt corrective
action" with respect to insured depository institutions that fail to satisfy
minimum capital requirements and imposes significant restrictions on such
institutions. See "Prompt Corrective Action" below.
LEVERAGE CAPITAL RATIO. The regulations of the FDIC require FDIC-insured banks
to maintain a minimum "Leverage Capital Ratio" or "Tier 1 Capital" (as defined
in the Risk-Based Capital Guidelines discussed in the following paragraphs) to
Total Assets of 3.0%. The regulations of the FDIC state that only banks with
the highest federal bank regulatory examination rating will be permitted to
operate at or near such minimum level of capital. All other banks are expected
to maintain an additional margin of capital, equal to at least 1% to 2% of Total
Assets, above the minimum ratio. Any bank experiencing or anticipating
significant growth is expected to maintain capital well above the minimum
levels. The Federal Reserve Board's guidelines impose substantially similar
leverage capital requirements on bank holding companies on a consolidated basis.
RISK-BASED CAPITAL REQUIREMENTS. The regulations of the FDIC also require FDIC-
insured banks to maintain minimum capital levels measured as a percentage of
such banks' risk-adjusted assets. A bank's qualifying total capital ("Total
Capital") for this purpose may include two components - "Core" (Tier 1) Capital
and "Supplementary" (Tier 2) Capital. Core Capital consists primarily of common
stockholders' equity, which generally includes common stock, related surplus and
retained earnings, certain non-cumulative perpetual preferred stock and related
surplus, and minority interests in the equity accounts of consolidated
subsidiaries, and (subject to certain limitations) mortgage servicing rights and
purchased credit card relationships, less all other intangible assets (primarily
goodwill). Supplementary Capital elements include, subject to certain
limitations, a portion of the allowance for losses on loans and leases,
perpetual preferred stock that does not qualify for inclusion in Tier 1 capital,
long-term preferred stock with an original maturity of at least 20 years and
related surplus, certain forms of perpetual debt and mandatory convertible
securities, and certain forms of subordinated debt and intermediate-term
preferred stock.
The risk-based capital rules of the FDIC and the Federal Reserve Board assign a
bank's balance sheet assets and the credit equivalent amounts of the bank's off-
balance sheet obligations to one of four risk categories, weighted at 0%, 20%,
50% or 100%, respectively. Applying these risk-weights to each category of the
bank's balance sheet assets and to credit the equivalent amounts of the bank's
off-balance sheet obligations and summing the totals results in the amount of
the bank's total Risk-Adjusted Assets for purposes of the risk-based capital
requirements. Risk-Adjusted Assets can either exceed or be less than reported
balance sheet assets, depending on the risk profile of the banking organization.
Risk-Adjusted Assets for institutions such as CTC, BWM and FBT will generally be
less than reported balance sheet assets because its retail banking activities
include proportionally more residential mortgage loans with a lower risk
weighing and relatively smaller off-balance sheet obligations.
The risk-based capital regulations require all banks to maintain a minimum ratio
of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-half
(4.0%) must be Core (Tier 1) Capital. For the purpose of calculating these
ratios: (i) a banking organization's Supplementary Capital eligible for
inclusion in Total Capital is limited to no more than 100% of Core Capital; and
(ii) the aggregate amount of certain types of Supplementary Capital eligible for
inclusion in Total Capital is further limited. For example, the regulations
limit the portion of the allowance for loan losses eligible for inclusion in
Total Capital to 1.25% of Risk-Adjusted Assets. The Federal Reserve Board has
established substantially identical risk-based capital requirements which are
applied to bank holding companies on a consolidated basis. The risk-based
capital regulations provide explicitly for consideration of interest rate risk
in the FDIC's overall evaluation of a bank's capital adequacy to ensure that
banks effectively measure and monitor their interest rate risk, and that they
maintain capital adequate for that risk. A bank deemed by the FDIC to have
excessive interest rate risk exposure may be required by the FDIC to maintain
additional capital (that is, capital in excess of the minimum ratios discussed
above). CTC, BWM and FBT believe that this provision will not have a material
adverse effect on them.
At December 31, 1996, the Company's consolidated Total and Tier 1 Risk-Based
Capital Ratios were 13.06% and 11.71%, respectively, and its Leverage Capital
Ratio was 8.58%. Based on the above figures and accompanying discussion, CC
exceeds all regulatory capital requirements.
PROMPT CORRECTIVE ACTION. Among other things, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") requires the federal banking regulators
to take "prompt corrective action" with respect to, and imposes significant
restrictions on, any bank that fails to satisfy its applicable minimum capital
requirements. FDICIA establishes five capital categories consisting of "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." Under applicable
regulations, a bank that has a Total Risk-Based Capital Ratio of 10.0% or
greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Leverage
Capital Ratio of 5.0% or greater, and is not subject to any written agreement,
order, capital directive or prompt corrective action directive to meet and
maintain a specific capital level for any capital measure is deemed to be "well
capitalized." A bank that has a Total Risk-Based Capital Ratio of 8.0% or
greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or greater and a Leverage
Capital Ratio of 4.0% or greater and does not meet the definition of a well
capitalized bank is considered to be "adequately capitalized." A bank that has
a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1 Risk-Based
Capital Ratio that is less than 4.0% or generally a Leverage Capital Ratio of
less than 4.0% is considered "undercapitalized." A bank that has a Total Risk-
Based Capital Ratio of less than 6.0%, or a Tier 1 Risk-Based Capital Ratio that
is less than 3.0% or a Leverage Capital Ratio that is less than 3.0% is
considered to be "significantly undercapitalized," and a bank that has a ratio
of tangible equity to total assets equal to or less than 2% is deemed to be
"critically undercapitalized." A bank may be deemed to be in a capital category
lower than is indicated by its actual capital position if it is determined to be
in an unsafe or unsound condition or receives an unsatisfactory examination
rating. FDICIA generally prohibits a bank from making capital distributions
(including payment of dividends) or paying management fees to controlling
stockholders or their affiliates if, after such payment, the bank would be
undercapitalized.
Under FDICIA and the applicable implementing regulations, an undercapitalized
bank will be (i) subject to increased monitoring by the FDIC; (ii) required to
submit to the FDIC an acceptable capital restoration plan (guaranteed, subject
to certain limits, by the bank's holding company) within 45 days; (iii) subject
to strict asset growth limitations; and (iv) required to obtain prior regulatory
approval for certain acquisitions, transactions not in the ordinary course of
business, and entry into new lines of business. In addition to the foregoing,
the FDIC may issue a "prompt corrective action directive" to any undercapital-
ized institution. Such a directive may require sale or re-capitalization of the
bank, impose additional restrictions on transactions between the bank and its
affiliates, limit interest rates paid by the bank on deposits, limit asset
growth and other activities, require divestiture of subsidiaries, require
replacement of directors and officers, and restrict capital distributions by the
bank's parent holding company.
In addition to the foregoing, a significantly undercapitalized institution may
not award bonuses or increases in compensation to its senior executive officers
until it has submitted an acceptable capital restoration plan and received
approval from the FDIC.
Not later than 90 days after an institution becomes critically undercapitalized,
the appropriate federal banking agency for the institution must appoint a
receiver or, with the concurrence of the FDIC, a conservator, unless the agency,
with the concurrence of the FDIC, determines that the purposes of the prompt
corrective action provisions would be better served by another course of action.
FDICIA requires that any alternative determination be "documented" and re-
assessed on a periodic basis. Notwithstanding the foregoing, a receiver must be
appointed after 270 days unless the appropriate federal banking agency and the
FDIC certify that the institution is viable and not expected to fail.
RISK-BASED DEPOSIT INSURANCE AND FICO ASSESSMENTS. The FDIC has adopted a rule
establishing a risk-based system which assigns an institution to one of three
capital categories consisting of (1) well capitalized, (2) adequately capital-
ized, or (3) undercapitalized, and one of three supervisory categories. An
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. Under this rule there are nine assessment
risk classifications (i.e. combinations of capital categories and supervisory
subgroups within each capital group). An institution's deposit insurance
assessment rate is determined by assigning the institution to a capital category
and a supervisory subgroup to determine which one of the nine risk
classification categories is applicable. The FDIC is authorized to raise the
assessment rates in certain circumstances. If the FDIC determines to increase
the assessment rates for all institutions, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in the
past and may raise BIF insurance premiums again in the future. If such action
is taken by the FDIC, it could have an adverse effect on the earnings of CTC,
BWM and FBT, the extent of which is not currently quantifiable. The risk
classification to which an institution is assigned by the FDIC is confidential
and may not be disclosed.
Current assessment rates range from 0% of domestic deposits for an institution
in the lowest risk category (i.e., well-capitalized and healthy from a
supervisory standpoint) to 0.27% of domestic deposits for institutions in the
highest risk category (i.e., undercapitalized and unhealthy from a supervisory
standpoint), for the first semiannual period of 1997. During 1996 assessment
rates also included a minimum annual assessment of $2,000 per institution. CTC,
BWM and FBT qualified for, and paid in 1996, the minimum annual assessment under
this rate schedule.
The Deposit Insurance Funds Act of 1996 eliminates the minimum assessment and
authorizes the Financing Corporation (FICO) to levy assessments on BIF-
assessable deposits and stipulates that the rate must equal one-fifth the FICO
assessment rate that is applied to deposits assessable by the SAIF. The actual
assessment rates for FICO were determined by deposit data from the September 30,
1996, Call Reports. Based on the 1996 Act, the Company anticipates that the
Banks will pay assessments of 1.3 cents per $100 of deposits in 1997, which
would amount to approximately $275,000 of expense for that year.
BROKERED DEPOSITS AND PASS-THROUGH DEPOSIT INSURANCE LIMITATIONS. Under FDICIA,
a bank cannot accept brokered deposits unless it either (i) is "Well
Capitalized" or (ii) is "Adequately Capitalized" and has received a written
waiver from the FDIC. For this purpose, "Well Capitalized" and "Adequately
Capitalized" have the same definitions as in the Prompt Corrective Action
regulations. See"- Prompt Corrective Action" above. Banks that are not in the
"Well Capitalized" category are subject to certain limits on the rates of
interest they may offer on any deposits (whether or not obtained through a
third-party deposit broker). Pass-through insurance coverage is not available
for deposits of certain employee benefit plans in banks that do not satisfy the
requirements for acceptance of brokered deposits, except that pass-through
insurance coverage will be provided for employee benefit plan deposits in
institutions which at the time of acceptance of the deposit meet all applicable
regulatory capital requirements and send written notice to their depositors that
their funds are eligible for pass-through deposit insurance. Although eligible
to do so, CTC, BWM and FBT do not accept brokered deposits.
CONSERVATORSHIP AND RECEIVERSHIP AMENDMENTS. FDICIA authorizes the FDIC to
appoint itself conservator or receiver for a state-chartered bank under certain
circumstances and expands the grounds for appointment of a conservator or
receiver for an insured depository institution to include (i) consent to such
action by the board of directors of the institution; (ii) cessation of the
institution's status as an insured depository institution; (iii) the institution
is undercapitalized and has no reasonable prospect of becoming adequately
capitalized, or fails to become adequately capitalized when required to do so,
or fails to timely submit an acceptable capital plan, or materially fails to
implement an acceptable capital plan; and (iv) the institution is critically
undercapitalized or otherwise has substantially insufficient capital. FDICIA
provides that an institution's directors shall not be liable to its stockholders
or creditors for acquiescing in or consenting to the appointment of the FDIC as
receiver or conservator for, or as a supervisor in the acquisition of, the
institution.
REAL ESTATE LENDING STANDARDS. FDICIA requires the federal bank regulatory
agencies to adopt uniform real estate lending standards. The FDIC has adopted
implementing regulations which establish supervisory limitations on Loan-to-
Value ("LTV") ratios in real estate loans by FDIC-insured banks. The
regulations require FDIC-insured banks to establish LTV ratio limitations within
or below the prescribed uniform range of supervisory limits.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank regulatory
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that would provide "excessive" compensation, fees or benefits, or
that could lead to material financial loss. In addition, the federal bank
regulatory agencies are required by FDICIA to prescribe standards specifying;
(i) maximum classified assets to capital ratios; (ii) minimum earnings
sufficient to absorb losses without impairing capital; and (iii) to the extent
feasible, a minimum ratio of market value to book value for publicly-traded
shares of depository institutions and depository institution holding companies.
The FDIC has issued regulations implementing certain of these provisions.
ACTIVITIES AND INVESTMENTS OF INSURED STATE BANKS. FDICIA provides that FDIC-
insured state banks such as CTC, BWM and FBT may not engage as a principal,
directly or through a subsidiary, in any activity that is not permissible for a
national bank unless the FDIC determines that the activity does not pose a
significant risk to the BIF, and the bank is in compliance with its applicable
capital standards. In addition, an insured state bank may not acquire or
retain, directly or through a subsidiary, any equity investment of a type, or in
an amount, that is not permissible for a national bank.
Subject to certain limited exceptions, the foregoing provisions of FDICIA
prohibit insured state banks such as CTC, BWM and FBT or any subsidiary of such
insured state banks from retaining or acquiring equity investments. However,
under an exception in the statute, an insured state bank that (i) is located in
a state such as Vermont or Massachusetts which authorized, as of September 30,
1991, state banks to invest in common or preferred stock listed on a national
securities exchange ("listed stock") or shares of an investment company
registered under the Investment Company Act of 1940 ("registered shares") and
(ii) during the period beginning September 30, 1990 and ending on November 26,
1991 made or maintained investments in listed stocks and registered shares, may
retain whatever listed stock or registered shares it lawfully acquired or held
prior to December 19, 1991 and may continue to acquire listed stock or
registered shares which may not exceed, taken together in the aggregate, 100% of
the bank's Tier 1 Capital. In order to acquire or retain any listed stock or
registered shares under this exception, the bank must file a one-time notice
with the FDIC containing specified information, and the FDIC must determine that
acquiring or retaining the listed stock or registered shares will not pose a
significant risk to the BIF. Any such approval may be subject to whatever
conditions or restrictions the FDIC determines to be necessary or appropriate
and will terminate with respect to further acquisitions of listed stock or
registered shares if the bank or its holding company experiences a change in
control and in certain other circumstances. CTC filed the one-time notice with
the FDIC and the FDIC did not object.
CONSUMER PROTECTION PROVISIONS. FDICIA also includes provisions requiring
advance notice to regulators and customers for any proposed branch closing and
authorizing (subject to future appropriation of the necessary funds) reduced
insurance assessments for institutions offering "lifeline" banking accounts or
engaged in lending in distressed communities. FDICIA also includes provisions
requiring depository institutions to make additional and uniform disclosures to
depositors with respect to the rates of interest, fees and other terms
applicable to consumer deposit accounts.
DEPOSITOR PRIORITY STATUTE. The FDI Act provides that, in the liquidation or
other resolution by any receiver of a bank insured by the FDIC, the claims of
depositors have priority over the general claims of other creditors. Hence, in
the event of the liquidation or other resolution of a banking subsidiary of the
Company, the general claims of the Company as creditor of such banking
subsidiary would be subordinate to the claims of the depositors of such banking
subsidiary, even if the claims of CC were not by their terms so subordinated.
In addition, this statute may, in certain circumstances, increase the costs to
banks of obtaining funds through non-deposit liabilities.
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Riegle-Neal Act") provides that an adequately
capitalized and managed bank holding company may (with Federal Reserve Board
approval) acquire control of banks outside its principal state of operations,
without regard to whether such acquisitions are permissible under state law.
States may, however, limit the eligibility of banks to be acquired by an out-of-
state bank holding company to banks in existence for a minimum period of time
(not in excess of five years). No bank holding company may make an acquisition
outside its principal state of operations which would result in it controlling
more than 10% of the total amount of deposits of all insured depository
institutions in the United States, or 30% or more of the total deposits of
insured depository institutions in any state (unless such limit is waived,
or a more restrictive or permissible limit is established, by a particular
state). In addition, beginning June 1, 1997, banks may branch across state
lines either by merging with banks in other states or by establishing new
branches in other states. The date relating to interstate branching through
mergers may be accelerated by any state. The provision relating to establishing
new branches in another state requires a state's specific approval. Effective
in 1996, the Vermont and Massachusetts legislatures adopted legislation to
accelerate the effective date of interstate branching through mergers (that is,
to "opt-in early"). Since 1990, Massachusetts has had nationwide reciprocal
interstate banking legislation permitting out-of-state banks to conduct banking
operations in that state both by mergers and by establishing new banks, subject
to the reciprocity requirements that banks from another state may acquire banks
in Massachusetts only if Massachusetts banks may conduct banking operations in
that state. CC is unable to predict the ultimate impact of this interstate
banking legislation on it or its competitors.
The United States Congress has periodically considered and adopted legislation
which has resulted in and could result in further regulation or deregulation of
both banks and other financial institutions. Such legislation could place the
Company, CTC, BWM, FBT or CCC in more direct competition with other financial
institutions, including mutual funds, securities brokerage firms and investment
banking firms. No assurance can be given as to whether any additional
legislation will be enacted or as to the effect of such legislation on the
business of the Company, CTC, BWM, FBT or CCC.
EMPLOYEES
The Company and its subsidiaries on December 31, 1996 employed 944 persons, with
a full-time equivalency of 877 employees. The Company enjoys good relations
with its employees. A variety of employee benefits, including health, group
life and disability income replacement insurance, a funded, non-contributory
pension plan, and an incentive savings and profit sharing plan, are available to
qualifying officers and employees.
SELECTED STATISTICAL INFORMATION
Certain consolidated financial data about the business of the Company is
contained on pages 13 to 53 of the Company's 1996 Annual Report to Stockholders
which is attached hereto as Exhibit 13.
ITEM 2
PROPERTIES
The Company's principal banking subsidiary, CTC, operates banking facilities in
36 locations in Vermont. The offices of the Company are located in the main
office of the CTC, which occupied all of the five-floor Chittenden Building at
Two Burlington Square in Burlington as of December 31, 1996. The Chittenden
Building is owned by CTC.
BWM and FBT both operate banking facilities in Massachusetts; BWM operating 6
locations and FBT operating 6 locations. CCC operates 2 mortgage company
facilities in Connecticut. The offices of CTC, BWM, FBT and CCC are in good
physical condition with modern equipment and facilities considered adequate to
meet the banking needs of customers in the communities serviced.
ITEM 3
LEGAL PROCEEDINGS
A number of legal claims against the Company arising in the normal course of
business were outstanding at December 31, 1996. Management, after reviewing
these claims with legal counsel, is of the opinion that these matters, when
resolved, will not have a material effect on the consolidated financial
statements.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters.
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information regarding the market in which the Company's common stock is traded,
and the quarterly high and low bid quotations for the Company's common stock
during the past five years are included in the Company's 1996 Annual Report to
Stockholders on page 57, and is attached hereto as Exhibit 13. The approximate
number of stockholders at February 28, 1997 was 3,147. Note 8 of the
Consolidated Financial Statements appearing on page 28 of the Company's 1996
Annual Report to Stockholders contains a discussion of restrictions on
dividends and is attached hereto as Exhibit 13.
Beginning October 17, 1996 through December 30, 1996, there were eight
transactions in which 27,171 shares of the Company's common stock were issued
pursuant to the 1993 Stock Option Plan (The SOP ). The SOP provides an
opportunity for key employees of the Company to purchase the Company's common
stock at stated exercise prices. Options exercised during the fourth quarter
had exercise prices ranging from $3.97 to $14.80 per share, with a weighted
average price of $9.20 per share. The Company received cash in the amount of
$249,952 from these transactions. The Company relies on Section 4 (2) of the
Securities Act of 1933 for exemption from registration. The Company anticipates
filing a Registration Statement on Form S-8 in the second quarter of 1997
covering the shares of the Company's common stock issued and issuable pursuant
to the SOP.
ITEM 6
SELECTED FINANCIAL DATA
A five-year summary of selected consolidated financial data for the Company and
its subsidiaries is included on page 40 of the Company's 1996 Annual Report to
Stockholders and is attached hereto as Exhibit 13.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is included on pages 41 to 53 of the Company's 1996 Annual Report to
Stockholders and is attached hereto as Exhibit 13.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries appear in the Company's 1996 Annual Report to Stockholders at the
pages indicated and are attached hereto as Exhibit 13:
Report of Independent Public Accountants Page 39
Consolidated Balance Sheets at
December 31, 1996 and 1995 Page 13
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995, and 1994 Page 14
Consolidated Statements of Changes in
Stockholders' Equity for the Years Ended
December 31, 1996, 1995, and 1994 Page 15
Consolidated Statements of Cash Flows for
the Years Ended December 31, 1996, 1995,
and 1994 Page 16
Notes to Consolidated Financial Statements Pages 17-38
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the directors and director-nominees of the Registrant is
included in the Company's definitive Proxy Statement for the 1997 Annual Meeting
of Stockholders at pages 5-10, and is specifically incorporated herein by
reference.
At December 31, 1996, the principal officers of the Company and its principal
subsidiary, CTC, with their ages, positions, and years of appointment, were as
follows:
YEAR
NAME AND AGE APPOINTED POSITIONS
- --------------------------------------------------------------------------------
Barbara W. Snelling, 69 1990 Chair of the Company and CTC
Paul A. Perrault, 45 1990 President and Chief Executive
Officer of the Company and CTC
Lawrence W. DeShaw, 50 1990 Executive Vice President of the
Company and CTC
John W. Kelly, 47 1990 Executive Vice President of the
Company and CTC
Kirk W. Walters, 41 1996 Executive Vice President, Chief
Financial Officer, and Treasurer of
the Company and CTC
F. Sheldon Prentice, 46 1985 Senior Vice President, General
Counsel, and Secretary of the
Company and CTC
John P. Barnes, 41 1990 Senior Vice President of the
Company and CTC
Danny H. O'Brien, 46 1990 Senior Vice President of the
Company and CTC
Howard L. Atkinson, 52 1996 Chief Auditor, CTC
- -------------------------------------------------------------------------------
All of the current officers, except Mr. Walters and Mr. Atkinson, have been
principally employed in executive positions with CTC for more than five years.
In accordance with the provisions of the Company's By-Laws, the officers, with
the exception of the Secretary, hold office at the pleasure of the Board of
Directors. The Secretary is elected annually by the Board of Directors.
ITEM 11
EXECUTIVE COMPENSATION
Information regarding remuneration of the directors and officers of the Company
is included in the Company's definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders at pages 11-19 and is specifically incorporated herein
by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of directors and director-nominees
of the Company, all directors and officers of the Company as a group, and
certain beneficial owners of the Company's common stock, as of January 31, 1997,
is included in the Company's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders, at pages 4-10, and is specifically incorporated herein
by reference.
There are no arrangements known to the registrant which may, at a subsequent
date, result in a change of control of the registrant.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the Company
and its Directors, Director-Nominees, Executive Officers, and family members of
these individuals, is included in the Company's definitive Proxy Statement for
its 1997 Annual Meeting of Stockholders at page 20, and is specifically
incorporated herein by reference.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)
(1) FINANCIAL STATEMENTS
The financial statements of the Company and its subsidiaries appear in the
Company's 1996 Annual Report to Stockholders at the pages indicated in Item 8,
and are attached hereto as Exhibit 13.
(2) FINANCIAL STATEMENT SCHEDULES
There are no financial statement schedules required to be included in this
report.
(3) EXHIBITS
The following are included as exhibits to this report:
3. By-Laws of the Company, as amended, incorporated herein by reference to
Exhibit 3 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1985.
3.01 Amendment to the By-Laws of the Company, dated February 16, 1988,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1987.
3.02 Amendment to the By-Laws of the Company, dated January 17, 1990,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1989.
3.03 Amendment to the By-Laws of the Company, dated June 19, 1991,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1991.
3.04 Amendment to the By-Laws of the Company, dated November 15, 1995,
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
3.1 Articles of Association of the Company, as amended, incorporated herein
by reference to the Proxy Statement for the 1994 Annual Meeting of
Stockholders.
4. Statement of the Company regarding its Dividend Reinvestment Plan is
incorporated herein by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
10.1 Directors' Deferred Compensation Plan, dated April 1972, as amended May
20, 1992, incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992.
10.2 Pension Plan of CTC, incorporated herein by reference to the Company's
Annual Report on form 10-K for the year ended December 31, 1994, as
amended on March 15, 1995 and December 20, 1995, and incorporated
herein by reference to the Company's Annual Report on form 10-K for the
year ended December 31, 1995, and December 20, 1996 attached to the
Company's Annual Report on Form 10-K for the year ended December 31,
1996.
10.3 Incentive Savings and Profit Sharing Plan, attached to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994, as
amended for the year ended December 31, 1995.
10.4 Letter from the Company to Paul A. Perrault, dated July 26, 1990,
regarding terms of employment, incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31,
1990.
10.5 The Company's 1988 Stock Option Plan, incorporated herein by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 1987.
10.6 The Company's Restricted Stock Plan, incorporated herein by reference
to the Company's Proxy Statement in connection with the 1986 Annual
Meeting of Stockholders.
10.7 Registration Statement under The Securities Act of 1933 on form S-8
dated February 27, 1996, incorporated herein by reference.
10.8 Executive Management Incentive Compensation Plan ("EMICP"),
incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994.
10.9 Amendment to EMICP to increase cap on awards from 60% to 100% of base
salary.
10.10 The Company's Stock Incentive Plan, dated January 1, 1993, incorporated
herein by reference to the Company's Proxy Statement for the 1993
Annual Meeting of Stockholders.
10.11 Compensation plan of Paul A. Perrault.
10.12 Supplemental Executive Retirement Plan of Paul A. Perrault.
13. The Company's 1996 Annual Report to Stockholders.
21. List of subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K
A report was filed by the Company on Form 8-K December 20, 1996 in connection
with the Company's hiring of Kirk W. Walters as Executive Vice President, Chief
Financial Officer and Treasurer.
EXHIBITS
(c)
EXHIBIT 10.2
BOARD OF DIRECTORS RESOLUTION RENAMING THE PENSION PLAN FOR EMPLOYEES OF THE
CHITTENDEN CORPORATION TO THE "CHITTENDEN PENSION ACCOUNT PLAN" AND AMENDING THE
PLAN TO A CASH BALANCE ACCOUNT TYPE PLAN.
EXHIBIT 10.9
AMENDMENT TO EMICP TO INCREASE CAP ON AWARDS FROM 60% TO 100% OF BASE SALARY.
EXHIBIT 10.11
COMPENSATION PLAN OF PAUL A. PERRAULT
EXHIBIT 10.12
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF PAUL A. PERRAULT
EXHIBIT 13
CHITTENDEN'S 1996 ANNUAL REPORT HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 21
LIST OF SUBSIDIARIES OF CHITTENDEN CORPORATION
Chittenden Trust Company, Vermont, d/b/a Chittenden Bank, Mortgage Service
Center of New England and CUMEX Mortgage Service Center
The Bank of Western Massachusetts, Massachusetts
Flagship Bank and Trust Company, Massachusetts
Chittenden Connecticut Corporation, Vermont, d/b/a Mortgage Service Center of
New England and CUMEX Mortgage Service Center
EXHIBIT 23
CONSENT OF ARTHUR ANDERSEN LLP HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 27
FINAICIAL DATA SCHEDULE HAS BEEN FILED AS AN EXHIBIT
EXHIBIT 10.2
CHITTENDEN CORPORATION
BOARD OF DIRECTORS RESOLUTION
AUTHORIZING THE ADOPTION OF THE
CHITTENDEN PENSION ACCOUNT PLAN
EFFECTIVE JANUARY 1, 1996
WHEREAS, Chittenden Corporation (the "Principal Employer") heretofore
adopted the Pension Plan for Employees of the Chittenden Corporation (the
"Plan"); and
WHEREAS, the Principal Employer desires to amend and restate the plan to
reflect changing employee retirement objectives; and
WHEREAS, the Principal Employer is permitted to amend the Plan at any time
by means of a resolution of the Board of Directors;
NOW, THEREFORE, the Board of Directors, at a meeting held on September 20,
1995 and at which a quorum was present and acting throughout, hereby authorizes
the Principal Employer to rename the Plan and to amend and restate the Plan as
follows:
Effective January 1, 1996, the Plan shall be renamed the "Chittenden
Pension Account Plan". The Plan shall be amended to a cash balance account
type plan. All benefits that accrued under the Plan as in effect
immediately prior to January 1, 1996, shall be converted to an actuarial
equivalent opening account balance under the Plan and shall further serve
as the minimum retirement benefit for an individual covered under the Plan
as of January 1, 1996.
The Plan shall be further amended to recognize the incorporation of a
previously eligible employee group. Effective as of October 7, 1996, the
Chittenden Connecticut Corporation shall become an "Employer" as defined
under the terms of the Plan. Employees of such corporation shall continue
to be eligible to participate in and accrue benefits under the terms of the
Plan without interruption.
The Principal Employer is further authorized to take whatever action is
necessary and appropriate to effect the amendment and restatement of the
Plan. A summary of the principal provision of the amended Plan are
documented in the attached summary.
IN WITNESS WHEREOF, the Board of Directors has caused this instrument to be
executed by its officer duly authorized and its corporate seal to be hereunto
affixed as of the 20th day of December, 1996.
CHITTENDEN CORPORATION
By: /s/F. Sheldon Prentice
F. Sheldon Prentice
SVP, General Counsel
& Secretary
ATTEST: /s/Eugenie J. Fortin
(CORPORATE SEAL)
EXHIBIT 10.9
FIRST AMENDMENT
This Amendment effective March 20, 1996 shall amend the Chittenden Corporation
Executive Management Incentive Compensation Plan (the "Plan") as follows:
1. Paragraph "a" of Section II of the Plan is hereby deleted in its entirety
and is replaced by the following paragraph:
a. Adjusted Earnings means the earnings per share or return
on equity, as the case may be, calculated based on the
actual after tax profit of the Company as published,
recognizing amounts awarded under this Plan, but excluding
(i) gains or losses from sales of assets not in the normal
course of business and exceeding $50,000 per year in the
aggregate, and (ii) gains or losses as a result of
securities transactions.
2. The reference to 60% in Paragraph "h" of Section II of the Plan shall be
changed to 100% and said Paragraph "h" of Section II shall now read as follows:
h. Incentive Award means bonuses ranging from 0% to 100% in such
percentages as shall be designated annually by the President of
the Company, with approval of the Board.
3. Paragraph "l" of Section II of the Plan is hereby deleted in its entirety
and is replaced by the following paragraph:
l. Profit Goal means the performance target of the Company
established each year by the Board for the then current Plan Year
as measured by the level of earnings per share and return on
equity of the Company. Each year the Board shall establish for
the then current Plan Year the targeted level of earnings per
share and the targeted level of return on equity. To the extent
that either of these targets is met, the performance target will
be achieved. The calculation of earnings per share and return on
equity shall be based on after-tax profit of the Company,
computed according to generally accepted accounting principles,
consistently applied, recognizing amounts awarded under this Plan
but excluding (i) gains or losses from sales of assets not in the
normal course of business and exceeding $50,000 per year in the
aggregate, and (ii) gains or losses as a result of securities
transactions.
4. All terms of the Plan not expressly amended herein shall remain in full
force and effect.
This Amendment shall be effective as of March 20, 1996.
ATTEST:
CHITTENDEN CORPORATION
By: S/F. SHELDON PRENTICE S/SARAH P. MERRITT
Witness
Title: SVP, GENERAL COUNSEL AND SECRETARY
EXHIBIT 10.11
PAUL A. PERRAULT
COMPENSATION PLAN
June 19, 1996
1. Base Salary: Increase in 1996 to $250,000 and in
1997 to $300,000, effective one and two years, respectively,
from date of last increase.
2. EMCIP: The following changes have already been
implemented:
- Increase cap to 100% of salary
- Payments all in cash
- Flexibility in payment of deferred portion of
award
3. Cash Bonus Plan: If (i) the Corporation's net income
(calculated after making an accrual for the amount payable
pursuant to this plan) exceeds a specified ROE and (ii) the
year-to-year increase in EPS is at least 10 percent, a cash
bonus (subject to a cap of 100% of base salary) will be paid
based upon a percentage of earnings in excess of such
earnings as equate to the specific ROE, as follows:
Bonus % on
earnings is
If ROE is: excess of 15% ROE:
------------ -------------------
15 - 17% 2%
17% + 5%
For example, assume average equity of $170 million (est.)
and 12.5 million (est.) shares outstanding:
Earnings in
Earnings EPS ROE excess of 15% % Amount
-----------------------------------------------------------------------
$25 million $2.00 14.70% $ ------- 2% $ ------
$26 million $2.08 15.29% $ 500,000 2% $ 10,000
$27 million $2.16 15.88% $1,500,000 2% $ 30,000
$28 million $2.24 16.47% $2,500,000 2% $ 50,000
$30 million $2.40 17.64% $4,500,000 5% $225,000
This plan is subject to annual review.
4. Stock Options: Options will be granted to purchase
150,000 shares, 50,000 vesting annually June 19, 1997, June
19, 1998 and June 19, 1999. The option price will be as
follows:
Date of Vesting Price
--------------- -------------------
June 1, 1997 June 19, 1996 price
June 1, 1998 20% in excess of June 19, 1996 price
June 1, 1999 30% in excess of June 19, 1996 price
Options must be exercised within five years of date of
vesting, or, if employment is terminated, within 60 days of
termination.
In the event of a "change in control," all options will vest
immediately.
Example based upon a current price of $22 per share, 10% per
year increase in market price of stock and exercise of
options five years after vesting:
Option Price at Gain per Total
Price exercise share gain
-------------------------------------------------------
$22.00 $38.97 $16.97 $ 848,500
$26.40 $42.52 $16.12 $ 806,000
$28.60 $46.06 $17.46 $ 873,000
---------------
$2,527,500
Market capitalization, June 19, 1996 to June 19, 2004:
12.5 million shares @ $22/share $275,000,000
12.5 million shares @ $47/share $587,500,000
Increase $312,500,000
Paul's gain $ 2,527,500
Gain as percentage of increase .81%
5. LTD: In the event of permanent disability resulting in
termination of employment, a monthly benefit will be paid
through age 60 based upon 60 percent of base salary at the
time of disability.
By: /s/ James C. Pizzagalli
------------------------
James C. Pizzagalli
EXHIBIT 10.12
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN OF PAUL A. PERRAULT
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
I. Purpose
Chittenden finds it desirable to create a non-qualified supplemental retirement
plan for it Chief Executive Officer to: (1) offset the effect of certain
regulatory restrictions on contributions to a qualified pension plan, and (2)
recognize that the Chief Executive Officer may have an insufficient working
career at Chittenden to realize a pension benefit that is an acceptable portion
of the Chief Executive's working salary and benefits. To compensate for these
factors and to reward a Chief Executive's performance, Chittenden will create a
Supplemental Pension for the Chief Executive under the terms and conditions
contained herein.
II. Definitions
(a) Accrued Benefit shall mean all sums allocated in prior years including
interest credited thereon pursuant to Section IV.
(b) Board shall mean the Board of Directors of the Chittenden Corporation.
(c) Chief Executive Officer shall mean Paul Perrault.
(d) Chittenden shall mean Chittenden Corporation.
(e) Code shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(f) Disability shall mean a total or permanent condition which qualifies
the Chief executive Officer to receive full Social Security Benefits.
(g) ERISA shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time.
(h) Gross Salary shall mean the total of all salary, benefits, and bonuses
paid to the CEO by the Corporation or its subsidiaries and reported in
box 1 ("wages, tips, other compensation") of form W-2 together with
that portion of compensation not reported in box 1 of the form W-2
(i.e. Flexible Medical/Dental premiums, Health Care/Dependent Care
Flexible spending accounts and 401k contributions).
(i) Plan shall mean this Supplement Executive Retirement Plan.
(j) ROE shall mean return on average common shareholders' equity
calculated on an annual basis as of 12/31.
III. Plan Construction
This is a defined contribution, non-qualified retirement plan. This means that
Chittenden will allocate a specific amount to a notional account calculated in
accordance with Paragraph IV below but the Plan will not pay a specific benefit.
Further, this Plan is intended to be a Top Hat Plan under ERISA and benefits
under the plan are not protected by the Pension Benefit Guaranty Corporation.
Any assets funding the Plan are subject to the claims of the general creditors
of Chittenden.
IV. Allocations
Allocations to the Plan shall be made on an annual basis each January. The
amount of the allocation shall be a certain percentage of gross salary based on
the ROE of Chittenden as of December 31st of each year determined in accordance
with the following schedule:
ROE % % Of Gross Salary
-------- -------------------
10 6.68
11 10.68
12 14.69
13 18.69
14 22.70
15 26.70
16 29.37
17 32.04
18 34.71
19 37.38
20 40.05
Should attained ROE in any given year be a partial percentage, it shall be
rounded to the nearest .5% and the annual contribution shall be interpolated
accordingly.
An allocation shall be made each year that the minimum ROE is met and the Chief
Executive remains employed with Chittenden in a full time capacity. The Board,
at its sole discretion, may amend the above schedule at any time.
V. Interest Calculation
Accrued balances shall earn interest based upon Chittenden's average yield on
earning assets. Such earnings shall be computed on an annual basis based upon
the preceding year's average yield on earning assets and calculated on the
December 31st balance plus any award for the current year. For example,
interest earned for 1995 would be calculated by multiplying the December 31st,
1994 balance, plus any award granted based upon 1994 performance, times the 1994
average yield on earning assets.
VI. Distributions
Distributions from the Plan shall begin when the Chief Executive retires
directly from active employment at or after reaching the age of 55.
Distributions of the accrued benefit shall be made on a schedule of monthly,
annual or lump sum payments. Such selection must be made at least 12 months
prior to the actual separation.
All accrued contributions shall be forfeited if the Chief Executive ceases
employment prior to age 55. Not withstanding the foregoing, accrued
contributions shall be distributed to the Chief Executive or his designated
beneficiary in the event of his death or disability or at the discretion of the
Board.
Distributions to a designated beneficiary or beneficiaries upon the Chief
Executive's death shall be as a lump sum.
VII. Successor Obligations
Not withstanding the provisions of section VIII, in the event of a merger or
acquisition in which Chittenden shall cease to exist as a distinct entity or a
change of control as defined in a certain agreement between Chittenden Bank and
Paul Perrault dated July 26, 1990, the surviving organization shall have no
obligation or requirement to make continuing contributions under the terms of
this Plan; provided however, such surviving Corporation shall remain liable to
the Chief Executive for all sums accrued prior to the merger or acquisition
regardless of his age at the time of this event. Interest as defined in Section
V shall continue to accrue on the undistributed balance. Such sums shall be
payable at the time of termination or retirement, whether prior or subsequent to
the attainment of age 55.
VIII. Plan Amendment and Termination
Chittenden or its successors and assigns may amend or terminate this plan at any
time at its discretion. All sums accrued for the benefit of the Chief Executive
to the date of plan termination shall remain due and payable in accordance with
this Plan. In the event that the Plan is amended or terminated all sums accrued
as of such date shall not be reduced and shall remain due and payable under the
terms of the Plan. Interest as defined in Section V shall continue to accrue on
the undistributed balance.
IX. Effective Date
This plan shall be effective on January 1, 1993.
IN WITNESS WHEREOF, this Supplemental Executive Retirement Plan has been adopted
and approved by the Board of Directors of the Chittenden Corporation and is
executed on behalf of the Corporation this 15th day of June, 1994 by
Barbara Snelling, Chair and Sarah Merritt, Senior Vice President and Human
Resources Director.
CHITTENDEN CORPORATION
By: /s/ Barbara W. Snelling
Barbara W. Snelling
Chair
By: /s/ Sarah P. Merritt
Sarah P. Merritt
Senior Vice President
And Duly Authorized Agent
IN THE PRESENCE OF:
/s/ F. Sheldon Prentice
F. Sheldon Prentice
Corporate Secretary
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1997 CHITTENDEN CORPORATION
BY: /S/ PAUL A. PERRAULT
Paul A. Perrault
President, Chief Executive Officer
and Director
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
- -------------------------------------------------------------------------------
/s/ Barbara W. Snelling Chair of the Board of Directors 03-22-97
/s/ Paul A. Perrault President, Chief Executive Officer
and Director 03-19-97
/s/ Kirk W. Walters Executive Vice President, Chief
Financial Officer and Treasurer
(principal accounting officer) 03-19-97
/s/ Frederic H. Bertrand Director 03-19-97
/s/ David M. Boardman Director 03-19-97
/s/ Paul J. Carrara Director 03-19-97
/s/ Lyn Hutton Director 03-19-97
/s/ Philip A. Kolvoord Director 03-19-97
/s/ James C. Pizzagalli Director 03-19-97
/s/ Pall D. Spera Director 03-19-97
Martel D. Wilson, Jr. Director
EX-13
2
96 ANNUAL REPORT
Successful growth needs to start from a solid foundation. At Chittenden
Corporation, our strength and foundation comes from the business we know best -
traditional, local banking.
From that core strength, we have made strategic changes which have transformed
Chittenden from a local Vermont institution into a regional financial services
company. Our growth has been through targeted acquisition of other banks and
continued expansion of our specialized businesses.
These three areas - traditional banking, targeted acquisitions and specialized
businesses - give us a broad foundation aimed at sustained growth and balance.
With this strategy in place, Chittenden is poised to handle the changes and
challenges ahead, while remaining a secure and dynamic financial institution
well into the future.
TABLE OF CONTENTS
3 Financial Highlights
4 Letter to Stockholders
6 Chittenden - Plotting Progress
8 Chittenden - A Strategic Approach to Banking
13 Consolidated Financial Statements
39 Report of Independent Public Accountants
41 Management's Discussion and Analysis of Financial
Condition and Results of Operation
54 Directors and Officers
57 Stockholder Information
FINANCIAL HIGHLIGHTS
1996 1995
---------------------------
(dollars in thousands
except per share amounts)
FOR THE YEAR
Net Interest income $ 83,993 $ 78,331
Provision for possible loan losses 4,183 5,000
Noninterest income 24,920 22,040
Noninterest expense 64,557 61,584
Net income 26,721 22,131
Cash dividends declared 8,747 4,803
----------------------------
AT YEAR END
Investment securities $ 397,092 $ 321,486
Net loans 1,268,472 1,179,788
Deposits 1,761,579 1,587,723
Stockholders' equity 174,401 153,949
Total assets 1,988,746 1,794,704
Number of stockholder 3,167 3,073
Number of employees 944 920
-------------------------------
PER SHARE OF COMMON STOCK
Fully diluted earnings $ 2.14 $ 1.83
Cash dividends declared 0.71 0.40
Book value at end of year 14.21 12.85
Weighted average shares outstanding 12,486,200 12,084,731
during year --------------------------------
LETTER TO STOCKHOLDERS
Since our last annual report, several things at Chittenden Corporation have
changed; however, some things haven't changed at all. One constant is our
commitment to execution - carrying out well-planned strategies that are
beneficial to our shareholders and customers in a workmanlike fashion, insuring
their effectiveness and sustainability.
We are pleased to report that these strategies are providing continued earnings
momentum. At $2.14 per share, earnings are up 17% from 1995, once again a new
record for the Corporation. I am particularly pleased that these results were
achieved while maintaining our core value of "balance" in all of our activities.
On the revenue side, net interest income increased 7%, and non-interest income
increased 13%, both numbers exhibiting gains across a broad array of activities.
Recognizing that even high-quality providers need to be low-cost producers,
expense growth has been contained to 5% during 1996 and, despite the obvious
strength of our loan loss reserves we provided for losses at a rate of $4.1
million, continuing to provide sufficient resources to maintain and even grow
our outstanding balance sheet strength.
One of the greatest challenges we continue to face, along with all financial
services providers, is offering the right mix of products and services at the
right time in ways that are beneficial for, and expected by, the marketplace.
Across the company, efforts are continuous on all these fronts, with customers
first in mind. Encouraging customers to utilize readily available technology,
expanding the availability of many services outside the branch environment, and
locating and staffing community offices to be complementary with our overall
effort reflects the reasons why customers of Chittenden's banks are loyal. They
expect more from Chittenden, and they get it. The choices of Who, What, When,
and Where, remain with the customer.
Much has been written in recent years about financial services, particularly the
impact that mergers and unregulated providers will have on traditional, local
banking. Some pundits take the view that, like Canada and parts of Europe and
Asia, the United States will soon consolidate to a handful of national banks. We
agree with the notion that we will have a few national banking companies, but we
do not believe that they will dominate the financial services industry nor make
obsolete the successful participation of other players.
Historically, Americans have not tended to behave in a way that would suggest
following patterns of other countries. Our nation's entrepreneurial spirit,
natural apprehension about size, and the advance of technology will ensure that
our citizens will continue to have a diverse array of options.
To remain viable, however, we at Chittenden believe it is crucial to be price
competitive, product competitive and personnel competitive. This means being
cost efficient, able to manage and integrate a number of diverse businesses, and
be the "employer of choice" up and down the line. Each of our major
constituencies has many choices. Investors, customers, employees and communities
are constantly presented with choices. It is our job to present the right
combination of our attributes to each member of these constituencies, to deepen
our relationships, and to continue our established "pattern of progress." I can
assure you that we are taking steps every day to keep Chittenden and the
consumer out in front by not becoming complacent, and by focusing on our role in
the future.
As I have said before, I am very proud of our results in 1996. But more that
anything else, I believe they show that our course is a good one. Our "steady
hand at the helm" philosophy doesn't mean we are inflexible, nor do we wait to
see what happens. It does mean we focus on execution today, and focus on what's
ahead. We look to be successful now, and in the future. By properly taking care
of business today we will be positioned to take care of business tomorrow. That
is the Chittenden of today, and of the future.
Our shareholders and customers deserve nothing less. In closing, I want to
publicly express my admiration and appreciation to the Chittenden people, your
employees and Board of Directors, who continue to be the inspiration for our
results. Thank you.
CHITTENDEN - PLOTTING PROGRESS
The following graphs are provided to give you a brief, visual review of
Chittenden's progress over the past six years. The graphs indicate that
Chittenden has achieved consistent and steady improvement in a number of
measurements. This performance is a reflection of Chittenden's commitment to a
balanced, efficient, and sound approach to banking.
Return on Average Equity (as a percent)
- ---------------------------------------
91 92 93 94 95 96
5.5 8.9 12.2 15.6 15.9 16.4
Return on Average Assets (as a percent)
- ----------------------------------------
91 92 93 94 95 96
0.37 0.62 0.94 1.2 1.3 1.4
Earnings per Share (in dollars)
- ---------------------------------------
91 92 93 94 95 96
0.4 0.7 1.1 1.6 1.8 2.1
Book Value per Share (in dollars)
- ---------------------------------------
91 92 93 94 95 96
8.0 8.8 10.0 10.4 12.8 14.2
Closing Price per Share (in dollars)
- ---------------------------------------
91 92 93 94 95 96
4.5 8.2 11.8 13.3 25.6 23.9
Efficiency Ratio (as a percent)
- ---------------------------------------
91 92 93 94 95 96
71 65 64 60 61 58
CHITTENDEN - A STRATEGIC APPROACH TO BANKING
TRADITIONAL BANKING
At Chittenden Corporation, our success as a whole is largely a reflection of the
success of our core business - traditional, local banking. For over 90 years, we
have constantly evolved to meet our customers' changing needs while remaining
focused on growth and efficiency.
Rather than pursuing growth by just adding more branches, the nature of Vermont
banking demands a creative approach. With a limited number of customers to be
found in-state, we have focused on expanding the products and services we can
offer our existing customers.
At a basic banking level, these efforts translate into innovative products that
create new ways and more reasons to bank with Chittenden. This year, we debuted
our Internet website, which can be found at www.chittenden.com. This handy tool
gives customers instant access to useful financial information and investment
advice. With other new service enhancements, customers can access specific
information about their accounts. Our newly expanded Automated Banking Line lets
customers use their phone to do much of their banking, such as account transfers
and loan payments. Chittenden's Loan-by-Phone program offers our customers the
convenience of applying for a consumer loan from their home or office. With
Chittenden Electronic Banking, businesses can keep an eye on finances and bank
from the convenience of their office PC. On a consumer product level, one of our
latest introductions is the Chittenden ATM & Check Card which works like a
check, but offers the convenience of a credit card. When a customer makes a
purchase using the card wherever Visa is accepted, the money is simply deducted
from their account electronically.
New products often come about from customer input. With the help of small
business owners, we put together our new "Chittenden Small Business Advantage"
package, combining valuable services with discounts and incentives. Our new
branch on Shelburne Road was designed with the customer in mind. An excellent
location, easy access, a separate commercial area, an information kiosk and
specialized service representatives will make this branch service-oriented for
commercial and retail customers alike.
Chittenden Bank also continues to grow beyond the traditional realm of deposits
and withdrawals. In a variety of areas, we provide products and services
designed to meet the unique, individual needs of our clients. We provide these
services through many different venues, including traditional branches and high-
tech connections. Because of this, Chittenden is becoming more and more a one-
stop shop for banking and financial services.
Small businesses have long been a major part of the Vermont economy. From "mom
and pop" operations to nationally known companies, their needs are very diverse.
One of the biggest differences between Chittenden and other banks is our
willingness to work with the smallest of these businesses, often ones that are
just getting started. Beyond providing loans, our Business Bankers provide the
advice and information needed to start a business. If we can't initially provide
financing, we work with the company and refer them to technical service programs
or financial access programs.
Much of our success in Business Banking comes from our knowledge of local
markets. Many offices have their own Business Banking specialists in-house who
have the authority to make decisions on loans. Through their knowledge of the
local market, these people are in a better position to evaluate the loan. While
Business Banking does not typically produce loans with enormous individual
dollar amounts, the volume of loans adds up to a significant piece of business
for the bank and establishes a strong relationship with each business. With this
focus on providing complete, custom services, Business Banking will continue to
benefit Chittenden and Vermont businesses. Our skill in small business lending
is also reflected in the volume of SBA lending through the Low Doc program. In
1996, our Branch Managers and Business Bankers helped earn Chittenden special
recognition for the highest volume of Low Doc loans in Vermont.
Our Commercial Finance Group gives businesses a helping hand by providing asset-
based lending. By lending against a company's inventory and receivables, we
provide new or expanding businesses the financing they need to keep growing. We
work closely with these customers, staying in contact with them on an almost
daily basis. This close contact, combined with aggressive sales efforts, has
paid off. Unique among Vermont banks and only three years old, our Commercial
Finance division has performed beyond expectations and will continue to succeed
in the future.
Another area of Chittenden which continues to grow is Correspondent Banking.
Working closely with smaller community banks around New England, we help furnish
their customers with mortgage services, automotive financing, and merchant
credit card services, all of which they would otherwise be unable to provide. We
also help these banks with commercial loans they are unable to approve because
of lending limitations. These programs consistently prove to be "win/win"
relationships. Chittenden gets the benefit of additional business and the
community bank can satisfy their customers' needs without losing out to a larger
competitor.
Chittenden has always offered investment products and investment management.
Over this past year, however, Chittenden Investment Services has begun to expand
and take on its own identity through distinctive marketing that gives more
significance to the brand. Investment Services has also grown by working closely
with other areas of the bank. One example of such cooperation is seen with
Private Banking. In this partnership, Private Banking can offer its professional
clients investments as well as loans and other bank services. Similarly, our
Investment Services area gets to strengthen their client base. These links
between departments will continue to expand, providing more business for the
bank and giving our customers more services under one roof.
Through a strong client base and close customer contact, Chittenden's Government
Banking group continues to be an extremely valuable part of the bank's core
business. This area provides almost 10% of the bank's deposits. By providing
state and local organizations with financial services, Government Banking gives
the bank a steady and relatively secure level of business. With the addition of
new technology, such as providing taxpayers the option of having their property
taxes automatically withdrawn from their account, Government Banking will
continue its steady position well into the future.
SPECIALIZED BUSINESSES
At Chittenden, Specialized Businesses continue to play an increasing role in our
growth. Specialized Businesses are services that were already in place at
Chittenden and have been expanded to a much wider market. By working closely
with outside banks and businesses, we can aggressively seek out new customers
for these existing services.
While we have long provided merchant services (the electronic processing of
credit card transactions) in Vermont, the field has changed dramatically.
Working with outside organizations, such as consultants, service providers and
other banks, 80% of our Merchant Services business is now located out of state.
In just the last two years, Merchant Services' volume has more than tripled,
going from $265 million in 1994 to $801 million in 1996.
Chittenden's Automotive Finance operation has also seen tremendous growth. Not
long ago, most people went directly to a bank to obtain auto financing. Now,
direct lending accounts for only a fraction of all auto loans. More and more,
people secure their financing right at the dealership. As a consequence,
Chittenden works with dealers across New England to provide loans. And with the
introduction of our TAMMAC Leasing operation, we now offer a full range of auto
financing products. In just two years, total loan and lease originations have
increased 80%, going from just under $50 million to almost $90 million, and
year-end outstandings have more than doubled. This growth also provides more
security for the bank. Rather than having a number of loans concentrated in one
geographic area, Chittenden can diversify and spread loans over a wider client
and geographic base.
Because of favorable tax laws in Vermont, many captive insurance companies are
based here. Captive insurers offer companies an alternative to traditional
insurance methods by providing the ability to insure themselves. We have carved
out a niche business for ourselves by catering to the specific needs of these
companies. Through a high level of service and an aggressive sales effort, our
customer base has grown from 30 companies in 1990 to almost 100 today in a
market of only 300. Captive insurers now have more reasons to do business with
Chittenden. Many of them are on-line so they can better monitor their financial
operations, and we have given them more options by providing
other services such as trust and investments. With these advancements and our
commitment to customer service, our business with the captive insurance industry
will continue to expand and contribute to Chittenden's success.
Chittenden has provided Payroll Services since 1969, but through sales efforts
and improvements in technology, the business has grown rapidly, tripling the
customer base in just four years. With a new software system, we can now provide
customers with more options and quicker processing. Through aggressive marketing
and new technology, Payroll Services will continue to be another growth-
oriented, Specialized Business for the bank.
Mortgage Service Center of New England, our wholesale mortgage business, has
grown significantly to give Chittenden the ability to offer residential mortgage
services to other financial institutions across New England. This ability was
further augmented by the 1995 acquisition of CUMEX, which specializes in
offering residential mortgage services to credit unions in the northeast region.
Mortgage Service Center can offer all or any portion of the mortgage operation
to its clients. For example, this year we entered into an agreement with a local
community bank in Connecticut to provide the entire mortgage operation to the
bank, complete with loan officers in local branches and servicing of originated
mortgages.
Chittenden's Specialized Businesses owe their growth to a basic change in
philosophy. Gone are the days when we could wait for customers to come to us. We
now have the ability to form unique alliances with a variety of organizations
across the country who can bring us new customers. With our experience,
technology, and consistent approach to business, along with a proven ability to
venture into new areas, Specialized Businesses will contribute to Chittenden's
success for years to come.
TARGETED ACQUISITIONS
Chittenden Corporation has also expanded beyond Vermont through targeted
acquisitions of other institutions. This strategy is not one based on geographic
proximity, but rather on selecting acquisitions of quality that can grow and
succeed with Chittenden's input, expertise and product offerings.
Both of our recent acquisitions fit this profile. Flagship Bank and Trust
Company, based in Worcester, Massachusetts, is a relatively new bank that has a
strong management team in place and is located in a market where there is plenty
of room to grow. The Worcester market is dominated by two large banks, but
Flagship Bank and Trust Company, with the ability to offer new products and
services that Chittenden provides, will be a viable and attractive, local
alternative to the larger competitors.
The Bank of Western Massachusetts is in a similar position. Based in
Springfield, Massachusetts, The Bank of Western Massachusetts is poised to
capture more market share from its larger competitors with an increased product
line. This year, we successfully introduced our Automotive Finance operation in
the Springfield area through The Bank of Western Massachusetts. To start this
operation from scratch would have been an expensive proposition, taking years to
become profitable. With the platform already in place at Chittenden, the start-
up was quicker, had less overhead, and became profitable in a shorter period of
time.
Both of these banks were managed successfully before we came along and that
success continues to grow today. With Chittenden's ability to bring in new
products, this success will be magnified and expanded much faster than would
have been possible before the mergers.
Chittenden will continue to be active in the acquisitions market. We have looked
at many different merger possibilities, but often walk away without taking
action because the match wasn't right. Future transactions will likely fall into
two areas: we will continue to look for banks in new markets that fit well with
Chittenden's business culture and philosophy, and we will look for opportunities
in markets where we already have a presence. Only when the situation makes sense
and when there is a real opportunity for cooperative growth and profitable
expansion, will future acquisitions be made.
Chittenden's dynamic, sustained success over the past six years is attributable
in part to our concentration on delivering the best in traditional, local
banking. In addition, strategic moves to augment growth and earnings have
resulted in developing two additional elements: targeted acquisitions and
expanded specialized businesses. With these three key components in place, the
result has been a balanced performance based on contributions from all of
Chittenden's business areas. This strategy will continue to keep Chittenden
ahead of the competition well into the 21st century.
CHITTENDEN CORPORATION CONSOLIDATED BALANCE SHEETS
December 31,
1996 1995
(in thousands)
ASSETS Restated
Cash and cash equivalents $ 230,259 $ 197,140
Securities available for sale 358,536 278,322
Securities held for investment (market value
$38,381,000 in 1996 and $42,634,000 in 1995) 38,556 43,164
Federal Home Loan Bank stock 5,591 5,591
Mortgage loans held for sale 9,870 14,692
Loans 1,296,568 1,207,606
Allowance for possible loan losses (28,096) (27,818)
-------------------------
Net loans 1,268,472 1,179,788
Accrued interest receivable 14,179 12,880
Other real estate owned 2,251 2,652
Net deferred tax asset 10,647 10,159
Other assets 15,797 13,855
Premises and equipment, net 24,297 24,947
Intangible assets 10,291 11,514
--------------------------
Total assets $1,988,746 $1,794,704
==========================
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES:
Deposits:
Demand $ 286,932 $ 252,421
Certificates of deposit $100,000 and over 104,295 105,604
Savings and other time 1,370,352 1,229,698
--------------------------
Total deposits 1,761,579 1,587,723
Short-term borrowings 23,992 25,025
Accrued expenses and other liabilities 26,234 25,523
Long-term debt 2,540 2,484
--------------------------
Total liabilities 1,814,345 1,640,755
==========================
Commitments and contingencies
STOCKHOLDERS EQUITY:
Preferred stock - $100 par value
authorized - 200,000 shares
issued and outstanding - none
Common stock - $1 par value
authorized - 30,000,000 shares
issued - 12,678,625 in 1996 and 12,345,304 in
1995 12,679 12,345
Surplus 74,706 70,806
Retained earnings 92,040 74,066
Treasury stock, at cost - 402,413 shares in 1996
and 367,417 shares in 1995 (4,770) (3,967)
Net unrealized gain (loss) on securities available
for sale, net of taxes of
($102,000) in 1996 and $533,000 in 1995 (208) 768
Unearned portion of employee restricted stock (46) (69)
------------------------
Total stockholders equity 174,401 153,949
------------------------
Total liabilities and stockholders equity $1,988,746 $1,794,704
===========================
The accompanying notes are an integral part of these consolidated financial statements.
CHITTENDEN CORPORATION CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1996 1995 1994
(in thousands, except per share amounts)
INTEREST INCOME: Restated
Interest on loans $116,563 $111,087 $ 82,396
Investment securities:
Mortgage-backed securities 6,062 5,666 1,058
Taxable 14,528 12,972 14,728
Tax-favored debt 2,950 2,687 1,678